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Articles and Advice |
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| Loan Modifications Is this the right option for you? By DJ Have you already tried to refinance only to be turned down due to your less than perfect credit, income, or lack of equity? Are you getting tired of the phone calls from the collectors? Is your mortgage payment about to shoot upwards because you are stuck on an adjustable rate mortgage? Have you experienced a recent hardship that is making it very difficult to keep current on your mortgage payment? The combination of a weakening economy, the collapse of the subprime sector of the mortgage industry, home values depreciating more than they have in over 20 years, and record foreclosures, has left many homeowners in a situation where they can no longer afford their mortgage payments. Unfortunately, many of them are unable to qualify for a traditional refinance due to their credit history or a lack of equity (including owing even more than their house is worth). A Loan Modification is a permanent change in one or more of the terms of a loan allowing the loan to be reinstated resulting in a lower payment that the borrower can afford. In most cases a homeowner in need for mortgage help will indeed qualify for a loan modification. Loan Modification is arguably the most effective tool you can use if you are behind on your mortgage and in midst of a financial hardship to save your home from entering foreclosure. With a loan modification, the mortgage loan is restructured so that it is affordable and can fit comfortably into your budget rather than being an overwhelming monthly drain on already tight finances. To ensure that you understand what a loan modification will actually do for you, consider the following facts: A loan modification is indicated when the original loan that is secured by a residence has terms that make it impossible for the homeowner to continue making the payments, thus risking the loss of the residence. Loan modifications are not the same as debt consolidations, refinancing loans, or even forbearances. Instead, they are long term solutions for rising interest rates or other hardships that are threatening to overwhelm the budget of a homeowner. Loan modifications stop foreclosure proceedings and instead reinstate the loans as they are being modified. Modifying the terms, interest rate or even principle balance of your mortgage can, in many instances, be just the right option for many homeowners in this situation. |
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| Buyers, get into negotiating position By Dian Hymer Bridging the price gap between home buyers and sellers can be a challenge in today's market. Sellers, many of whom have a hard time accepting that their home has lost value, often expect to sell for more than buyers are willing to pay. Buyers, on the other hand, are concerned that home prices could drop further. So, they're making sure that they don't overpay. There are exceptions to the rule. Very desirable homes in the best locations sometimes sell for over the asking price, particularly if there isn't much inventory of similar homes on the market. Some foreclosure properties at bargain prices are attracting multiple offers. Prices are rising in select areas. Overall, however, it's a still a buyer's market in most parts of the country. There's not much you can do to convince an unrealistic seller that he should accept your market-price offer. Many of the listings on the market belong to sellers who will sell only if they get a certain price. They may not be able to sell for less because of the size of the mortgage(s) secured against the property. In some cases, sellers bought at the peak and then improved the property. They can't bear to take the loss they would incur if they sold at market price. In other words, these sellers would like to sell, but they won't sell unless they get their price. Before you make an offer on a listing that's priced over market, try to find out as much as possible about the sellers' motivation, and if there's any flexibility in their price. A lot of time and emotional energy goes into making an offer. Save your efforts for listings where the sellers are motivated. That is, they don't just want to sell -- they need to sell. Some sellers want to test the waters at a price that's higher than the market will support. They usually feel that someone will appreciate the added value their home offers and pay more for it. However, these sellers will often negotiate with a legitimate buyer who offers a price that is less than the list price. HOUSE HUNTING TIP: To put yourself in the best negotiating position, make sure that your financing is in order and that you are able to show the seller that you are capable of closing the deal. The fallout ratio is high in the current market. Many of these transactions fail to close because the buyers couldn't get financing. It's always a good idea to be preapproved for the financing you'll need to buy a home before you make an offer. Preapproval involves making a formal loan application, having your credit checked, as well as verifying your funds for down payment and closing costs, and validating your income and employment. Lenders often want to know that you have enough surplus cash to make house payments (mortgage, property taxes and insurance) for two to three months. Buyers who make an initial low offer and who aren't in competition should make as clean an offer as possible. This means omitting anything that's not necessary. However, you should include contingencies for loan and appraisal approval and an inspection contingency. It's a good idea to include a copy of your preapproval letter with your offer. If you are approved for a higher price than you are offering, ask your lender or mortgage broker to issue a preapproval letter for the price you're offering. THE CLOSING: Then be prepared to negotiate. It may take several rounds of counteroffering back and forth to reach a mutually acceptable price. |
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| Mortgage approval is no easy task By Dian Hymer It wasn't too long ago that home buyers made offers without financing contingencies and closed the deal in as short as 14 days following acceptance. Quick closes are virtually impossible today if you're buying a home with the aid of a mortgage. And, it's highly recommended to include loan and appraisal contingencies in your offer. Following the credit crisis of August 2007, many mortgage lenders closed down. Those that are left have cut their staff due to low demand for mortgages. Also, it's now necessary to actually qualify financially for a home mortgage. This adds time to the loan approval and funding process. For most mortgages, home buyers are now required to have good credit. They need to provide verification of employment (W-2s or tax returns), verification of the funds needed to close (down payment and closing costs) and verification of reserve funds. If the funds haven't been sitting in your bank account for a few months, some lenders require proof of where the money came from. Be prepared to provide brokerage statements, and any other supporting documentation that will validate you as a bona fide borrower. Buyers who own other real estate will need to provide even more documentation. HOUSE HUNTING TIP: It's a good idea to start pulling together all of your financial documents as soon as you're serious about buying a home. Ideally, the paperwork required by the lender should be forwarded to your loan agent or mortgage broker within a couple of days of contract acceptance. You can't wait until the last minute to provide the lenders what they need and expect to close on time. Before you write an offer, check with your mortgage person to find out how long it will take to process and fund the mortgage. Some lenders are taking 35 to 40 days from acceptance. So, you wouldn't want to commit to a 30-day closing, if this is the case. Make sure that you allow sufficient time in your contract for the appraisal and formal lender underwriting approval. This could take two to three weeks, depending on the lender and on how diligent you are about supplying the documentation. Your lender or mortgage broker will order the appraisal of the home you're buying. It should be ordered as soon as possible. If you end up not buying the house, you might owe an appraisal fee. However, waiting to order the appraisal could cost you time. Many lenders require a review appraisal, which is a second appraisal to confirm that the first one is accurate in terms of market value. Ideally, this should be done before you remove your appraisal contingency. If it can't be done within that time frame, ask the seller for an extension. Before August 2007, it was common practice for lenders to prepare the mortgage documents for the buyers to sign even though all underwriting conditions had not been met. For instance, the lender might have needed proof that you paid a charge-card account down to a zero balance. Today, many lenders won't issue the mortgage documents until all of the pre-funding conditions have been met. So, you need to be prepared to provide additional documentation that the lender might request, even if it's at the last minute. Work with a good loan agent or mortgage broker who will help keep you on track throughout the process. And, as outrageous as the lender's requests might seem, don't let it get to you. Lenders have a lot of due diligence work to do to restore their credibility with investors. The housing market is dependent on investors buying mortgages so that buyers can buy homes. THE CLOSING: Properly qualifying buyers for mortgages is long overdue. |
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| Staging tips that sell By Dian Hymer Home prices have fallen and many homeowners are mortgaged to the hilt. This makes it difficult for some sellers to justify spending a penny to get their home ready for the market. However, the home-sale market also is very competitive in areas that are still bloated with inventory of unsold homes. When buyers have a choice, they pick the best. They want a home at a good price, in a good location, and one that they can move right into without having to do any work. Investor buyers are snapping up foreclosures at an increased pace. These homes are usually not in good condition. And, in some cases they are selling for half of what they sold for four or five years ago. If you're a seller who's selling in a market where there is competition from distressed-sale foreclosures or from other sellers who are offering their homes in top condition, you will be at a disadvantage if you don't fix up your home before selling. It will take longer for you to sell and you could sell for a lot less than if you had invested time and money in properly preparing your home for sale. There is a lot you can do to get your home ready that doesn't cost much money -- it just takes time and hard work. For instance, most people have too many personal possessions in their homes, particularly if they have lived there for years. Decluttering benefits you in a couple of ways. You won't pay to move things you no longer want or need. More importantly, buyers will be better able to see what your home has to offer instead of focusing on your things. HOUSE HUNTING TIP: It's worthwhile to consider hiring a home staging decorator. Some sellers only need a consultation of one to two hours. Ask the stager what you should keep and what should be moved out before you start showing the house. Also, get recommendations for furniture and artwork arrangement. The way you live in your house is not necessarily the best way to show it off to prospective buyers. For example, many homeowners place their sofa across from the fireplace, which can mean that a buyer is greeted by the back of the sofa when they walk into the room. It stops them in their tracks. If the sofa is moved to one side and two chairs are placed opposite the sofa, the room will appear more open and the traffic flow won't be obstructed. Sometimes the scale of your furniture isn't right for showing your home to its best advantage. Recently, buyers who had been looking for more than a year for the right house saw one that they thought could be it. However, they were concerned that the bedrooms were too small. They had the good sense to go home and get a tape measure. They came back to the house and measured the rooms they were concerned about. It turns out they were larger than they appeared. The house was furnished with beautiful pieces, but they were large and made some rooms appear smaller than they actually were. Today's buyers have a lot to think about when they buy a home. Are they buying at the right price and time? Will the house work for the long term? Can they qualify for and afford the financing they need? It helps the process along if you can create an ambiance that enables a buyer to fall in love on the first visit. THE CLOSING: You need to create the wow factor so that when buyers walk in they say, "I better act quickly. This house won't be on the market for long." |
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| Selling home to offspring has its benefits By Benny Kass SCIN. No, it's not the stuff that covers our body. It's a highly complex legal and financial transaction that may be of interest to elderly homeowners. SCIN stands for "self-cancelling installment note." Let's take this example: Your parents own their house but their financial situation makes it difficult to maintain the house. You are prepared to buy the house and rent it back to your parents, but because you currently have your own house, you are unable to qualify for another mortgage loan. Your parents purchased the house back in the 1960s for $30,000, and it is now worth $600,000. Over the years, they have made approximately $100,000 in improvements. They are eligible for the up-to-$500,000 exclusion of gain, because they file a joint tax return and have owned and lived in the house for a very long time. When they sell the house -- to you or anyone -- they will not have to pay any capital gains tax, as $600,000 (sales price) minus $130,000 (cost basis) equals $470,000 (capital gain), which falls within the $500,000 exemption limit. Since the house is free and clear of any mortgage, your parents are prepared to take back the entire sales price. You sign a promissory note for $600,000, and the note is secured by a deed of trust (the mortgage), which is recorded among the land records in the jurisdiction where the property is located. The note carries an interest rate of 6.25 percent, which is what commercial banks are currently charging for similar mortgage loans. You go to closing and take title to the property. Your parents sign a lease whereby they agree to pay you a monthly rental. While this is income to you, it will most likely be offset by the various tax deductions you can get -- such as depreciation, mortgage interest, real estate tax, insurance and maintenance of the house. Although this sounds like a routine real estate transaction, there is one unique feature. The promissory note that you signed in favor of your parents contains the following language: In the event of the death of both of the lenders (i.e. the parents) prior to the final payment of principal and interest, the unpaid principal and interest shall be deemed cancelled and extinguished as though paid upon the death of the last lender. This is a SCIN -- a self-cancelling installment note. Why is this such an important tool? When a person dies, estate tax must be paid on the value of the decedent's adjusted taxable gifts. If your parents made gifts to you that exceeded the yearly gift-tax exclusion (currently $12,000 per parent), you should discuss this with your own accountant to get a clear picture of the estate-tax consequences. A bona fide SCIN cancels the remaining obligation upon the death of the lender, so there is nothing left to be included in that decedent's gross estate, and thus no tax is owed on that cancelled debt. Note that I used the word "bona fide." That's Latin legalese, which Black's Law Dictionary defines as "in or with good faith ... without deceit or fraud." The Internal Revenue Service is constantly challenging the bona fides of these SCIN transactions, claiming that they are not done in good faith but are designed to avoid having the pay the estate tax. A SCIN signed by family members is presumed to be a gift and not a bona fide transaction. But according to one federal court, "This presumption may be rebutted by an affirmative showing that there existed at the time of the transaction a real expectation of repayment and intent to enforce the collection of the indebtedness." (Costanza v. IRS, Sixth Circuit Court of Appeals, decided Feb. 19, 2003). Space in this column does not permit me to recite all of the facts upon which the Sixth Circuit overturned the tax court and held that the SCIN was, in fact, legitimate. Here, however, are some suggestions to assist you in rebutting the presumption: 1. The note must be secured by a valid and enforceable deed of trust, which is recorded in the appropriate land records office. The borrower would want this anyway, because mortgage interest cannot be deducted unless the mortgage (deed of trust) is recorded; 2. Go to the Internet and find out from the mortality tables what the life expectancy is for your parents. The promissory note should come due prior to that expected death. For example, if your mother's life expectancy is 22 years (based on her current age and the mortality tables), the loan should mature no later than 20 years from the date it is entered into. 3. The sales price must be market value or higher. Otherwise, even if the SCIN is held to be valid (i.e. bona fide) the IRS has the right to assess a gift tax on the difference between the sales price and the fair market price at the time the sale took place. In fact, to avoid having the IRS claim that this was really a gift, you should either increase the sales price above the market value or increase the amount of the mortgage interest rate so as to show that there was consideration for the cancellation provision. After all, if this was not a family transaction, the lender would not want the note to be cancelled without getting some premium for that. 4. Treat the entire transaction as if the parties were strangers. Have a lawyer prepare the legal documents, and go to a title attorney's office for the settlement. 5. Finally, have your parents document in writing their need and desire to have the monthly payments for their retirement years. A SCIN can be a valuable family tool, if done properly. Otherwise, the amount of the cancellation will be considered part of the estate and will have taxable consequences. |
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