Monday, September 29, 2008
Thursday, September 25, 2008
First-time homebuyer tax credit repaid slowly if at all
First-time homebuyer tax credit repaid slowly if at allWASHINGTON – Sept. 25, 2008 – If a first-time homebuyer purchases a home before the end of 2008, he or she gets a $7,500 tax credit in 2009 when they file their federal income taxes, but it must be paid back over time. Here’s how it works: The first-time homebuyer credit is similar to a 15-year interest-free loan to be repaid in 15 equal annual installments beginning with the second tax year after the credit is claimed as an additional tax on the taxpayer’s income tax return for that year. For example, if a buyer claims a $7,500 first-time homebuyer credit on his 2008 return, he’ll start paying it back on his 2010 tax return with $500 due each year from 2010 to 2024. Some exceptions apply, however, including: • If the taxpayer dies, remaining annual installments are not due. If a spouse dies, the remaining spouse must repay only his or her half.• If the home stops being a primary residence, all remaining annual installments become due for taxes paid on the year that happens. There are special rules for involuntary conversions.• If the home is sold, all remaining annual installments become due on the return for the year of sale. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated.• If ownership is transferred to a spouse or ex-spouse following divorce, the new owner becomes responsible for all subsequent installment payments.
Wednesday, September 24, 2008
Monday, September 22, 2008
SHOR SALE ( Real Estate )
A short sale is when a bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's Loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale.
Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.
A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.
Creditors, their surrogates, and those who politically benefit from the mortgage industry -- especially those in the real-estate, mortgage servicing, and banking -- wrongly portray short sales as difficult to complete or morally questionable[citation needed]. This is simply untrue if the value of the underlying asset, a home, has fallen dramatically and the debtor has limited assets. Short sales are extraordinarily common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.
Contents
1 Negotiatons
2 Recent Changes to Federal Laws Affecting Mortgages
3 Credit reporting
4 References
5 External links
Negotiatons
Lenders have a department (typically called a loss mitigation department) that processes potential short sale transactions. Typically, lenders do not accept short sale offers or requests for short sales until a Notice of Default has been issued or recorded with the locality where the property is located.
Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. "Red tape" is very common in short sales, requiring potentially multiple levels of approvals and conditions. Junior liens - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve the short sale. Frequent objectors to short sales include tax lieners (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale.
Recent Changes to Federal Laws Affecting Mortgages
When the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed.
However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences -- rental properties are ineligible for relief -- so consultation with a tax advisor is necessary to ensure that a borrower qualifies.[1]
More recent legislation provides for a specialized type of refinancing option, available for mortgages made after 2006, for owner-occupied homes. Under this program a debtor provides information similar to that necessary for a short-sale but rather than selling the house to a third-party an FHA guaranteed loan at a fixed-rate is available if the original lender is willing to write-off all but 85-percent of outstanding of the debtor's obligations (including principal, interest, late-fees, prepayment penalties, and all other fees). FHA-backed refinance packages are available beginning October, 2008, and carry a fee equal to 1.5% of the value of the house. Debtors who exercise this option must sacrifice 50-100 percent of equity that builds in a house, and may not participate in home equity loan programs. This program is only available to owner-occupied residences. This program requires consent from a lender: consent is not automatic and may be freely withheld, though withholding consent can result in a foreclosure with adverse financial results.
Credit reporting
A short sale does adversely affect a person's credit report, though the negative impact is typically less than a foreclosure. Short sales are a type of settlement. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information it is typically possible to obtain another mortgage 1-3 years after a short sale.
While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating mortgage balances to reflect a zero balance after a short sale. However, willfully misrepresenting information on a credit report constitutes libel in many states, and lenders may be sued in civil court for engaging in this behavior.
References
Fact Sheet: The Mortgage Forgiveness Debt Relief Act of 2007
Wednesday, September 17, 2008
This Home-Equity Loans Come with Big Risk
When an investor offers you $50,000 or $100,000 in exchange for 30 percent to 50 percent of your home's future appreciation, is it a good deal?
That's what some investment firms are promoting as an alternative to traditional home equity loans, lines of credit and reverse mortgages. The companies argue that sharing future increases in value is a superior way to convert current equity into spendable money now because there are no monthly payments or interest charges, fees are comparatively low, and investors agree to participate in losses in a home's value as well as in gains.
Two of the investment companies -- REX and Grander Financial -- are specifically targeting homeowners in their 50s and younger, who are ineligible for reverse mortgage programs, which are restricted to individuals 62 and older.
But are there drawbacks in the details that homeowners need to consider? Absolutely. Start with the core concept of "no interest" being charged on the lump-sum amounts of money homeowners receive. Is $50,000 today in exchange for half of all future appreciation on a hypothetical $500,000 house worth it?
Maybe -- especially if values are likely to remain flat, decline or increase minimally. But consider this scenario over an extended period, say eight to 10 years. Assume your house increases in value by $250,000 -- 50 percent -- and is worth $750,000 when you want to terminate the agreement and sell. You've had full use of the $50,000 during the years without paying a dollar of interest. Now you must pay back the $50,000 plus 50 percent of the appreciation -- $125,000 -- to the investor from the proceeds.
That may suit you just fine. Ignoring selling expenses and any existing mortgage debt, you net $575,000 because you owe $175,000 to the investor ($50,000 plus $125,000). For a $50,000 cash advance, you've given up $125,000. Your house increased in value by 50 percent, but look at the investor's return: The $50,000 advance has leveraged $125,000 -- well over double.
This may not be "interest" in the terminology preferred by the investors, but it's definitely a "yield" on their capital -- and a good one at that. The investors' return on a relatively small advance of money is magnified over extended periods because it's tied to the value changes of a far larger asset -- the entire house.
In fairness, there's risk to the investor as well. If your home value drops during that extended period, the investors suffer a loss proportional to their stake in the home's change in value.
There are some other considerations. Poke around the offering documents of these programs and you find restrictions that shouldn't be ignored, including the equivalent of a prepayment penalty for sales of properties within the first five years. In the REX and Grander Financial contracts, the penalty is 25 percent of the amount of the original advance in year one, 20 percent in year two, 15 percent during year three, 10 percent in year four and 5 percent in year five.
After that, there's no penalty for selling the house or terminating the agreement. On a $100,000 advance when the house is sold in year one, the homeowners would owe $125,000 plus any appreciation gain.
There's a potentially troublesome "deferred maintenance adjustment" clause in the agreements. The investors have the legal right, based on an "independent, third-party" appraisal or inspection, to claim additional payments at sale "to reflect any maintenance that should have been performed when the agreement was in effect." The words "should have" are subjective enough to cause some serious disagreements between owners and investors.
Take note, too, that the agreements give the investors the right to limit the "maximum authorized debt" on your home once you've pocketed an advance. That includes credit lines, second loans and first mortgages secured by the property.
Whatever the sponsors choose to call their products -- they are adamant that these are not "loans" -- they provide investors with a security instrument that constitutes a publicly recorded lien against the property similar to a deed of trust or mortgage.
Finally, in evaluating these products, bear this in mind: Because equity investment agreements without age restrictions are new, they receive little or no regulatory scrutiny at the federal or state levels. REX's managing director, Tjarko Leifer, said his firm would welcome regulation and uniform standards as the industry expands.
But it's not there now. Consumers need to thoroughly understand what they're getting into.
That's what some investment firms are promoting as an alternative to traditional home equity loans, lines of credit and reverse mortgages. The companies argue that sharing future increases in value is a superior way to convert current equity into spendable money now because there are no monthly payments or interest charges, fees are comparatively low, and investors agree to participate in losses in a home's value as well as in gains.
Two of the investment companies -- REX and Grander Financial -- are specifically targeting homeowners in their 50s and younger, who are ineligible for reverse mortgage programs, which are restricted to individuals 62 and older.
But are there drawbacks in the details that homeowners need to consider? Absolutely. Start with the core concept of "no interest" being charged on the lump-sum amounts of money homeowners receive. Is $50,000 today in exchange for half of all future appreciation on a hypothetical $500,000 house worth it?
Maybe -- especially if values are likely to remain flat, decline or increase minimally. But consider this scenario over an extended period, say eight to 10 years. Assume your house increases in value by $250,000 -- 50 percent -- and is worth $750,000 when you want to terminate the agreement and sell. You've had full use of the $50,000 during the years without paying a dollar of interest. Now you must pay back the $50,000 plus 50 percent of the appreciation -- $125,000 -- to the investor from the proceeds.
That may suit you just fine. Ignoring selling expenses and any existing mortgage debt, you net $575,000 because you owe $175,000 to the investor ($50,000 plus $125,000). For a $50,000 cash advance, you've given up $125,000. Your house increased in value by 50 percent, but look at the investor's return: The $50,000 advance has leveraged $125,000 -- well over double.
This may not be "interest" in the terminology preferred by the investors, but it's definitely a "yield" on their capital -- and a good one at that. The investors' return on a relatively small advance of money is magnified over extended periods because it's tied to the value changes of a far larger asset -- the entire house.
In fairness, there's risk to the investor as well. If your home value drops during that extended period, the investors suffer a loss proportional to their stake in the home's change in value.
There are some other considerations. Poke around the offering documents of these programs and you find restrictions that shouldn't be ignored, including the equivalent of a prepayment penalty for sales of properties within the first five years. In the REX and Grander Financial contracts, the penalty is 25 percent of the amount of the original advance in year one, 20 percent in year two, 15 percent during year three, 10 percent in year four and 5 percent in year five.
After that, there's no penalty for selling the house or terminating the agreement. On a $100,000 advance when the house is sold in year one, the homeowners would owe $125,000 plus any appreciation gain.
There's a potentially troublesome "deferred maintenance adjustment" clause in the agreements. The investors have the legal right, based on an "independent, third-party" appraisal or inspection, to claim additional payments at sale "to reflect any maintenance that should have been performed when the agreement was in effect." The words "should have" are subjective enough to cause some serious disagreements between owners and investors.
Take note, too, that the agreements give the investors the right to limit the "maximum authorized debt" on your home once you've pocketed an advance. That includes credit lines, second loans and first mortgages secured by the property.
Whatever the sponsors choose to call their products -- they are adamant that these are not "loans" -- they provide investors with a security instrument that constitutes a publicly recorded lien against the property similar to a deed of trust or mortgage.
Finally, in evaluating these products, bear this in mind: Because equity investment agreements without age restrictions are new, they receive little or no regulatory scrutiny at the federal or state levels. REX's managing director, Tjarko Leifer, said his firm would welcome regulation and uniform standards as the industry expands.
But it's not there now. Consumers need to thoroughly understand what they're getting into.
Monday, September 15, 2008
Contingencies in real estate contracts
In real estate contracts the contingency is a common element. Contingencies are clauses in a contract that give either the buyer or seller a way to get out of the contract if certain conditions or timelines aren’t met. A commonly used example is that of a buyer making an offer on a new home before selling his existing home. The buyer needs to sell his present home before being able to get financing on the new one. So he makes his offer contingent upon the sale of his existing home. There will always be a time period associated with such a contingency. If the buyer is able to get his present home sold within that time period, the deal can go forward. But if he fails to sell within the specified time period, the seller has the option of getting out of the deal. In most cases, sellers won’t accept this kind of contingency, because they will most likely feel that they can find another buyer capable of closing the deal without needing to sell another home first. But new home builders are often willing to accept an offer contingent upon the sale of an existing home.
Every contract can be unique. The possibilities for contingencies are virtually endless. Some of the more commonly used contingencies would include:
Financing. Contingencies that depend on the buyer being able to obtain financing are very common.
Home Inspections. Probably the most common type of contingency is the “contingent upon satisfactory completion of inspection”. There are any number of specific types of inspection for which a contingency might be included in a contract. Some of the more common would include inspection by a qualified home inspector for hidden defects, pest inspections, water and sewage system inspections, inspections dealing with the presence of radon or mold, etc.
Appraisal. It’s not unusual for a buyer to have a contingency that allows for a formal appraised value at or above purchase price. Since lenders will nearly always want an appraisal performed too, sellers usually don’t have a problem with this.
Remember, just like everything else in real estate contracts, contingencies are negotiable. Always take care before signing that you are comfortable with all contingencies included in your contract. Likewise, take time to think about what contingencies you might like to have added.
Every contract can be unique. The possibilities for contingencies are virtually endless. Some of the more commonly used contingencies would include:
Financing. Contingencies that depend on the buyer being able to obtain financing are very common.
Home Inspections. Probably the most common type of contingency is the “contingent upon satisfactory completion of inspection”. There are any number of specific types of inspection for which a contingency might be included in a contract. Some of the more common would include inspection by a qualified home inspector for hidden defects, pest inspections, water and sewage system inspections, inspections dealing with the presence of radon or mold, etc.
Appraisal. It’s not unusual for a buyer to have a contingency that allows for a formal appraised value at or above purchase price. Since lenders will nearly always want an appraisal performed too, sellers usually don’t have a problem with this.
Remember, just like everything else in real estate contracts, contingencies are negotiable. Always take care before signing that you are comfortable with all contingencies included in your contract. Likewise, take time to think about what contingencies you might like to have added.
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