I have had the pleasure a couple of times to hear a presentation from Bob Hale, CEO of the Houston Association of Realtors HAR.com . He spoke about Houston's great website and how consumers have flocked to their website to get wonderful real estate information and also to find Realtors to represent them in a transactions. The Houston Association of Realtors is the most progressive group of Realtors that I have seen in my 24 years as a real estate broker. They have knocked down the fears that if we give the Public more information then we as Realtors will not be needed anymore. In fact, the opposite has happened in Houston with their great website.
The Boards of Directors of the Contra Costa and Bay East Associations of REALTORS® have signed Statements of Intent to participate in a statewide Multiple Listing Service (MLS) being created by the California Association of REALTORS®. Both organizations have been working with neighboring MLSs for over three years to expand access to property information for their members and believe this approach is the best long term solution.
A solution to the problem of having several MLSs serving a local region has been long sought by larger real estate brokerage companies. They typically must join several MLSs if their business serves more than just a small, local area. The real winner with this initiative, however, is the general public, who would have the ability to access statewide information through their real estate agent
"A statewide MLS would not only give real estate agents and brokers access to comprehensive property information, it would also give them a standard MLS database with a single set of rules, policies and data display requirements" according to the Bay East Association of REALTORS® president. "This is something the real estate community has been seeking for many years, and we encourage our neighboring REALTOR® associations and MLSs to participate in the statewide MLS initiative" .
It is anticipated that under the statewide MLS, the local Associations will be the point of contact for members to subscribe to and participate in the California MLS, and, in turn, enhance the level of MLS services to agents and brokers.
While a statewide MLS in my opinion is a step in the right direction, I truly hope that California Realtors can someday be as progressive as Houston and create a website that leads us to the future as Houston has done! California Realtors need to remove their fears and plunge into the future to give the consumers the service and information possible in order for them to make good decisions in purchasing or selling a home!
See for yourself HAR.com !!!
Showing posts with label home ownership. Show all posts
Showing posts with label home ownership. Show all posts
Friday, March 14, 2008
Friday, March 7, 2008
Judge throws out ban on down-payment assistance
Federal regulators have not adequately explained their decision to reverse a policy allowing seller-funded down-payment assistance on FHA-backed loans -- or provided sufficient responses to suggestions on ways to mend, rather than end, the practice -- a federal judge has ruled.
The ruling means the U.S. Department of Housing and Urban Development will have to reopen an administrative proceeding that culminated in a rule change last October banning seller-funded down-payment assistance on loans guaranteed by the Federal Housing Administration (see Inman News story).
Claiming seller-funded down-payment assistance artificially inflates home prices and more than doubles the odds that a loan will end up in default, HUD put forward the proposed rule change last spring. A final rule banning the practice was published in the Federal Register on Oct. 1, after HUD received more than 15,000 comments on the proposal.
Three nonprofits that provide seller-funded down-payment assistance filed separate lawsuits to block implementation of the rule, saying it would have a disproportionate impact on minorities, low-income and single-parent families who rely on the down-payment-assistance programs they provide.
In a Feb. 29 order setting aside the rule change, U.S. District Court Judge Lawrence Karlton said that although HUD provided a "reasoned basis" for the rule change, it "was not honest with itself or the public that it was reversing course from its prior policy."
In putting forward the proposed rule change, Karlton said, HUD presented evidence that seller-funded down-payment assistance harms consumers by inflating home prices, and that the increased default rates on such loans leads to greater losses. HUD also noted abortive attempts at ending seller-funded down-payment assistance during the Clinton administration.
But more recently, Karlton said, HUD had "warmed" to seller-funded down-payment assistance -- a fact omitted in its arguments for a change in course.
In a 2005 letter, HUD Assistant Secretary for Housing Brian Montgomery defended seller-funded down-payment assistance against calls for a ban by the U.S. Government Accountability Office. Although Montgomery recognized problems with the practice, he said those who relied on seller-funded down-payment assistance "are representative of the population that FHA was established to serve."
At the time, Montgomery said that instead of banning the practice, FHA would rather charge higher premiums on loans that relied on seller-funded down-payment assistance.
Karlton said that "while HUD may have set forth good reasons for the rule's adoption, it did not adequately explain why it was changing its mind."
By failing to acknowledge its previous position, HUD violated the Administrative Procedures Act, which governs the process for implementing such changes, the judge said in his order.
Karlton said HUD also failed to provide an adequate response to some arguments put forward by proponents of seller-funded down payment assistance for overhauling, instead of abolishing, the practice.
Those suggestions included the same proposal put forward by Montgomery in 2005 -- that HUD implement risk-based pricing for loans involving seller-funded down-payment insurance -- and require lenders to inform appraisers of the source of down-payment assistance.
HUD maintains that it is implementing risk-based pricing, and that FHA modernization legislation now being considered by Congress will lower or eliminate down-payment requirements for some borrowers.
But Karlton said such an argument is "a non-sequitur" because HUD's intent is to introduce risk-based pricing in conjunction with a ban on seller-funded down-payment assistance, rather than in lieu of a ban, as proposed in 2005.
In ordering the Housing Department to reopen the rulemaking process, Karlton barred HUD Secretary Alphonso Jackson from participating in the proceedings because of remarks attributed to him during the public comment period.
In a June 5, 2007, article by Bloomberg News, Jackson was quoted as saying he was "very much against" seller-funded down-payment assistance. "I think it's wrong. I don't want to continue to be a partner in a program where so many people can't afford to keep up their payments."
The article also paraphrased Jackson as saying HUD intended to approve the new rule even if the agency received critical comments.
"Allowing the public to submit comments to an agency that has already made its decision is no different from prohibiting comments altogether," Karlton said.
But Karlton also said courts have found that just because officials take positions or express strong views doesn't mean they are no longer capable of being objective and fair.
Because Jackson was not involved in the original rule-making proceeding -- he had delegated that authority to Montgomery -- it might be "imprudent" to reopen the process simply to exclude him, Karlton said.
But since he had already decided to reopen the process for other reasons -- because HUD failed to provide a reasoned analysis for its departure from prior policy, and did not adequately respond to comments -- disqualifying Jackson "will likely impose little or no burden on the agency," Karlton ruled.
The ruling was made in a case brought by Nehemiah Corp. of America in the U.S. District Court for the Eastern District of California. Two similar lawsuits were filed by AmeriDream Inc. and the Penobscot Indian Nation in the U.S. District Court for Washington, D.C.
Scott Syphax, the president and chief executive officer of Nehemiah, issued a statement this week saying the company was "thrilled with the Court's decision to support low- to moderate-income families across the country" and looked forward to working with HUD in the future.
The ruling means the U.S. Department of Housing and Urban Development will have to reopen an administrative proceeding that culminated in a rule change last October banning seller-funded down-payment assistance on loans guaranteed by the Federal Housing Administration (see Inman News story).
Claiming seller-funded down-payment assistance artificially inflates home prices and more than doubles the odds that a loan will end up in default, HUD put forward the proposed rule change last spring. A final rule banning the practice was published in the Federal Register on Oct. 1, after HUD received more than 15,000 comments on the proposal.
Three nonprofits that provide seller-funded down-payment assistance filed separate lawsuits to block implementation of the rule, saying it would have a disproportionate impact on minorities, low-income and single-parent families who rely on the down-payment-assistance programs they provide.
In a Feb. 29 order setting aside the rule change, U.S. District Court Judge Lawrence Karlton said that although HUD provided a "reasoned basis" for the rule change, it "was not honest with itself or the public that it was reversing course from its prior policy."
In putting forward the proposed rule change, Karlton said, HUD presented evidence that seller-funded down-payment assistance harms consumers by inflating home prices, and that the increased default rates on such loans leads to greater losses. HUD also noted abortive attempts at ending seller-funded down-payment assistance during the Clinton administration.
But more recently, Karlton said, HUD had "warmed" to seller-funded down-payment assistance -- a fact omitted in its arguments for a change in course.
In a 2005 letter, HUD Assistant Secretary for Housing Brian Montgomery defended seller-funded down-payment assistance against calls for a ban by the U.S. Government Accountability Office. Although Montgomery recognized problems with the practice, he said those who relied on seller-funded down-payment assistance "are representative of the population that FHA was established to serve."
At the time, Montgomery said that instead of banning the practice, FHA would rather charge higher premiums on loans that relied on seller-funded down-payment assistance.
Karlton said that "while HUD may have set forth good reasons for the rule's adoption, it did not adequately explain why it was changing its mind."
By failing to acknowledge its previous position, HUD violated the Administrative Procedures Act, which governs the process for implementing such changes, the judge said in his order.
Karlton said HUD also failed to provide an adequate response to some arguments put forward by proponents of seller-funded down payment assistance for overhauling, instead of abolishing, the practice.
Those suggestions included the same proposal put forward by Montgomery in 2005 -- that HUD implement risk-based pricing for loans involving seller-funded down-payment insurance -- and require lenders to inform appraisers of the source of down-payment assistance.
HUD maintains that it is implementing risk-based pricing, and that FHA modernization legislation now being considered by Congress will lower or eliminate down-payment requirements for some borrowers.
But Karlton said such an argument is "a non-sequitur" because HUD's intent is to introduce risk-based pricing in conjunction with a ban on seller-funded down-payment assistance, rather than in lieu of a ban, as proposed in 2005.
In ordering the Housing Department to reopen the rulemaking process, Karlton barred HUD Secretary Alphonso Jackson from participating in the proceedings because of remarks attributed to him during the public comment period.
In a June 5, 2007, article by Bloomberg News, Jackson was quoted as saying he was "very much against" seller-funded down-payment assistance. "I think it's wrong. I don't want to continue to be a partner in a program where so many people can't afford to keep up their payments."
The article also paraphrased Jackson as saying HUD intended to approve the new rule even if the agency received critical comments.
"Allowing the public to submit comments to an agency that has already made its decision is no different from prohibiting comments altogether," Karlton said.
But Karlton also said courts have found that just because officials take positions or express strong views doesn't mean they are no longer capable of being objective and fair.
Because Jackson was not involved in the original rule-making proceeding -- he had delegated that authority to Montgomery -- it might be "imprudent" to reopen the process simply to exclude him, Karlton said.
But since he had already decided to reopen the process for other reasons -- because HUD failed to provide a reasoned analysis for its departure from prior policy, and did not adequately respond to comments -- disqualifying Jackson "will likely impose little or no burden on the agency," Karlton ruled.
The ruling was made in a case brought by Nehemiah Corp. of America in the U.S. District Court for the Eastern District of California. Two similar lawsuits were filed by AmeriDream Inc. and the Penobscot Indian Nation in the U.S. District Court for Washington, D.C.
Scott Syphax, the president and chief executive officer of Nehemiah, issued a statement this week saying the company was "thrilled with the Court's decision to support low- to moderate-income families across the country" and looked forward to working with HUD in the future.
Article is by the US Housing and Urban Development
***
***
Thursday, March 6, 2008
There are Pockets of Pain around the US but Not as if Most Americans are Losing Their Homes!
Sure, there are pockets of pain around the US, but it's not as if most Americans are losing their homes. More than 99% of homes aren't in foreclosure.
By Scott Burns
A recent list of year-end mortgage foreclosure rates in 100 top metropolitan areas drew a lot of attention. Released by RealtyTrac, a company that compiles data on home foreclosures, the list showed the number of foreclosure filings in each metro area, the percentage of homes being foreclosed and the percentage change from the previous year.
Though the report had some dismal news -- such as the nearly 4.9% foreclosure rate in the Stockton, Calif., area -- a close look at the data also provides some reassuring information. It tells me, for instance, that the foreclosure crisis is a regional problem, not a systemic one. It could become a systemic problem, of course, but we're a long way from that now.
This news will disappoint the gloom-and-doom crew and all those seeking the excitement of financial upheaval. But it may be time to temper our worry and take a closer look at some of the year-over-year foreclosure statistics:
Though the national rate of foreclosure increased by a whopping 79% between December 2006 and December 2007, the rate was still only 1.033%. Because about 30% of all homes are owned mortgage-free, this means that for all the noise about a crisis, only seven-tenths of 1% of all homes were in foreclosure.
In the top 100 housing markets, the average foreclosure rate was somewhat higher -- 1.38% -- and it was up 78% over the previous year. But if you rank-ordered the list of the top 100 areas, only 34 had foreclosure rates above the group average. Fifty-one areas had rates of 1% or less.
Foreclosure rates actually fell in 14 of the 100 areas. More important, many of the areas with the highest increases in foreclosure rates were rising off rates that were tiny. The Bethesda, Md., area, to offer the most extreme case, saw foreclosures rise 1,288% -- to a rate of 0.682%. In other words, foreclosures there were virtually nonexistent the year before. Today they are still well below the national average. The same can be said for the Albany, N.Y., area (up 638% to 0.25%), the Baltimore area (up 544% to 0.73%) and the Providence, R.I., area (up 354% to 0.41%).
Another pattern emerges if you cross the foreclosure rates with the Office of Federal Housing Enterprise Oversight (OFHEO) index of home prices. It shows that the top 10 foreclosure areas in America are areas of extreme price change -- changes far from the national average of 46.92% over the past five years. (See the table below.)
Talk back: Do you think the foreclosure crisis is overblown?
Seven of the top 10 foreclosure areas had experienced major price spikes in the past five years. Three of the top 10 foreclosure areas had experienced price increases that were dramatically lower than the national average. That pattern continues when you examine the top 25 foreclosure areas.
A tale of two extremes:
Metro area-Foreclosure rate 12/07 -Year to year increase of foreclosures- 5-year home-appreciation rate
Detroit/Livonia/Dearborn, Mich. 4.92% 68.15% -0.92%
Stockton, Calif. 4.87% 271.3% 65.07%
Las Vegas/Paradise, Nev. 4.23% 169.11% 88.33%
Riverside/San Bernardino, Calif. 3.83% 186.14% 107.80%
Sacramento, Calif. 3.12% 272.54% 56.9%
Cleveland/Lorain/Elyria/Mentor, Ohio 2.97% 112.43% 9.36%
Bakersfield, Calif. 2.96% 244.82% 113.82%
Miami 2.72% 106.13% 114.98%
Denver/Aurora, Colo. 2.64% 27.19% 10.83%
Fort Lauderdale, Fla. 2.63% 110.05% 94.29%
National average 1.03% 79.21% 46.92%
Average of top 100 metro areas 1.38% 78.23% Not available
Sources: RealtyTrac, OFHEO
The seven areas with the top price appreciation for the past five years averaged a stunning 91.6% increase, nearly double the national average. The national average, in turn, was about triple the inflation rate for the period.
Small wonder the foreclosure rate is booming as well. Anyone who bought in the past few years with a 5% or 10% down payment has a good chance of being upside down as froth comes off the market. In those areas the problem is about irrational price spikes and the hazards they bring to homeownership.
Some would call this "a Cadillac problem" -- a great problem to have, like having more boats than you have water-skiers. Though 5% of the homeowners may be losing their homes, most of the other 95% probably feel significantly richer.
Smart Spending blog: When is it OK to walk away from your home?
How much richer? Try this. Suppose you paid three times your income for a house and it nearly doubled in value over five years. What does that mean? It means your net worth grew by nearly three years of income. Try achieving that with your 401(k) plan. Even if you bought halfway through the surge, your gain is likely to be well more than one year of income. However you cut it, the change compares quite favorably with working and saving.
Should you rent or buy?Owning your own home is an idea so popular that it's known as the American dream. But as prices fall and foreclosures rise, for many it's become a nightmare instead.
The three metro areas with low price appreciations are a different matter. Homeowners in Detroit have actually lost money on their homes over the past five years. That, in turn, has limited their ability to make up for income shortfalls by borrowing against home equity. Add a shrinking job market, and places such as Detroit are coping with a perpetual surplus of sellers over buyers.
One indication is the cost of renting a U-Haul truck. It recently cost $1,447 to rent a 26-foot truck to move from Detroit to Dallas but only $521 to rent the same truck to move from Dallas to Detroit. The real economic problem, for the most people, isn't the price-spike states. It's the deflation states.
Questions about personal finance and investments may be e-mailed to scott@scottburns.com
Article is Compliments of California Association of Realtors
By Scott Burns
A recent list of year-end mortgage foreclosure rates in 100 top metropolitan areas drew a lot of attention. Released by RealtyTrac, a company that compiles data on home foreclosures, the list showed the number of foreclosure filings in each metro area, the percentage of homes being foreclosed and the percentage change from the previous year.
Though the report had some dismal news -- such as the nearly 4.9% foreclosure rate in the Stockton, Calif., area -- a close look at the data also provides some reassuring information. It tells me, for instance, that the foreclosure crisis is a regional problem, not a systemic one. It could become a systemic problem, of course, but we're a long way from that now.
This news will disappoint the gloom-and-doom crew and all those seeking the excitement of financial upheaval. But it may be time to temper our worry and take a closer look at some of the year-over-year foreclosure statistics:
Though the national rate of foreclosure increased by a whopping 79% between December 2006 and December 2007, the rate was still only 1.033%. Because about 30% of all homes are owned mortgage-free, this means that for all the noise about a crisis, only seven-tenths of 1% of all homes were in foreclosure.
In the top 100 housing markets, the average foreclosure rate was somewhat higher -- 1.38% -- and it was up 78% over the previous year. But if you rank-ordered the list of the top 100 areas, only 34 had foreclosure rates above the group average. Fifty-one areas had rates of 1% or less.
Foreclosure rates actually fell in 14 of the 100 areas. More important, many of the areas with the highest increases in foreclosure rates were rising off rates that were tiny. The Bethesda, Md., area, to offer the most extreme case, saw foreclosures rise 1,288% -- to a rate of 0.682%. In other words, foreclosures there were virtually nonexistent the year before. Today they are still well below the national average. The same can be said for the Albany, N.Y., area (up 638% to 0.25%), the Baltimore area (up 544% to 0.73%) and the Providence, R.I., area (up 354% to 0.41%).
Another pattern emerges if you cross the foreclosure rates with the Office of Federal Housing Enterprise Oversight (OFHEO) index of home prices. It shows that the top 10 foreclosure areas in America are areas of extreme price change -- changes far from the national average of 46.92% over the past five years. (See the table below.)
Talk back: Do you think the foreclosure crisis is overblown?
Seven of the top 10 foreclosure areas had experienced major price spikes in the past five years. Three of the top 10 foreclosure areas had experienced price increases that were dramatically lower than the national average. That pattern continues when you examine the top 25 foreclosure areas.
A tale of two extremes:
Metro area-Foreclosure rate 12/07 -Year to year increase of foreclosures- 5-year home-appreciation rate
Detroit/Livonia/Dearborn, Mich. 4.92% 68.15% -0.92%
Stockton, Calif. 4.87% 271.3% 65.07%
Las Vegas/Paradise, Nev. 4.23% 169.11% 88.33%
Riverside/San Bernardino, Calif. 3.83% 186.14% 107.80%
Sacramento, Calif. 3.12% 272.54% 56.9%
Cleveland/Lorain/Elyria/Mentor, Ohio 2.97% 112.43% 9.36%
Bakersfield, Calif. 2.96% 244.82% 113.82%
Miami 2.72% 106.13% 114.98%
Denver/Aurora, Colo. 2.64% 27.19% 10.83%
Fort Lauderdale, Fla. 2.63% 110.05% 94.29%
National average 1.03% 79.21% 46.92%
Average of top 100 metro areas 1.38% 78.23% Not available
Sources: RealtyTrac, OFHEO
The seven areas with the top price appreciation for the past five years averaged a stunning 91.6% increase, nearly double the national average. The national average, in turn, was about triple the inflation rate for the period.
Small wonder the foreclosure rate is booming as well. Anyone who bought in the past few years with a 5% or 10% down payment has a good chance of being upside down as froth comes off the market. In those areas the problem is about irrational price spikes and the hazards they bring to homeownership.
Some would call this "a Cadillac problem" -- a great problem to have, like having more boats than you have water-skiers. Though 5% of the homeowners may be losing their homes, most of the other 95% probably feel significantly richer.
Smart Spending blog: When is it OK to walk away from your home?
How much richer? Try this. Suppose you paid three times your income for a house and it nearly doubled in value over five years. What does that mean? It means your net worth grew by nearly three years of income. Try achieving that with your 401(k) plan. Even if you bought halfway through the surge, your gain is likely to be well more than one year of income. However you cut it, the change compares quite favorably with working and saving.
Should you rent or buy?Owning your own home is an idea so popular that it's known as the American dream. But as prices fall and foreclosures rise, for many it's become a nightmare instead.
The three metro areas with low price appreciations are a different matter. Homeowners in Detroit have actually lost money on their homes over the past five years. That, in turn, has limited their ability to make up for income shortfalls by borrowing against home equity. Add a shrinking job market, and places such as Detroit are coping with a perpetual surplus of sellers over buyers.
One indication is the cost of renting a U-Haul truck. It recently cost $1,447 to rent a 26-foot truck to move from Detroit to Dallas but only $521 to rent the same truck to move from Dallas to Detroit. The real economic problem, for the most people, isn't the price-spike states. It's the deflation states.
Questions about personal finance and investments may be e-mailed to scott@scottburns.com
Article is Compliments of California Association of Realtors
Wednesday, March 5, 2008
Good News! FHA Releases New Mortgage Limits in California
GOOD NEWS !!!!!
FHA Releases New Mortgage Limits for California Counties
FHA Max Limits Include 14 CA Counties
* FHA Press Release *
WASHINGTON - Tens of thousands of California families could be eligible
this year to purchase or refinance their homes using affordable,
government-backed mortgages, thanks to the economic growth package
signed into law by President Bush. The Economic Stimulus Act of 2008
will allow HUD's Federal Housing Administration (FHA) to temporarily
increase its loan limits and insure larger mortgages at a more
affordable price in high cost areas of the country.
"The Bush Administration is expanding the pool of eligible borrowers,
enabling more American families to qualify for safe, affordable
FHA-insured mortgage loans. These temporarily higher loan limits are a
shot in the arm for communities trying to sustain property values,
bringing much-needed liquidity to the mortgage market, while helping
many current homeowners who desperately need to refinance," said HUD
Secretary Alphonso Jackson at a forum on how to prevent foreclosure at
the Operation Hope Center in Los Angeles and a Hope Now Alliance event
in Anaheim.
Beginning tomorrow, HUD will offer temporary FHA loan limits that will
range from $271,050 to $729,750. Overall, the change in loan limits
will help provide economic stability to America 's communities and give
nearly 240,000 additional homeowners and homebuyers a safer, more
affordable mortgage alternative. The maximum amount of $729,750 will
only be applicable to extremely high-cost metropolitan areas such as:
Los Angeles County , San Francisco County , Orange County , and Santa
Barbara County . Previously, FHA's loan limits in these very high-cost
areas were capped at $362,790.
The Economic Stimulus Act of 2008 permits FHA to insure loans on amounts
up to 125 percent of the area median house price, when that amount is
between the national minimum ($271,050) and maximum ($729,750). The new
minimum and maximum loan limits are based on 65 percent and 175 percent
of the conforming loan limits for Government-Sponsored Enterprises in
2008, which is $417,000. The FHA used a combination of existing
government data sets and available commercial information to determine
the median sales price for each area. The change in loan limits are
applicable to all FHA-insured mortgage loans endorsed after HUD
publishes the increased loan limits tomorrow, and it lasts until
December 31, 2008 .
By increasing loan limits nationwide, FHA will provide much needed
liquidity and stability to housing markets across the country. Already,
as conventional sources of mortgage credit have been contracting, FHA
has been filling the void. From September to December 2007, FHA
facilitated more than $38 billion of much-needed mortgage activity in
the housing market, more than $15 billion of which was through
FHASecure, FHA's refinancing product. By focusing on 30-year fixed rate
mortgages, FHA helps homeowners avoid and escape the risks associated
exotic subprime mortgage products, which have resulted in rising default
and foreclosure rates.
"This is not an easy crisis to address, and there is no silver-bullet,
but I know that we can help hundreds of thousands of people keep their
homes, and we can calm the waters," said Jackson .
In January 2009, FHA's maximum loan limit will return to $362,790,
unless the U.S. Congress approves bipartisan legislation to permanently
increase loan limits as part of the FHA Modernization bill, which is
still awaiting final approval on Capitol Hill.
"In January 2009 the loan limits will return to their previous setting,"
Jackson said. "That is why we need to permanently raise the loan limits
to an acceptable level that more accurately reflect housing prices
nationwide. We also need to make the minimum down payment more flexible
and create a fairer insurance premium structure. This will allow more
families to use FHA."
FHA loan limits are based on the county in which the property is
located. However, for properties located in metropolitan or
micropolitan statistical areas, the limit is set at that of the county
with the highest limit within the metropolitan or micropolitan area.
The new temporary FHA loan limits for California are attached below.
The full text of the Secretary's remarks can be found on the HUD
website.
HUD is the nation's housing agency committed to increasing
homeownership, particularly among minorities; creating affordable
housing opportunities for low-income Americans; and supporting the
homeless, elderly, people with disabilities and people living with AIDS.
The Department also promotes economic and community development, and
enforces the nation's fair housing laws. More information about HUD and
its programs is available on the Internet at www.hud.gov
California County Limits
Obs prop_addr_st county_nm med_price FHA_1unit
185 CA Alameda County 995000 729750 - MAX
186 CA Alpine County 438000 547500
187 CA Amador County 355000 443750
188 CA Butte County 320000 400000
189 CA Calaveras County 370000 462500
190 CA Colusa County 318000 397500
191 CA Contra Costa County 995000 729750 - MAX
192 CA Del Norte County 249000 311250
193 CA El Dorado County 464000 580000
194 CA Fresno County 305000 381250
195 CA Glenn County 230000 287500
196 CA Humboldt County 315000 393750
197 CA Imperial County 260000 325000
198 CA Inyo County 350000 437500
199 CA Kern County 295000 368750
200 CA Kings County 260000 325000
201 CA Lake County 321000 401250
202 CA Lassen County 200000 271050
203 CA Los Angeles County 710000 729750 - MAX
204 CA Madera County 340000 425000
205 CA Marin County 995000 729750 - MAX
206 CA Mariposa County 330000 412500
207 CA Mendocino County 410000 512500
208 CA Merced County 378000 472500
209 CA Modoc County 125000 271050
210 CA Mono County 370000 462500
211 CA Monterey County 599000 729750 - MAX
212 CA Napa County 615000 729750 - MAX
213 CA Nevada County 450000 562500
214 CA Orange County 710000 729750 - MAX
215 CA Placer County 464000 580000
216 CA Plumas County 328000 410000
217 CA Riverside County 400000 500000
218 CA Sacramento County 464000 580000
219 CA San Benito County 790000 729750 - MAX
220 CA San Bernardino County 400000 500000
221 CA San Diego County 558000 697500
222 CA San Francisco County 995000 729750 - MAX
223 CA San Joaquin County 391000 488750
224 CA San Luis Obispo County 550000 687500
225 CA San Mateo County 995000 729750 - MAX
226 CA Santa Barbara County 615000 729750 - MAX
227 CA Santa Clara County 790000 729750 - MAX
228 CA Santa Cruz County 719000 729750 - MAX
229 CA Shasta County 339000 423750
230 CA Sierra County 228000 285000
231 CA Siskiyou County 235000 293750
232 CA Solano County 446000 557500
233 CA Sonoma County 530000 662500
234 CA Stanislaus County 339000 423750
235 CA Sutter County 340000 425000
236 CA Tehama County 250000 312500
237 CA Trinity County 200000 271050
238 CA Tulare County 260000 325000
239 CA Tuolumne County 350000 437500
240 CA Ventura County 599000 729750 - MAX
241 CA Yolo County 464000 580000
242 CA Yuba County 340000 425000
FHA Releases New Mortgage Limits for California Counties
FHA Max Limits Include 14 CA Counties
* FHA Press Release *
WASHINGTON - Tens of thousands of California families could be eligible
this year to purchase or refinance their homes using affordable,
government-backed mortgages, thanks to the economic growth package
signed into law by President Bush. The Economic Stimulus Act of 2008
will allow HUD's Federal Housing Administration (FHA) to temporarily
increase its loan limits and insure larger mortgages at a more
affordable price in high cost areas of the country.
"The Bush Administration is expanding the pool of eligible borrowers,
enabling more American families to qualify for safe, affordable
FHA-insured mortgage loans. These temporarily higher loan limits are a
shot in the arm for communities trying to sustain property values,
bringing much-needed liquidity to the mortgage market, while helping
many current homeowners who desperately need to refinance," said HUD
Secretary Alphonso Jackson at a forum on how to prevent foreclosure at
the Operation Hope Center in Los Angeles and a Hope Now Alliance event
in Anaheim.
Beginning tomorrow, HUD will offer temporary FHA loan limits that will
range from $271,050 to $729,750. Overall, the change in loan limits
will help provide economic stability to America 's communities and give
nearly 240,000 additional homeowners and homebuyers a safer, more
affordable mortgage alternative. The maximum amount of $729,750 will
only be applicable to extremely high-cost metropolitan areas such as:
Los Angeles County , San Francisco County , Orange County , and Santa
Barbara County . Previously, FHA's loan limits in these very high-cost
areas were capped at $362,790.
The Economic Stimulus Act of 2008 permits FHA to insure loans on amounts
up to 125 percent of the area median house price, when that amount is
between the national minimum ($271,050) and maximum ($729,750). The new
minimum and maximum loan limits are based on 65 percent and 175 percent
of the conforming loan limits for Government-Sponsored Enterprises in
2008, which is $417,000. The FHA used a combination of existing
government data sets and available commercial information to determine
the median sales price for each area. The change in loan limits are
applicable to all FHA-insured mortgage loans endorsed after HUD
publishes the increased loan limits tomorrow, and it lasts until
December 31, 2008 .
By increasing loan limits nationwide, FHA will provide much needed
liquidity and stability to housing markets across the country. Already,
as conventional sources of mortgage credit have been contracting, FHA
has been filling the void. From September to December 2007, FHA
facilitated more than $38 billion of much-needed mortgage activity in
the housing market, more than $15 billion of which was through
FHASecure, FHA's refinancing product. By focusing on 30-year fixed rate
mortgages, FHA helps homeowners avoid and escape the risks associated
exotic subprime mortgage products, which have resulted in rising default
and foreclosure rates.
"This is not an easy crisis to address, and there is no silver-bullet,
but I know that we can help hundreds of thousands of people keep their
homes, and we can calm the waters," said Jackson .
In January 2009, FHA's maximum loan limit will return to $362,790,
unless the U.S. Congress approves bipartisan legislation to permanently
increase loan limits as part of the FHA Modernization bill, which is
still awaiting final approval on Capitol Hill.
"In January 2009 the loan limits will return to their previous setting,"
Jackson said. "That is why we need to permanently raise the loan limits
to an acceptable level that more accurately reflect housing prices
nationwide. We also need to make the minimum down payment more flexible
and create a fairer insurance premium structure. This will allow more
families to use FHA."
FHA loan limits are based on the county in which the property is
located. However, for properties located in metropolitan or
micropolitan statistical areas, the limit is set at that of the county
with the highest limit within the metropolitan or micropolitan area.
The new temporary FHA loan limits for California are attached below.
The full text of the Secretary's remarks can be found on the HUD
website.
HUD is the nation's housing agency committed to increasing
homeownership, particularly among minorities; creating affordable
housing opportunities for low-income Americans; and supporting the
homeless, elderly, people with disabilities and people living with AIDS.
The Department also promotes economic and community development, and
enforces the nation's fair housing laws. More information about HUD and
its programs is available on the Internet at www.hud.gov
California County Limits
Obs prop_addr_st county_nm med_price FHA_1unit
185 CA Alameda County 995000 729750 - MAX
186 CA Alpine County 438000 547500
187 CA Amador County 355000 443750
188 CA Butte County 320000 400000
189 CA Calaveras County 370000 462500
190 CA Colusa County 318000 397500
191 CA Contra Costa County 995000 729750 - MAX
192 CA Del Norte County 249000 311250
193 CA El Dorado County 464000 580000
194 CA Fresno County 305000 381250
195 CA Glenn County 230000 287500
196 CA Humboldt County 315000 393750
197 CA Imperial County 260000 325000
198 CA Inyo County 350000 437500
199 CA Kern County 295000 368750
200 CA Kings County 260000 325000
201 CA Lake County 321000 401250
202 CA Lassen County 200000 271050
203 CA Los Angeles County 710000 729750 - MAX
204 CA Madera County 340000 425000
205 CA Marin County 995000 729750 - MAX
206 CA Mariposa County 330000 412500
207 CA Mendocino County 410000 512500
208 CA Merced County 378000 472500
209 CA Modoc County 125000 271050
210 CA Mono County 370000 462500
211 CA Monterey County 599000 729750 - MAX
212 CA Napa County 615000 729750 - MAX
213 CA Nevada County 450000 562500
214 CA Orange County 710000 729750 - MAX
215 CA Placer County 464000 580000
216 CA Plumas County 328000 410000
217 CA Riverside County 400000 500000
218 CA Sacramento County 464000 580000
219 CA San Benito County 790000 729750 - MAX
220 CA San Bernardino County 400000 500000
221 CA San Diego County 558000 697500
222 CA San Francisco County 995000 729750 - MAX
223 CA San Joaquin County 391000 488750
224 CA San Luis Obispo County 550000 687500
225 CA San Mateo County 995000 729750 - MAX
226 CA Santa Barbara County 615000 729750 - MAX
227 CA Santa Clara County 790000 729750 - MAX
228 CA Santa Cruz County 719000 729750 - MAX
229 CA Shasta County 339000 423750
230 CA Sierra County 228000 285000
231 CA Siskiyou County 235000 293750
232 CA Solano County 446000 557500
233 CA Sonoma County 530000 662500
234 CA Stanislaus County 339000 423750
235 CA Sutter County 340000 425000
236 CA Tehama County 250000 312500
237 CA Trinity County 200000 271050
238 CA Tulare County 260000 325000
239 CA Tuolumne County 350000 437500
240 CA Ventura County 599000 729750 - MAX
241 CA Yolo County 464000 580000
242 CA Yuba County 340000 425000
Tuesday, March 4, 2008
Short Sales versus Foreclosure and Deeds in Lieu
Short Sales and Deeds in Lieu After the Mortgage Forgiveness Debt Relief Act of 2007
by Richard A. Goodman
Hardly a day goes by without alarming new statistics concerning real estate sales, mortgages and foreclosures. To cite but one, in 2007, there were 84,375 trustee’s sales in California, an all time record. Since the rates on $385 billion of subprime and other nontraditional loans are expected to reset in 2008, nearly as much as in 2007, relief is not expected at any time soon.
Legislative and regulatory proposals abound to stem the tide of foreclosure. At least ten states (not including California) have enacted foreclosure related legislation within the past year. In December, the Federal Reserve proposed rules under the Home Ownership and Equity Protection Act (“HOEPA”) to address the problem. The House of Representatives recently passed the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.B. 3915) and similar legislation has been passed by the Senate (S.B. 2338).
The harsh reality is that, confronted with loan payments they no longer can afford, owners have only three alternatives short of bankruptcy: giving the lender a deed in lieu of foreclosure; by doing a short sale (i.e., a sale in which the lender agrees to accept less than a full payoff of its loan balance); or walking away from the property and allowing the lender to foreclose. The article will address the differences between these three alternatives and show how the recently enacted Mortgage Forgiveness Debt Relief Act of 2007 affects the tax consequences of each of them.
Major Issues and Considerations
Costs, Timing and Title: In California, a non-judicial foreclosure sale cannot occur until at least three months and twenty-one days after the recordation of a notice of default. If the owner brings a civil action to stop foreclosure or files for bankruptcy, the process can take far longer. In addition, a foreclosure sale costs the lender several thousand dollars, much more if there is litigation. Furthermore, the lender cannot even commence eviction proceedings until after the trustee’s sale. By contrast, if a lender accepts a deed in lieu of foreclosure or approves a short sale, the process can be completed within days rather than months, at minimal cost, and can be conditioned on the owner’s relinquishing possession.
Given the disadvantages of and obstacles to foreclosure, why do so many trustee’s sales occur? One reason is that owners frequently are too dispirited to avoid foreclosure or are unaware that they may be better off attempting to transfer the property through a “deeds in lieu” or a short sale. In addition, lenders frequently require owners to pay all escrow and closing costs as a condition of accepting a deed in lieu. Equally significant, however, is that only by completing a foreclosure sale can junior liens be wiped out. By accepting a “deed in lieu,” the lender takes title to the property subject to all junior liens and encumbrances!
Example 1: Mary Green’s home is worth $500,000 in the current market but is encumbered both by a $500,000 Deed of Trust in favor of Lender A and a $100,000 Deed of Trust in favor of Lender B and she is in default on both loans. She offers a deed in lieu of foreclosure to Lender A, but it declines.
If Lender A were to accept the deed in lieu, it would acquire the property subject to the $100,000 Deed of Trust while if it forecloses, the purchaser at the trustee’s sale will acquire the property free and clear of the $100,000 Deed of Trust.
This is not an insignificant problem since distressed property frequently is encumbered by several deeds of trust. Therefore, any lender willing to consider accepting a deed in lieu invariably requires the issuance of a new title policy to insure that there are no junior liens against the property.
A short sale, like a deed in lieu, can be completed quickly and cheaply. Furthermore, unlike a deed in lieu, the owner rarely is required to pay for escrow and closing costs. However, as with deeds in lieu, the existence of junior liens presents nearly insuperable problems. The reason is that a short sale requires the cooperation of all lenders. The senior lender has little reason to offer any of the proceeds to a junior lender, since all junior liens will be wiped out if the senior lender forecloses. Therefore, the senior lender typically requires that it receive all of the net proceeds of sale or that the junior lienholder be paid only a token amount. If the senior loan has been securitized, the loan securitization agreement may explicitly prohibit the loan servicer from negotiating in this situation. However, if the junior lienholder will receive nothing from a short sale, it has no incentive to cooperate.
Credit Impairment: A foreclosure, which is considered a "major derogatory," typically results in the lowering of one’s FICO credit score by 250-280 points. This can severely hamper someone's ability to get credit for many years. In addition, since many insurance companies now utilize credit histories to evaluate applicants, a foreclosure can later prevent an owner from obtaining life, health or disability insurance.
However, the effect of a major derogatory depends in part upon the circumstances under which it occurred. For example, if the borrower lost his property because of medical bills from a catastrophic illness, a subsequent lender may overlook even a major derogatory. Similarly, a borrower who has been candid and forthcoming with the lender as soon as financial problems occur will be viewed in a far more positive light than one who simply stops making payments, or worse, misleads the lender in any way. Potential lenders are most hostile to borrowers who have defrauded prior lenders or have intentionally delayed foreclosure proceedings in the past.
Although giving a deed in lieu may also have serious credit consequences, these frequently can be ameliorated. For example, an owner can negotiate for the lender, in a deed in lieu transaction to report the loan as “paid” or “settled” rather than as a foreclosure. In addition, loan applications do not always flag such transfers, although the application for conforming loans does request information on deeds in lieu as well as on prior foreclosures.
A short sale usually has significantly less effect than either a foreclosure or a deed in lieu, usually lowering one’s FICO score by 80-100 points. Furthermore, the owner can negotiate, as a condition of a short sale, that, in a short sale, the lender reports its loan as “paid” or “settled” to credit reporting bureaus. In addition, many applications for non-conforming loans do not ask about short sales at all.
Even if a new lender becomes aware that a loan applicant previously completed a short sale, the lender may not treat this as a major derogatory. Many lenders look favorably on a potential borrower who has taken affirmative steps to minimize the prior lender's loss.
Personal liability: As difficult as it is for an owner to face the loss of his entire equity, the possibility that the owner may have personal liability, in addition, is an even greater nightmare. In deciding how to dispose of a distressed property, the owner must understand whether there is any risk of personal liability and, if so, under what circumstances.
In California, "purchase money" loans are automatically non-recourse. A "purchase money" loan is a loan made by a seller to finance the purchase of property of any type or a loan made by a third party lender for the purchase of an owner-occupied, one-to-four unit property. The refinancing of a purchase money loan through the original lender is treated as a purchase money loan up to the amount of the original loan. Any loan other than a purchase money loan is a recourse loan unless it is specifically made non-recourse. This is typically accomplished by including a provision that the lender’s only recourse is to property and that the borrower has no personal liability on the note.
If a loan is non-recourse, either because it is a purchase money loan or because the note contains non-recourse language, the borrower need have no concern about potential personal liability.
But what if the loan is a recourse liability? The first thing to recognize is that even when lenders are entitled to pursue claims for personal liability, they rarely do so because of the expense, delay and uncertainty involved. In order to seek personal liability against the borrower, the lender must utilize a judicial foreclosure rather than a non-judicial foreclosure, which lengthens the foreclosure process by many months. After a decree of foreclosure is obtained, the court must hold a "fair value" hearing to determine if a deficiency judgment will be allowed. And even if a deficiency judgment is awarded, the lender may be unable to collect it. Potential buyers usually are scared away as the prior owner has a one-year right of redemption.
It is no wonder, therefore, most lenders prefer to conduct non-judicial foreclosures even though, by doing so, they must relinquish the possibility of obtaining deficiency judgments. In fact, the only situation in which an owner is likely to face personal liability is where the property is encumbered by a recourse junior lien. If the senior lender forecloses, the holder of the junior lien becomes a "sold out junior lienor." As such, that lender can sue directly on its note and seek personal liability against the borrower. Therefore, an owner whose property is encumbered by a recourse junior lien should take all reasonable steps to avoid a foreclosure of the senior lien. These steps might include agreeing to sign a new, relatively small note in favor of an existing lender in order to overcome the lender’s reluctance to agree to a short sale.
Lender Cooperation: If a short sale is contemplated, the lender should be consulted as soon as possible, as lenders typically require detailed financial information from the borrower as well as the listing and purchase documentation.
The most important factor influencing a lender's decision is whether the lender is likely to recoup more by foreclosing and selling the property as an REO or by accepting the short sale payoff. This decision is usually influenced by the following considerations:
• Has the property been fairly exposed to the market?
• Are the real estate brokers willing to accept a reduced commission?
• How quickly can the short sale be consummated and the loan payoff made?
• How much expense would the lender incur in a non-judicial foreclosure?
• Would the lender undertake significant toxic or other liability risks by
acquiring the property?
Tax Considerations: If a loan is non-recourse, the tax consequences of a short sale, a deed in lieu and a foreclosure are identical: the taxpayer is treated as having taxable gain to the extent that the loan balance exceeds the taxpayer's adjusted basis in the property. This gain generally is treated as capital gain.
Example 2: In 2004, John Doe purchases Blackacre, a vacation home, for $500,000, making a $50,000 down payment and obtaining a purchase money loan from Lender A for $450,000. In 2005, Doe refinances with a $600,000 loan from Lender A, which is secured by a non-recourse deed of trust. In 2006, Doe sells Blackacre for $550,000 in a short sale, paying all of the net proceeds to Lender A.
The $450,000 loan is non-recourse because it is used for the acquisition of Doe’s principal residence. The $600,000 is non-recourse by its terms. In 2006, Doe has a capital gain of $100,000 (i.e., $600,000-$500,000). Similarly, Doe would have had a $100,000 capital gain if he gave a deed in lieu to Lender A or if Lender A foreclosed.
Of course, if the property is the owner’s principal residence, all or part of the gain may be excluded.
Example 3: The facts are the same as in Example 2 except that Blackacre is Doe’s principal residence.
If Doe has owned and resided in Blackacre for at least two years as of the date of the short sale (or deed in lieu or foreclosure) and otherwise meets the requirements of IRC section 121, he will be entitled to an exclusion of up to $250,000 of gain if he is unmarried, $500,000 if he is married (the “Personal Residence Exclusion”).
Prior to 2007, the rule was that if the loan is recourse, an owner will have cancellation of debt income (“COD”) to the extent that the loan balance exceeds the fair market value of the property, regardless of how he disposes of the property. COD income is not eligible for the Personal Residence Exclusion and is taxable as ordinary income, not as capital gain!
Example 4: The facts are the same as in Example 3 except that the refinance in 2005 is through Lender B and is not specifically made non-recourse.
Because the purchase money loan is not refinanced through the original lender, the $600,000 loan is recourse. Therefore, on his 2006 tax return, Doe must report a capital gain of $50,000 (i.e., $550,000-500,000) unless the Personal Residence Exclusion applies. Doe also must report $50,000 of COD income (i.e., $600,000-$550,000).
In theory, the result was the same whether a recourse loan was cancelled through a foreclosure, the giving of a deed in lieu or a short sale. However, in either a foreclosure or a deed in lieu, the seller can contend, with the support of expert appraisals, that the fair market value of the property is at least as great as the loan balance. In a short sale, by contrast, the seller is stuck with the sale price as establishing the property’s fair market value.
The Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”), signed by President Bush on December 20, 2007, provides that certain debt cancellation is not treated as COD income. The Act applies only to “Qualified Personal Residence Indebtedness” (“QPRI”). QPRI is defined as indebtedness incurred in the acquisition of the taxpayer’s principal residence (not exceeding $2,000,000) or the refinancing of that loan up to its initial amount. Thus, a refinancing loan through a different lender is treated as QPRI even though it is a recourse loan. To the extent that COD income is excluded under the Act, the owner’s basis in the property is reduced. The Act applies to QPRI discharged after 2006 and before 2010.
Example 5: The facts are the same as in Example 4 except that the short sale occurs in 2007 rather than in 2006.
The $600,000 loan is QPRI under the Act. Therefore, Doe does not have COD income. However, he has a capital gain of $100,000 (i.e., $550,000-$450,000), unless the Personal Residence Exclusion Applies.
The computations become more complex if some but not all of an owner’s refinancing debt is treated as QPRI.
Example 6: Ray and Janet Burke purchase Greenacre, their personal residence, in 2006. The purchase price is $1,000,000, payable $100,000 down, with a $900,000 loan from Lender X. In 2007, they obtain a $1,100,000 refinancing loan from Lender Y. In 2008, they complete a short sale of Greenacre for $750,000.
Although the $1,100,000 loan is recourse, $900,000 of it is treated as QPRI and the $200,000 balance is treated as COD, which the Burkes must report in 2008 as ordinary income. Since the Burkes have been relieved of $150,000 of COD income (i.e., $900,000-$750,000), their basis in Greenacre is reduced by $150,000 to $850,000 (i.e., $1,000,000 basis-$150,000 basis reduction). Therefore, in addition to reporting, as ordinary income, the $200,000 COD income, the Burkes have a non-deductible loss of $100,000 (i.e., $750,000 sales price-$850,000 adjusted basis).
Conclusion
From the standpoint of cost, credit impairment and personal liability, a short sale usually is preferable to a deed in lieu and both generally are advantageous as compared with a foreclosure. However, if a property is encumbered by a junior lien, the holder of the senior lien is unlikely to approve either a deed in lieu or a short sale. If the junior lien is recourse, avoiding foreclosure becomes all the more important since foreclosure of the senior lien may well expose the owner to personal liability on the junior lien. From a tax standpoint, some owners will be relieved of COD income under the Act. However, in situations where the Act does not apply (such as vacation homes and investment property), the tax consequences of a short sale will continue to be harsher than those of either a deed in lieu or of a foreclosure.
Information is compliments of Placer Title Company
Looking for a California Realtor contact: Jean Powers 800 378-7300
by Richard A. Goodman
Hardly a day goes by without alarming new statistics concerning real estate sales, mortgages and foreclosures. To cite but one, in 2007, there were 84,375 trustee’s sales in California, an all time record. Since the rates on $385 billion of subprime and other nontraditional loans are expected to reset in 2008, nearly as much as in 2007, relief is not expected at any time soon.
Legislative and regulatory proposals abound to stem the tide of foreclosure. At least ten states (not including California) have enacted foreclosure related legislation within the past year. In December, the Federal Reserve proposed rules under the Home Ownership and Equity Protection Act (“HOEPA”) to address the problem. The House of Representatives recently passed the Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.B. 3915) and similar legislation has been passed by the Senate (S.B. 2338).
The harsh reality is that, confronted with loan payments they no longer can afford, owners have only three alternatives short of bankruptcy: giving the lender a deed in lieu of foreclosure; by doing a short sale (i.e., a sale in which the lender agrees to accept less than a full payoff of its loan balance); or walking away from the property and allowing the lender to foreclose. The article will address the differences between these three alternatives and show how the recently enacted Mortgage Forgiveness Debt Relief Act of 2007 affects the tax consequences of each of them.
Major Issues and Considerations
Costs, Timing and Title: In California, a non-judicial foreclosure sale cannot occur until at least three months and twenty-one days after the recordation of a notice of default. If the owner brings a civil action to stop foreclosure or files for bankruptcy, the process can take far longer. In addition, a foreclosure sale costs the lender several thousand dollars, much more if there is litigation. Furthermore, the lender cannot even commence eviction proceedings until after the trustee’s sale. By contrast, if a lender accepts a deed in lieu of foreclosure or approves a short sale, the process can be completed within days rather than months, at minimal cost, and can be conditioned on the owner’s relinquishing possession.
Given the disadvantages of and obstacles to foreclosure, why do so many trustee’s sales occur? One reason is that owners frequently are too dispirited to avoid foreclosure or are unaware that they may be better off attempting to transfer the property through a “deeds in lieu” or a short sale. In addition, lenders frequently require owners to pay all escrow and closing costs as a condition of accepting a deed in lieu. Equally significant, however, is that only by completing a foreclosure sale can junior liens be wiped out. By accepting a “deed in lieu,” the lender takes title to the property subject to all junior liens and encumbrances!
Example 1: Mary Green’s home is worth $500,000 in the current market but is encumbered both by a $500,000 Deed of Trust in favor of Lender A and a $100,000 Deed of Trust in favor of Lender B and she is in default on both loans. She offers a deed in lieu of foreclosure to Lender A, but it declines.
If Lender A were to accept the deed in lieu, it would acquire the property subject to the $100,000 Deed of Trust while if it forecloses, the purchaser at the trustee’s sale will acquire the property free and clear of the $100,000 Deed of Trust.
This is not an insignificant problem since distressed property frequently is encumbered by several deeds of trust. Therefore, any lender willing to consider accepting a deed in lieu invariably requires the issuance of a new title policy to insure that there are no junior liens against the property.
A short sale, like a deed in lieu, can be completed quickly and cheaply. Furthermore, unlike a deed in lieu, the owner rarely is required to pay for escrow and closing costs. However, as with deeds in lieu, the existence of junior liens presents nearly insuperable problems. The reason is that a short sale requires the cooperation of all lenders. The senior lender has little reason to offer any of the proceeds to a junior lender, since all junior liens will be wiped out if the senior lender forecloses. Therefore, the senior lender typically requires that it receive all of the net proceeds of sale or that the junior lienholder be paid only a token amount. If the senior loan has been securitized, the loan securitization agreement may explicitly prohibit the loan servicer from negotiating in this situation. However, if the junior lienholder will receive nothing from a short sale, it has no incentive to cooperate.
Credit Impairment: A foreclosure, which is considered a "major derogatory," typically results in the lowering of one’s FICO credit score by 250-280 points. This can severely hamper someone's ability to get credit for many years. In addition, since many insurance companies now utilize credit histories to evaluate applicants, a foreclosure can later prevent an owner from obtaining life, health or disability insurance.
However, the effect of a major derogatory depends in part upon the circumstances under which it occurred. For example, if the borrower lost his property because of medical bills from a catastrophic illness, a subsequent lender may overlook even a major derogatory. Similarly, a borrower who has been candid and forthcoming with the lender as soon as financial problems occur will be viewed in a far more positive light than one who simply stops making payments, or worse, misleads the lender in any way. Potential lenders are most hostile to borrowers who have defrauded prior lenders or have intentionally delayed foreclosure proceedings in the past.
Although giving a deed in lieu may also have serious credit consequences, these frequently can be ameliorated. For example, an owner can negotiate for the lender, in a deed in lieu transaction to report the loan as “paid” or “settled” rather than as a foreclosure. In addition, loan applications do not always flag such transfers, although the application for conforming loans does request information on deeds in lieu as well as on prior foreclosures.
A short sale usually has significantly less effect than either a foreclosure or a deed in lieu, usually lowering one’s FICO score by 80-100 points. Furthermore, the owner can negotiate, as a condition of a short sale, that, in a short sale, the lender reports its loan as “paid” or “settled” to credit reporting bureaus. In addition, many applications for non-conforming loans do not ask about short sales at all.
Even if a new lender becomes aware that a loan applicant previously completed a short sale, the lender may not treat this as a major derogatory. Many lenders look favorably on a potential borrower who has taken affirmative steps to minimize the prior lender's loss.
Personal liability: As difficult as it is for an owner to face the loss of his entire equity, the possibility that the owner may have personal liability, in addition, is an even greater nightmare. In deciding how to dispose of a distressed property, the owner must understand whether there is any risk of personal liability and, if so, under what circumstances.
In California, "purchase money" loans are automatically non-recourse. A "purchase money" loan is a loan made by a seller to finance the purchase of property of any type or a loan made by a third party lender for the purchase of an owner-occupied, one-to-four unit property. The refinancing of a purchase money loan through the original lender is treated as a purchase money loan up to the amount of the original loan. Any loan other than a purchase money loan is a recourse loan unless it is specifically made non-recourse. This is typically accomplished by including a provision that the lender’s only recourse is to property and that the borrower has no personal liability on the note.
If a loan is non-recourse, either because it is a purchase money loan or because the note contains non-recourse language, the borrower need have no concern about potential personal liability.
But what if the loan is a recourse liability? The first thing to recognize is that even when lenders are entitled to pursue claims for personal liability, they rarely do so because of the expense, delay and uncertainty involved. In order to seek personal liability against the borrower, the lender must utilize a judicial foreclosure rather than a non-judicial foreclosure, which lengthens the foreclosure process by many months. After a decree of foreclosure is obtained, the court must hold a "fair value" hearing to determine if a deficiency judgment will be allowed. And even if a deficiency judgment is awarded, the lender may be unable to collect it. Potential buyers usually are scared away as the prior owner has a one-year right of redemption.
It is no wonder, therefore, most lenders prefer to conduct non-judicial foreclosures even though, by doing so, they must relinquish the possibility of obtaining deficiency judgments. In fact, the only situation in which an owner is likely to face personal liability is where the property is encumbered by a recourse junior lien. If the senior lender forecloses, the holder of the junior lien becomes a "sold out junior lienor." As such, that lender can sue directly on its note and seek personal liability against the borrower. Therefore, an owner whose property is encumbered by a recourse junior lien should take all reasonable steps to avoid a foreclosure of the senior lien. These steps might include agreeing to sign a new, relatively small note in favor of an existing lender in order to overcome the lender’s reluctance to agree to a short sale.
Lender Cooperation: If a short sale is contemplated, the lender should be consulted as soon as possible, as lenders typically require detailed financial information from the borrower as well as the listing and purchase documentation.
The most important factor influencing a lender's decision is whether the lender is likely to recoup more by foreclosing and selling the property as an REO or by accepting the short sale payoff. This decision is usually influenced by the following considerations:
• Has the property been fairly exposed to the market?
• Are the real estate brokers willing to accept a reduced commission?
• How quickly can the short sale be consummated and the loan payoff made?
• How much expense would the lender incur in a non-judicial foreclosure?
• Would the lender undertake significant toxic or other liability risks by
acquiring the property?
Tax Considerations: If a loan is non-recourse, the tax consequences of a short sale, a deed in lieu and a foreclosure are identical: the taxpayer is treated as having taxable gain to the extent that the loan balance exceeds the taxpayer's adjusted basis in the property. This gain generally is treated as capital gain.
Example 2: In 2004, John Doe purchases Blackacre, a vacation home, for $500,000, making a $50,000 down payment and obtaining a purchase money loan from Lender A for $450,000. In 2005, Doe refinances with a $600,000 loan from Lender A, which is secured by a non-recourse deed of trust. In 2006, Doe sells Blackacre for $550,000 in a short sale, paying all of the net proceeds to Lender A.
The $450,000 loan is non-recourse because it is used for the acquisition of Doe’s principal residence. The $600,000 is non-recourse by its terms. In 2006, Doe has a capital gain of $100,000 (i.e., $600,000-$500,000). Similarly, Doe would have had a $100,000 capital gain if he gave a deed in lieu to Lender A or if Lender A foreclosed.
Of course, if the property is the owner’s principal residence, all or part of the gain may be excluded.
Example 3: The facts are the same as in Example 2 except that Blackacre is Doe’s principal residence.
If Doe has owned and resided in Blackacre for at least two years as of the date of the short sale (or deed in lieu or foreclosure) and otherwise meets the requirements of IRC section 121, he will be entitled to an exclusion of up to $250,000 of gain if he is unmarried, $500,000 if he is married (the “Personal Residence Exclusion”).
Prior to 2007, the rule was that if the loan is recourse, an owner will have cancellation of debt income (“COD”) to the extent that the loan balance exceeds the fair market value of the property, regardless of how he disposes of the property. COD income is not eligible for the Personal Residence Exclusion and is taxable as ordinary income, not as capital gain!
Example 4: The facts are the same as in Example 3 except that the refinance in 2005 is through Lender B and is not specifically made non-recourse.
Because the purchase money loan is not refinanced through the original lender, the $600,000 loan is recourse. Therefore, on his 2006 tax return, Doe must report a capital gain of $50,000 (i.e., $550,000-500,000) unless the Personal Residence Exclusion applies. Doe also must report $50,000 of COD income (i.e., $600,000-$550,000).
In theory, the result was the same whether a recourse loan was cancelled through a foreclosure, the giving of a deed in lieu or a short sale. However, in either a foreclosure or a deed in lieu, the seller can contend, with the support of expert appraisals, that the fair market value of the property is at least as great as the loan balance. In a short sale, by contrast, the seller is stuck with the sale price as establishing the property’s fair market value.
The Mortgage Forgiveness Debt Relief Act of 2007 (the “Act”), signed by President Bush on December 20, 2007, provides that certain debt cancellation is not treated as COD income. The Act applies only to “Qualified Personal Residence Indebtedness” (“QPRI”). QPRI is defined as indebtedness incurred in the acquisition of the taxpayer’s principal residence (not exceeding $2,000,000) or the refinancing of that loan up to its initial amount. Thus, a refinancing loan through a different lender is treated as QPRI even though it is a recourse loan. To the extent that COD income is excluded under the Act, the owner’s basis in the property is reduced. The Act applies to QPRI discharged after 2006 and before 2010.
Example 5: The facts are the same as in Example 4 except that the short sale occurs in 2007 rather than in 2006.
The $600,000 loan is QPRI under the Act. Therefore, Doe does not have COD income. However, he has a capital gain of $100,000 (i.e., $550,000-$450,000), unless the Personal Residence Exclusion Applies.
The computations become more complex if some but not all of an owner’s refinancing debt is treated as QPRI.
Example 6: Ray and Janet Burke purchase Greenacre, their personal residence, in 2006. The purchase price is $1,000,000, payable $100,000 down, with a $900,000 loan from Lender X. In 2007, they obtain a $1,100,000 refinancing loan from Lender Y. In 2008, they complete a short sale of Greenacre for $750,000.
Although the $1,100,000 loan is recourse, $900,000 of it is treated as QPRI and the $200,000 balance is treated as COD, which the Burkes must report in 2008 as ordinary income. Since the Burkes have been relieved of $150,000 of COD income (i.e., $900,000-$750,000), their basis in Greenacre is reduced by $150,000 to $850,000 (i.e., $1,000,000 basis-$150,000 basis reduction). Therefore, in addition to reporting, as ordinary income, the $200,000 COD income, the Burkes have a non-deductible loss of $100,000 (i.e., $750,000 sales price-$850,000 adjusted basis).
Conclusion
From the standpoint of cost, credit impairment and personal liability, a short sale usually is preferable to a deed in lieu and both generally are advantageous as compared with a foreclosure. However, if a property is encumbered by a junior lien, the holder of the senior lien is unlikely to approve either a deed in lieu or a short sale. If the junior lien is recourse, avoiding foreclosure becomes all the more important since foreclosure of the senior lien may well expose the owner to personal liability on the junior lien. From a tax standpoint, some owners will be relieved of COD income under the Act. However, in situations where the Act does not apply (such as vacation homes and investment property), the tax consequences of a short sale will continue to be harsher than those of either a deed in lieu or of a foreclosure.
Information is compliments of Placer Title Company
Looking for a California Realtor contact: Jean Powers 800 378-7300
Friday, February 29, 2008
More About Mortgage Debt Relief Act of 2007
TAX RELIEF FOR SHORT SALES
As many of you may know, one of the big impediments to short sales was the fact that the taxpayer would be charged with ordinary income for any debt which was forgiven by a lender in the short sale. So the taxpayer might get out from under the property but was left with a big income tax bill. The long awaited tax relief from this provision has now been signed into law. On December 20, 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) which greatly reduces the negative tax implications of a short sale if the debt being forgiven meets certain criteria. Under this new law, there is a permanent exclusion for discharges of debt of up to $2,000,000 (which was forgiven by the lender after January 1, 2007) if the debt was secured by a principal residence and was incurred in the acquisition, construction or substantial improvement of the principal residence. Instead of including the amount forgiven as income, the basis of the individual's principal residence will be reduced by the amount excluded under the bill. This new law does not change existing law as it relates to forgiveness of a debt which was used for purposes other than acquisition, construction or improvement. So lines of credit and home equity loans which were used for paying off credit cards, buying second homes, boats, etc. will still be treated as ordinary income if forgiven by the lender.
Info compliments of Placer Title Company
As many of you may know, one of the big impediments to short sales was the fact that the taxpayer would be charged with ordinary income for any debt which was forgiven by a lender in the short sale. So the taxpayer might get out from under the property but was left with a big income tax bill. The long awaited tax relief from this provision has now been signed into law. On December 20, 2007, President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) which greatly reduces the negative tax implications of a short sale if the debt being forgiven meets certain criteria. Under this new law, there is a permanent exclusion for discharges of debt of up to $2,000,000 (which was forgiven by the lender after January 1, 2007) if the debt was secured by a principal residence and was incurred in the acquisition, construction or substantial improvement of the principal residence. Instead of including the amount forgiven as income, the basis of the individual's principal residence will be reduced by the amount excluded under the bill. This new law does not change existing law as it relates to forgiveness of a debt which was used for purposes other than acquisition, construction or improvement. So lines of credit and home equity loans which were used for paying off credit cards, buying second homes, boats, etc. will still be treated as ordinary income if forgiven by the lender.
Info compliments of Placer Title Company
Wednesday, February 27, 2008
Transfer Property Tax Base if You are Over 55 in California!
Transfer Property Tax Base if You are Over 55 in California
Office of Assessor COUNTY of Alameda CALIFORNIA
1221 Oak St., County Administration Building
Oakland, California 94612-4288
South County Toll Free (800) 660-7725 www.acgov.org/assessor
TRANSFER OF PROPERTY TAX BASE FOR PERSONS 55 AND OLDER OR SEVERELY AND PERMANENTLY DISABLED (Revenue and Taxation Code 69.5) (Proposition 60, 90, or 110)
PURPOSE
This pamphlet will acquaint you with Section 69.5 which allows any person age 55 or older or severely and permanently disabled to transfer the base year value of their original property to a replacement dwelling of "equal or lesser value" that is purchased or newly constructed within two years of the sale of the original property. The full text of the law can be found in the State of California Property Taxes Law Guide, Volume 1.
HISTORY
Proposition 60 allowed for base value transfers to qualified replacement dwellings of "equal or lesservalue" within the same county that were purchased or newly constructed on or after November 6, 1986. Proposition 90 extended the Prop 60 benefits to qualified homeowners transferring their base year values from other counties and was effective July 13, 1989 in Alameda county. Proposition 110 extended the benefits to qualified disabled homeowners of any age and was effective for replacement dwellings purchased or newly constructed on or after June 6, 1990. Senate Bill 1692 effective September 25, 1996 allowed qualified persons who had prior claims based on age 55 to have a second claim based on disability.
REQUIREMENTS
1. At the time of the sale of the original property, the claimant or the claimant's spouse who resides with the claimant is at least 55 years of age, or severely and permanently disabled. The claimant's spouse need not be an owner of record of the original property. If co-owners, only the co-owner who is the claimant must be age 55 or disabled.
2. The claimant has not previously been granted, as a claimant, the property tax relief provided by this section. (See definition of "claimant") The sole exception is where the claimant was first granted relief based on age 55 and subsequently became severely and permanently disabled. The claimant may then qualify for a second claim based on the disability.
3. The replacement property must be purchased or newly constructed within two years either before or after of the sale of the original property.
4. The sale of the original property must be a change in ownership that subjects the property to reappraisal at its current market value or results in a base year value transfer as a replacement dwelling for someone qualifying under Section 69.5 or the disaster relief provisions of Section 69.
5. At the time the claim is filed, the claimant is an owner of the replacement dwelling and occupies it as his or her principal place of residence and, as a result thereof, the property is eligible for the homeowner's exemption.
6. Either at the time of its sale or at the time it was substantially damaged by calamity or within two years of the purchase or new construction of the replacement dwelling, the claimant was an owner of the original property and occupied it as his or her principal place of residence and, as a result thereof, the property was eligible for the homeowner's exemption.
7. The replacement dwelling must be of "equal or lesser value" than the original residence. "Equal or lesser value" means that the market value of a replacement dwelling may not exceed: 100% of the market value of the original property if the replacement dwelling is purchased or newly constructed prior to the date of sale of the original property, 105% of the market value of the original property if the replacement dwelling is purchased or newly constructed within the first year following the date of sale of the original property, or 110% of the market value of the original property if the replacement dwelling is purchased or newly constructed within the second year following the date of sale of the original property. The market value of the original property may include indexing adjustments. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available, not even a partial benefit.
TO APPLY
To apply for relief the completed claim form and required documents must be filed with the assessor within three years of the date the replacement dwelling is purchased or newly constructed. This claim is not open to public inspection.
TO RESCIND
To rescind a claim a written notice of rescission must be delivered to the assessor within certain time limits. A fee may be required.
DEFINITIONS
"Claimant" means any person claiming relief provided by this law and their spouse if the spouse is also a record owner of the replacement dwelling. "Person" means any individual, but does not include any firm, partnership, association, corporation, company, or other legal entity or organization of any kind except that the claimant(s) may hold their residence in trust for themselves.
"Severely and permanently disabled person" is any person who has a physical disability or impairment, whether from birth or by reason of accident or disease, that results in a functional limitation as to employment or substantially limits one or more major life activities of that person.
"Original property" and "Replacement dwelling" means place of abode that is owned and occupied by the claimant as his or her principal place of residence. Each unit of a multi-unit dwelling is considered a separate dwelling for claim purposes.
"Sale and Purchase" mean "a change in ownership for consideration".
"Market value of the original property" means its market value at the time of its sale or immediately prior to its damage by calamity if it was sold in its damaged state.
QUESTIONS & ANSWERS
Q: When making the "equal or lesser value" test, is a simple comparison of the sales price of the original residence and the purchase price or cost of new construction of the replacement dwelling all that is needed?
A: Generally, when a property is sold on the open market its sales price is considered market value. However, because sale/purchase prices or costs of new construction are not always the same as market value, the assessor may have to determine the market value, which may differ from the sale/purchase price or cost of new construction.
Note: Only the market value of the primary residence and its related improvements are used for the "equal or lesser value" test. For single unit properties this represents the total value of the property. For residential properties with commercial uses or extra living units the appraiser must deduct the market value of those portions for the "equal or lesser value" tests. (See example below)
Q: The claimant sold his original two-unit property that consisted of his primary residence and a second unit and purchased a replacement dwelling. What portion of his sold property will qualify as the "original property" for the "equal of lesser value" test?
A: For the "equal or lesser value" test, the "original property" consists of the claimant's primary residence (land and improvements). The market value of the second unit (land and improvements) would be deducted from the market value of the total property. Only the amount of the indexed base value allocated to the original residence would be transferred.
Q: If otherwise qualified, will I meet the "equal or lesser value" test if I sold my original residence July 20,1999 for $350,000 and purchased my replacement dwelling May 3, 2000 for $365,000? Both properties were bought and sold for market value.
A: Yes. The replacement dwelling was purchased within the first year following the sale of the original and its purchase price did not exceed 105% of the market value of the original residence ($350,000 X 1.05 = $367,500). (See requirement No. 7)
Q: Can an otherwise qualified owner buy a vacant lot and then build a new replacement dwelling and qualify?
A: Yes. As long as the completion of the new dwelling took place within two years, either before or after, the sale of the original property. The purchase of the lot can take place at any time before the completion of new construction. For the "equal or lesser value" test the total market value of the replacement property (land and improvements) is determined as of the date of the completion of the new construction.
Q: Can I, a qualified claimant, sell my original home and buy a replacement dwelling with co-owners not of age 55 and transfer my base value?
A: Yes, co-owners of any age are allowed. However, the total full market value of your original home will be compared with the total full market value of the replacement dwelling for the "equal or lesser value" test regardless of the fact that you are only a part owner of the replacement dwelling.
Q: Can two owners sell their separately owned and occupied properties, combine their base year values, and purchase one replacement dwelling together?
A: No. There is no provision for combining base year values. The base year value of only one original property can be transferred to the replacement dwelling.
Q: Can two co-owners sell their original residence they shared and each still qualify for the claim when each acquires a separate replacement dwelling?
A: No. Only one can receive the benefit. The qualified co-owners must decide between themselves who will get the benefit. Only in the case of a multiple unit original property where several co-owners qualify for separate homeowner's exemptions may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.
Q: Can I sell my original property and purchase a 50% interest in a replacement dwelling and still qualify?
A: No. A partial or fractional interest purchase is not eligible. The entire interests in both the replacement dwelling and the original property must be purchased and sold.
Q: Will the transfer of an original property or acquisition of a replacement dwelling by gift or devise qualify under Section 69.5?
A: A property that is given away or acquired by gift or devise will not qualify because nothing of value was exchanged. Section 69.5 requires a "sale" of the original property and a "purchase" of a replacement dwelling.
Q: May I sell my original property to my child and give my child the benefit of the parent-child exclusion and still transfer my base value when I purchase a replacement property?
A: No. The parents need to choose to which exclusion they wish to apply their base year value. If the parents sell to their children and choose to transfer their base year value to them using the parent-child exclusion, then the base year value is no longer theirs to transfer to a replacement residence.
Q: Can a mobile home qualify as either an original or a replacement dwelling for the base year value transfer?
A: Yes, but only if the mobile home is subject to local property taxation (LPT). Mobile homes that pay vehicle license fees annually (VLF) would not qualify because they have no base year values.
Q: Can a supplemental tax assessment be issued when the base year value is transferred from an original property to a replacement dwelling?
A: Yes. The law requires that supplemental assessments, both positive and negative, be calculated for all transactions that result in base-year value changes. This is accomplished by comparing the base value transferred from the original property to the assessment on the replacement dwelling.
Q: After receiving the notice that my application has been approved, do I still need to pay the existing tax bills?
A: Yes. All outstanding tax bills on your replacement property must be paid. They will not be cancelled or corrected. Any overpayments you make will be refunded when the claim is processed.
Q: Can new construction completed on a replacement dwelling after the transfer of the base value also qualify for relief under this section?
A: Yes, provided that the new construction was completed within two years of the sale of the original property, the assessor is notified within 30 days of the completion, and the market value of the new construction plus the market value of the replacement dwelling when acquired does not exceed the market value of the original property as determined for the original claim.
TELEPHONE NUMBERS
ASSESSOR'S DEPARTMENT
General Information
Assessee Services ................................... 510 / 272-3787
Base Value Transfers ........................... 510 / 272-3787
(Age 55 / Disabled / Disaster Relief / Eminent Domain)
Exclusions .............................................. 510 / 272-3800
(Parent-Child / Grandparent-Grandchild)
Change in Ownership Information ......... 510 / 272-3800
Homeowner's Exemption ....................... 510 / 272-3770
Business Personal Property
General Information ............................... 510 / 272-3836
Boats and Aircraft .................................. 510 / 272-3838
South County Toll Free ....................... 800 / 660-7725
Web Site: www.acgov.org/assessor
RELATED COUNTY OFFICES
Clerk, Assessment Appeals Board
Assessment Appeals Information ........ 510 / 272-6352
Tax Collector
Tax payment information including
24 Hour Automated System ................. 510 / 272-6800
Auditor
Property Tax Rates ............................... 510 / 272-6564
Recorder
Deed Recording Information ............... 510 / 272-6363
Rev 7/02
In need of a Realtor Contact: Jean Powers 800-378-7300
Office of Assessor COUNTY of Alameda CALIFORNIA
1221 Oak St., County Administration Building
Oakland, California 94612-4288
South County Toll Free (800) 660-7725 www.acgov.org/assessor
TRANSFER OF PROPERTY TAX BASE FOR PERSONS 55 AND OLDER OR SEVERELY AND PERMANENTLY DISABLED (Revenue and Taxation Code 69.5) (Proposition 60, 90, or 110)
PURPOSE
This pamphlet will acquaint you with Section 69.5 which allows any person age 55 or older or severely and permanently disabled to transfer the base year value of their original property to a replacement dwelling of "equal or lesser value" that is purchased or newly constructed within two years of the sale of the original property. The full text of the law can be found in the State of California Property Taxes Law Guide, Volume 1.
HISTORY
Proposition 60 allowed for base value transfers to qualified replacement dwellings of "equal or lesservalue" within the same county that were purchased or newly constructed on or after November 6, 1986. Proposition 90 extended the Prop 60 benefits to qualified homeowners transferring their base year values from other counties and was effective July 13, 1989 in Alameda county. Proposition 110 extended the benefits to qualified disabled homeowners of any age and was effective for replacement dwellings purchased or newly constructed on or after June 6, 1990. Senate Bill 1692 effective September 25, 1996 allowed qualified persons who had prior claims based on age 55 to have a second claim based on disability.
REQUIREMENTS
1. At the time of the sale of the original property, the claimant or the claimant's spouse who resides with the claimant is at least 55 years of age, or severely and permanently disabled. The claimant's spouse need not be an owner of record of the original property. If co-owners, only the co-owner who is the claimant must be age 55 or disabled.
2. The claimant has not previously been granted, as a claimant, the property tax relief provided by this section. (See definition of "claimant") The sole exception is where the claimant was first granted relief based on age 55 and subsequently became severely and permanently disabled. The claimant may then qualify for a second claim based on the disability.
3. The replacement property must be purchased or newly constructed within two years either before or after of the sale of the original property.
4. The sale of the original property must be a change in ownership that subjects the property to reappraisal at its current market value or results in a base year value transfer as a replacement dwelling for someone qualifying under Section 69.5 or the disaster relief provisions of Section 69.
5. At the time the claim is filed, the claimant is an owner of the replacement dwelling and occupies it as his or her principal place of residence and, as a result thereof, the property is eligible for the homeowner's exemption.
6. Either at the time of its sale or at the time it was substantially damaged by calamity or within two years of the purchase or new construction of the replacement dwelling, the claimant was an owner of the original property and occupied it as his or her principal place of residence and, as a result thereof, the property was eligible for the homeowner's exemption.
7. The replacement dwelling must be of "equal or lesser value" than the original residence. "Equal or lesser value" means that the market value of a replacement dwelling may not exceed: 100% of the market value of the original property if the replacement dwelling is purchased or newly constructed prior to the date of sale of the original property, 105% of the market value of the original property if the replacement dwelling is purchased or newly constructed within the first year following the date of sale of the original property, or 110% of the market value of the original property if the replacement dwelling is purchased or newly constructed within the second year following the date of sale of the original property. The market value of the original property may include indexing adjustments. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available, not even a partial benefit.
TO APPLY
To apply for relief the completed claim form and required documents must be filed with the assessor within three years of the date the replacement dwelling is purchased or newly constructed. This claim is not open to public inspection.
TO RESCIND
To rescind a claim a written notice of rescission must be delivered to the assessor within certain time limits. A fee may be required.
DEFINITIONS
"Claimant" means any person claiming relief provided by this law and their spouse if the spouse is also a record owner of the replacement dwelling. "Person" means any individual, but does not include any firm, partnership, association, corporation, company, or other legal entity or organization of any kind except that the claimant(s) may hold their residence in trust for themselves.
"Severely and permanently disabled person" is any person who has a physical disability or impairment, whether from birth or by reason of accident or disease, that results in a functional limitation as to employment or substantially limits one or more major life activities of that person.
"Original property" and "Replacement dwelling" means place of abode that is owned and occupied by the claimant as his or her principal place of residence. Each unit of a multi-unit dwelling is considered a separate dwelling for claim purposes.
"Sale and Purchase" mean "a change in ownership for consideration".
"Market value of the original property" means its market value at the time of its sale or immediately prior to its damage by calamity if it was sold in its damaged state.
QUESTIONS & ANSWERS
Q: When making the "equal or lesser value" test, is a simple comparison of the sales price of the original residence and the purchase price or cost of new construction of the replacement dwelling all that is needed?
A: Generally, when a property is sold on the open market its sales price is considered market value. However, because sale/purchase prices or costs of new construction are not always the same as market value, the assessor may have to determine the market value, which may differ from the sale/purchase price or cost of new construction.
Note: Only the market value of the primary residence and its related improvements are used for the "equal or lesser value" test. For single unit properties this represents the total value of the property. For residential properties with commercial uses or extra living units the appraiser must deduct the market value of those portions for the "equal or lesser value" tests. (See example below)
Q: The claimant sold his original two-unit property that consisted of his primary residence and a second unit and purchased a replacement dwelling. What portion of his sold property will qualify as the "original property" for the "equal of lesser value" test?
A: For the "equal or lesser value" test, the "original property" consists of the claimant's primary residence (land and improvements). The market value of the second unit (land and improvements) would be deducted from the market value of the total property. Only the amount of the indexed base value allocated to the original residence would be transferred.
Q: If otherwise qualified, will I meet the "equal or lesser value" test if I sold my original residence July 20,1999 for $350,000 and purchased my replacement dwelling May 3, 2000 for $365,000? Both properties were bought and sold for market value.
A: Yes. The replacement dwelling was purchased within the first year following the sale of the original and its purchase price did not exceed 105% of the market value of the original residence ($350,000 X 1.05 = $367,500). (See requirement No. 7)
Q: Can an otherwise qualified owner buy a vacant lot and then build a new replacement dwelling and qualify?
A: Yes. As long as the completion of the new dwelling took place within two years, either before or after, the sale of the original property. The purchase of the lot can take place at any time before the completion of new construction. For the "equal or lesser value" test the total market value of the replacement property (land and improvements) is determined as of the date of the completion of the new construction.
Q: Can I, a qualified claimant, sell my original home and buy a replacement dwelling with co-owners not of age 55 and transfer my base value?
A: Yes, co-owners of any age are allowed. However, the total full market value of your original home will be compared with the total full market value of the replacement dwelling for the "equal or lesser value" test regardless of the fact that you are only a part owner of the replacement dwelling.
Q: Can two owners sell their separately owned and occupied properties, combine their base year values, and purchase one replacement dwelling together?
A: No. There is no provision for combining base year values. The base year value of only one original property can be transferred to the replacement dwelling.
Q: Can two co-owners sell their original residence they shared and each still qualify for the claim when each acquires a separate replacement dwelling?
A: No. Only one can receive the benefit. The qualified co-owners must decide between themselves who will get the benefit. Only in the case of a multiple unit original property where several co-owners qualify for separate homeowner's exemptions may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.
Q: Can I sell my original property and purchase a 50% interest in a replacement dwelling and still qualify?
A: No. A partial or fractional interest purchase is not eligible. The entire interests in both the replacement dwelling and the original property must be purchased and sold.
Q: Will the transfer of an original property or acquisition of a replacement dwelling by gift or devise qualify under Section 69.5?
A: A property that is given away or acquired by gift or devise will not qualify because nothing of value was exchanged. Section 69.5 requires a "sale" of the original property and a "purchase" of a replacement dwelling.
Q: May I sell my original property to my child and give my child the benefit of the parent-child exclusion and still transfer my base value when I purchase a replacement property?
A: No. The parents need to choose to which exclusion they wish to apply their base year value. If the parents sell to their children and choose to transfer their base year value to them using the parent-child exclusion, then the base year value is no longer theirs to transfer to a replacement residence.
Q: Can a mobile home qualify as either an original or a replacement dwelling for the base year value transfer?
A: Yes, but only if the mobile home is subject to local property taxation (LPT). Mobile homes that pay vehicle license fees annually (VLF) would not qualify because they have no base year values.
Q: Can a supplemental tax assessment be issued when the base year value is transferred from an original property to a replacement dwelling?
A: Yes. The law requires that supplemental assessments, both positive and negative, be calculated for all transactions that result in base-year value changes. This is accomplished by comparing the base value transferred from the original property to the assessment on the replacement dwelling.
Q: After receiving the notice that my application has been approved, do I still need to pay the existing tax bills?
A: Yes. All outstanding tax bills on your replacement property must be paid. They will not be cancelled or corrected. Any overpayments you make will be refunded when the claim is processed.
Q: Can new construction completed on a replacement dwelling after the transfer of the base value also qualify for relief under this section?
A: Yes, provided that the new construction was completed within two years of the sale of the original property, the assessor is notified within 30 days of the completion, and the market value of the new construction plus the market value of the replacement dwelling when acquired does not exceed the market value of the original property as determined for the original claim.
TELEPHONE NUMBERS
ASSESSOR'S DEPARTMENT
General Information
Assessee Services ................................... 510 / 272-3787
Base Value Transfers ........................... 510 / 272-3787
(Age 55 / Disabled / Disaster Relief / Eminent Domain)
Exclusions .............................................. 510 / 272-3800
(Parent-Child / Grandparent-Grandchild)
Change in Ownership Information ......... 510 / 272-3800
Homeowner's Exemption ....................... 510 / 272-3770
Business Personal Property
General Information ............................... 510 / 272-3836
Boats and Aircraft .................................. 510 / 272-3838
South County Toll Free ....................... 800 / 660-7725
Web Site: www.acgov.org/assessor
RELATED COUNTY OFFICES
Clerk, Assessment Appeals Board
Assessment Appeals Information ........ 510 / 272-6352
Tax Collector
Tax payment information including
24 Hour Automated System ................. 510 / 272-6800
Auditor
Property Tax Rates ............................... 510 / 272-6564
Recorder
Deed Recording Information ............... 510 / 272-6363
Rev 7/02
In need of a Realtor Contact: Jean Powers 800-378-7300
Sunday, February 24, 2008
Why Buy a Home in Today’s Market?
www.yourpieceofcalifornia.com
1 Interest rates on long-term, fixed, and adjustable mortgages are at historically low levels. The rate on a 30-year, fixed mortgage is hovering just below 6 percent,while,by comparison, interest rates were hitting 8 percent and higher during the last market down turn in the late 1990s, and were between 10 and 12 percent at the height of the last housing boom in the 1980s. Lower interest rates make it easier to qualify for a loan, and yourmonthly payments are more affordable.
2 No one can put a price on the intrinsic value of homeownership. Home prices also
reflect financial worth and, the good news is, across California the median sales price for a single-family home has been consistently rising for several decades. In short,housing remains a solid, long-term financial investment. While the pace of home appreciation has slowed over the last year, historical data suggest home prices will continue to appreciate overtime. The projected median home price for a single-family home in California in 2008, for example,is $553,000. By comparison, the median price in 2000 was $241,350; $193,770 in 1990,and $99,550 in 1980. (source: C.A.R.)
3 The length of time a home remains on the market before it is sold has increased from roughly two weeks in 2004 to between eight and nine weeks in 2007. According to the unsold inventory index provided by the CALIFORNIA ASSOCIATION OF REALTORS®, it would take 16.3 months to sell all the homes on the market at the current sales pace, compared with 6.4 months in 2006. With more homes on the market for longer periods of time, you have more choices when it comes to selecting a home today.
4 The multiple-offer frenzy that dominated the latest housing boom has subsided, and there is less pressure on today’s home buyers to outbid one another. REALTORS® in California reported that in 2007 only 28 percent of homes sold had multiple offers,compared with 57 percentin 2004. (source: C.A.R.)
5 The credit industry crisis that has made securing a home loan difficult for many has led to heightened scrutiny of mortgage lenders. As a result, state and federal agencies have created protections for home buyers that were not in place a year ago. The U.S. Federal Reserve, for example,has proposed a plan to require lenders to confirm a borrower’s ability to afford a mortgage before making a loan and establishing guidelines for explaining subprime loan terms in order to better educate buyers. Many new public education and awareness campaigns, such as Freddie Mac’s “Don’t Borrow Trouble®” campaign, have been developed to help you achieve the dream of homeownership without the financial risks that led so many borrowers into trouble in recent years.
Buying a home in today’s market may be challenging, particularly for those with credit problems or little saved to put toward a down payment. But there are many factors impacting the current housing market that make buying a home today a viable option.
Information compliments of California Association of Realtors
Ready to Buy or Sell?
Contact Jean: homes@jeanpowers.com 800-378-7300
www.yourpieceofcalifornia.com
1 Interest rates on long-term, fixed, and adjustable mortgages are at historically low levels. The rate on a 30-year, fixed mortgage is hovering just below 6 percent,while,by comparison, interest rates were hitting 8 percent and higher during the last market down turn in the late 1990s, and were between 10 and 12 percent at the height of the last housing boom in the 1980s. Lower interest rates make it easier to qualify for a loan, and yourmonthly payments are more affordable.
2 No one can put a price on the intrinsic value of homeownership. Home prices also
reflect financial worth and, the good news is, across California the median sales price for a single-family home has been consistently rising for several decades. In short,housing remains a solid, long-term financial investment. While the pace of home appreciation has slowed over the last year, historical data suggest home prices will continue to appreciate overtime. The projected median home price for a single-family home in California in 2008, for example,is $553,000. By comparison, the median price in 2000 was $241,350; $193,770 in 1990,and $99,550 in 1980. (source: C.A.R.)
3 The length of time a home remains on the market before it is sold has increased from roughly two weeks in 2004 to between eight and nine weeks in 2007. According to the unsold inventory index provided by the CALIFORNIA ASSOCIATION OF REALTORS®, it would take 16.3 months to sell all the homes on the market at the current sales pace, compared with 6.4 months in 2006. With more homes on the market for longer periods of time, you have more choices when it comes to selecting a home today.
4 The multiple-offer frenzy that dominated the latest housing boom has subsided, and there is less pressure on today’s home buyers to outbid one another. REALTORS® in California reported that in 2007 only 28 percent of homes sold had multiple offers,compared with 57 percentin 2004. (source: C.A.R.)
5 The credit industry crisis that has made securing a home loan difficult for many has led to heightened scrutiny of mortgage lenders. As a result, state and federal agencies have created protections for home buyers that were not in place a year ago. The U.S. Federal Reserve, for example,has proposed a plan to require lenders to confirm a borrower’s ability to afford a mortgage before making a loan and establishing guidelines for explaining subprime loan terms in order to better educate buyers. Many new public education and awareness campaigns, such as Freddie Mac’s “Don’t Borrow Trouble®” campaign, have been developed to help you achieve the dream of homeownership without the financial risks that led so many borrowers into trouble in recent years.
Buying a home in today’s market may be challenging, particularly for those with credit problems or little saved to put toward a down payment. But there are many factors impacting the current housing market that make buying a home today a viable option.
Information compliments of California Association of Realtors
Ready to Buy or Sell?
Contact Jean: homes@jeanpowers.com 800-378-7300
Saturday, February 23, 2008
Some Banks are Withdrawing Equity Line of Credit From Homeowners!
Homeowners Losing Equity Lines
As House Values Fall, Some Banks Withdraw Credit
(By Susan Biddle -- The Washington Post)
In one brief phone call, Nancy Corazzi's lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago.
The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth.
"I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins ."I was near tears. We needed this credit line to get us through some tough times."
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.
Now that home prices have dropped in many parts of the country, lenders are nervous that they may never collect the money that they extended to borrowers. They are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers like Corazzi in the lurch.
"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."
Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
The company declined to disclose how many of the affected borrowers lived in the Washington area. About 381,000 borrowers in the region had home equity lines at the end of last year, according to Moody's economy.com.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.
"We know this can cause hardship to our customers," Francisco said. "If they used the credit to make payments that are in the pipeline, we will work with them to make sure the payment goes through."
The appeal of home equity lines has always been their flexibility
They operate like credit cards, with the home as collateral. Borrowers can use the money when they want, up to a limit, then repay it over time. The limit depends on the amount of equity they have in the house. Home equity lines, which grew popular in the late 1980s, have typically attracted educated borrowers with above-average incomes and job stability who tend to repay what they borrow in a timely manner, industry studies show.
Since the crisis in the housing and mortgage markets started, however, delinquencies on home equity lines reached 0.84 percent in the third quarter, the highest level in a decade, the American Bankers Association said.
Because missed payments are often a precursor to foreclosure, lenders are spooked. Companies that hold credit lines typically recoup little, if any, of their money in a foreclosure, hence the retreat on home equity lending.
Larry F. Pratt, chief executive of First Savings Mortgage in McLean, said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.
"A layperson would not recognize the language because it's not that blatant," Pratt said. "It talks about deterioration of the value of the asset or the value of the collateral. . . . It's not boilerplate language by any means."
Maggie DelGallo did not realize that when she took out a home equity line a few years ago on her home in Loudoun County. Her lender recently froze the line.
DelGallo, a real estate broker, has used some of her credit line over the years. Had she known the freeze was coming, "I would have drained it," she said. "I would have taken every dime and possibly placed it in a money-market vehicle."
DelGallo said she does not think she is in dire straits. "It's more like a huge disappointment," she said. "I have this line of credit attached to my home that's useless."
Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.
Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.
It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.
Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.
By the time their lender called, the couple had $45,000 remaining unused on the credit line. Ron Corazzi is now looking for a second job, and his wife is hoping to pick up work as a substitute teacher.
Meanwhile, they are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi's job status and the drop in their home's value. Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.
"I told them, 'You guys are wrong,' " Nancy Corazzi said. "They said, 'Sorry, this is what we're doing in the entire area.' "
Corazzi said she was blindsided by what's happened. "I didn't know they could do that. I thought I was too smart to have something like this happen to me."
As House Values Fall, Some Banks Withdraw Credit
(By Susan Biddle -- The Washington Post)
In one brief phone call, Nancy Corazzi's lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago.
The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth.
"I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins ."I was near tears. We needed this credit line to get us through some tough times."
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.
Now that home prices have dropped in many parts of the country, lenders are nervous that they may never collect the money that they extended to borrowers. They are responding by freezing or lowering the credit limits on home equity lines, leaving thousands of borrowers like Corazzi in the lurch.
"Nearly all the top home equity lenders I know of are doing this or considering doing this," said Joe Belew, president of the Consumer Bankers Association, which represents some of the nation's largest home equity lenders. "They are all looking at how to protect themselves as real estate values go down, and it's just not good for the borrowers to get so overextended."
Countrywide Financial, the nation's largest mortgage lender, suspended the home equity lines of 122,000 customers last month after reviewing their property values and outstanding loan balances. The company, like others, has an internal automated appraisal system that tracks values.
The company declined to disclose how many of the affected borrowers lived in the Washington area. About 381,000 borrowers in the region had home equity lines at the end of last year, according to Moody's economy.com.
USAA Federal Savings Bank froze or reduced credit lines for 15,000 of its customers, including Corazzi, and will not reconsider its decisions until "real estate values improve substantially," the company said in a statement.
Bank of America is starting to do the same and is contacting some borrowers, said Terry Francisco, a bank spokesman.
"We know this can cause hardship to our customers," Francisco said. "If they used the credit to make payments that are in the pipeline, we will work with them to make sure the payment goes through."
The appeal of home equity lines has always been their flexibility
They operate like credit cards, with the home as collateral. Borrowers can use the money when they want, up to a limit, then repay it over time. The limit depends on the amount of equity they have in the house. Home equity lines, which grew popular in the late 1980s, have typically attracted educated borrowers with above-average incomes and job stability who tend to repay what they borrow in a timely manner, industry studies show.
Since the crisis in the housing and mortgage markets started, however, delinquencies on home equity lines reached 0.84 percent in the third quarter, the highest level in a decade, the American Bankers Association said.
Because missed payments are often a precursor to foreclosure, lenders are spooked. Companies that hold credit lines typically recoup little, if any, of their money in a foreclosure, hence the retreat on home equity lending.
Larry F. Pratt, chief executive of First Savings Mortgage in McLean, said most mortgage documents he has seen give lenders wide latitude to suspend or freeze credit lines.
"A layperson would not recognize the language because it's not that blatant," Pratt said. "It talks about deterioration of the value of the asset or the value of the collateral. . . . It's not boilerplate language by any means."
Maggie DelGallo did not realize that when she took out a home equity line a few years ago on her home in Loudoun County. Her lender recently froze the line.
DelGallo, a real estate broker, has used some of her credit line over the years. Had she known the freeze was coming, "I would have drained it," she said. "I would have taken every dime and possibly placed it in a money-market vehicle."
DelGallo said she does not think she is in dire straits. "It's more like a huge disappointment," she said. "I have this line of credit attached to my home that's useless."
Last year, 34 percent of borrowers said they used their home equity lines to pay off other debt and 29 percent used them for home renovation, according to a survey of lenders by BenchMark Consulting International. Another 31 percent used them to pay for other things, such as medical bills, weddings or vacations.
Corazzi initially used her line to consolidate debt. She and her husband took out the credit line in October because they thought her job was in jeopardy.
It was. In December, her salaried position as a loan-processing manager at a local mortgage bank changed to a commission-only job.
Given the slowdown in the industry, Corazzi has collected only one paycheck since then. Her husband, Ron, sells large-format copiers and printers to builders, and his salary alone cannot support them and their four children, ages 4 to 8.
By the time their lender called, the couple had $45,000 remaining unused on the credit line. Ron Corazzi is now looking for a second job, and his wife is hoping to pick up work as a substitute teacher.
Meanwhile, they are trying to open a new home equity line elsewhere, but chances are slim given the change in Nancy Corazzi's job status and the drop in their home's value. Five months ago, the Ellicott City house was appraised at $560,000; the lender says it is now worth $469,100.
"I told them, 'You guys are wrong,' " Nancy Corazzi said. "They said, 'Sorry, this is what we're doing in the entire area.' "
Corazzi said she was blindsided by what's happened. "I didn't know they could do that. I thought I was too smart to have something like this happen to me."
A Seller's Plan! Where do I Start?
1. Find the Right Representative
The experience and knowledge of a dedicated real estate professional can be priceless. A good Realtor® forms a powerful team with his or her clients that makes it possible for them to have a smooth, successful, stress-free sale.
2. Determine your Needs/Wants for the Sale and for Your New Home
Selling your primary residence can be tricky because you have to simultaneously be thinking about where you would like to buy. First weigh your priorities – selling price is certainly important, but having a quick and efficient sale can often be worth accepting a slightly lower offer. Talk to your agent and make sure you’re comfortable with where your priorities are.
At the same time, you should be compiling a needs/wants list for the home you will buy. You will probably have to act fairly quickly when your house sells, so any amount of preparation you can do will serve you well.
3. Prepare Your House for Showing
Underprepared homes can be sales disasters. Your home will never get as much attention from potential buyers as when it is first listed, so clearing clutter, cleaning, making repairs, and putting your home’s best foot forward is essential. Don’t “open for business” until your home is ready to be seen as favorably as possible.
4. Find out How Your Local Market Looks
Being realistic about your market is the key to a smooth sale. There is no substitute for a professional real estate representative when it comes to local market knowledge.
5. List aAway!
Lots of photos and online exposure are the key to getting a good response for your listing. Working with an agent who uses Point2 Agent software is a great step in the right direction. Now just “open” the house and sit back and wait for the flood of eager buyers!
--------------------------------------------------------------------------------
What is a CMA and Why Do You Need One?
CMA is real estate shorthand for "Comparative Market Analysis." A CMA is a report prepared by a real estate agent providing data comparing your property to similar properties in the marketplace.
The first thing an agent will need to do to provide you with a CMA is to inspect your property. Generally, this inspection won't be overly detailed (she or he is not going to crawl under the house to examine the foundation), nor does the house need to be totally cleaned up and ready for an open house. It should be in such a condition that the agent will be able to make an accurate assessment of its condition and worth. If you plan to make changes before selling, inform the agent at this time.
The next step is for the agent to obtain data on comparable properties. This data is usually available through MLS (Multiple Listing Service), but a qualified agent will also know of properties that are on the market or have sold without being part of the MLS. This will give the agent an idea how much your property is worth in the current market. Please note that the CMA is not an appraisal. An appraisal must be performed by a licensed appraiser.
The CMA process takes place before your home is listed for sale. This is a good assessment of what your house could potentially sell for.
CMAs are not only for prospective sellers. Buyers should consider requesting a CMA for properties they are seriously looking at to determine whether the asking price is a true reflection of the current market. Owners who are upgrading or remodeling can benefit from a CMA when it's used to see if the intended changes will "over-improve" their property compared to others in the neighborhood.
Jean Powers CRS, ASP®, e-PRO, PMN
Real Estate Broker
(510) 908.9002
(800) 378.7300
Homes@JeanPowers.com
www.JeanPowers.com
www.JeanSellsDreams.com
The experience and knowledge of a dedicated real estate professional can be priceless. A good Realtor® forms a powerful team with his or her clients that makes it possible for them to have a smooth, successful, stress-free sale.
2. Determine your Needs/Wants for the Sale and for Your New Home
Selling your primary residence can be tricky because you have to simultaneously be thinking about where you would like to buy. First weigh your priorities – selling price is certainly important, but having a quick and efficient sale can often be worth accepting a slightly lower offer. Talk to your agent and make sure you’re comfortable with where your priorities are.
At the same time, you should be compiling a needs/wants list for the home you will buy. You will probably have to act fairly quickly when your house sells, so any amount of preparation you can do will serve you well.
3. Prepare Your House for Showing
Underprepared homes can be sales disasters. Your home will never get as much attention from potential buyers as when it is first listed, so clearing clutter, cleaning, making repairs, and putting your home’s best foot forward is essential. Don’t “open for business” until your home is ready to be seen as favorably as possible.
4. Find out How Your Local Market Looks
Being realistic about your market is the key to a smooth sale. There is no substitute for a professional real estate representative when it comes to local market knowledge.
5. List aAway!
Lots of photos and online exposure are the key to getting a good response for your listing. Working with an agent who uses Point2 Agent software is a great step in the right direction. Now just “open” the house and sit back and wait for the flood of eager buyers!
--------------------------------------------------------------------------------
What is a CMA and Why Do You Need One?
CMA is real estate shorthand for "Comparative Market Analysis." A CMA is a report prepared by a real estate agent providing data comparing your property to similar properties in the marketplace.
The first thing an agent will need to do to provide you with a CMA is to inspect your property. Generally, this inspection won't be overly detailed (she or he is not going to crawl under the house to examine the foundation), nor does the house need to be totally cleaned up and ready for an open house. It should be in such a condition that the agent will be able to make an accurate assessment of its condition and worth. If you plan to make changes before selling, inform the agent at this time.
The next step is for the agent to obtain data on comparable properties. This data is usually available through MLS (Multiple Listing Service), but a qualified agent will also know of properties that are on the market or have sold without being part of the MLS. This will give the agent an idea how much your property is worth in the current market. Please note that the CMA is not an appraisal. An appraisal must be performed by a licensed appraiser.
The CMA process takes place before your home is listed for sale. This is a good assessment of what your house could potentially sell for.
CMAs are not only for prospective sellers. Buyers should consider requesting a CMA for properties they are seriously looking at to determine whether the asking price is a true reflection of the current market. Owners who are upgrading or remodeling can benefit from a CMA when it's used to see if the intended changes will "over-improve" their property compared to others in the neighborhood.
Jean Powers CRS, ASP®, e-PRO, PMN
Real Estate Broker
(510) 908.9002
(800) 378.7300
Homes@JeanPowers.com
www.JeanPowers.com
www.JeanSellsDreams.com
Friday, February 22, 2008
A Buyers's Transaction!
Where do I Start?
For many, beginning the homebuying process can be overwhelming. You may be uncertain about taking the initial steps. I hope this guide will help clear up some of those uncertainties by providing you with some useful information about the homebuying process.
When is the right time to start talking to a professional, and who do I choose?
Anytime you have questions you want answered is the right time to start. You can begin with either a Realtor or a lender. A Realtor can help you assess your financial picture, counsel you through the entire homebuying process, find a home that suits you and introduce you to a lender who can work with you on a financing package that meets your needs. A Realtor will work through all the intricacies of the transaction until close of escrow. A lender will work with you on the loan process and can preapprove you for a loan before you even begin house-hunting.
If it happens that you are not ready for any of this, both professionals will be happy simply to provide you with information.
How do I choose a Realtor?
In today's market, finding and purchasing a home can be a very involved and a complicated process. It is essential to find a Realtor who is qualified and dedicated to providing you with the best representation. It is best that you hire a Realtor who is a Broker. A Broker has more education, knowledge and skills than a Realtor who only has a Sales license. Always check the Department of Real Estate to see how long the Realtor has had a license and if they are in good standing. You can go to: www.dre.org . Once you have found that the Realtor is experienced and a full-time professional who knows the market in the area in which you are interested, determine if they know the available inventory in your location and price range. Ask for and check for references.
Your Realtor should have the time and energy to devote to you and your search for a home. Perhaps most importantly, choose an agent with whom you have a personal rapport.
Buying a home is an intimate type of business transaction. Trying to go through the process with someone you can't relate to will not work. Find a qualified Broker who you like, one who matches your personality and meets your individual needs. This will make the home purchase experience much more enjoyable.
What happens after I have chosen a Broker Realtor and spoken with a lender?
Given your price range, decide what kind of home you want and need. Think about size, location, special features such as fireplace and garage.
Begin looking at properties with your Realtor Broker so you have a good basis for making a final decision. Assess whether the home you can afford to purchase is the right home for you. If this is not the case, you may be unrealistic in your expectations and may need to adjust them to suit your budget.
When you find the home you like, make an offer to purchase. Your Realtor Broker's knowledge of the market and market values will assist you in making sure the price you offer represents good value for the property.
I've found the home I want. I've made the offer. What happens next?
The seller may accept your offer, reject your offer, or make a counter offer. If your offer is rejected, you can make another offer or look for a different house. If the seller makes a counter offer, you can either accept that offer or counter with yet another offer. Negotiations may continue back and forth until you and the seller agree to a final purchase price and terms of the contract. When this agreement is reached, the offer is "ratified". Your Realtor will now be required to deposit the specifed amount as per your contract, into an escrow account with a Title Company. During the escrow period, which is usually 30 to 40 days, certain conditions ("contingencies") specified in the contract must be met or waived within agreed-upon time periods.
These conditions typically include: having a professional inspection of the property, obtaining formal loan approval from the lender, and reviewing the seller's disclosures.
When Will I Actually Own The Home?
You will own the home when all conditions of the contract are met and escrow closes. The following are some of the conditions commonly found in home purchase contracts:
Finding a loan for the amount and at the terms stated in the contract. You should have a pre approved loan with a lender prior to submitting an offer to purchase the property.
Receiving a satisfactory report on the condition of the home by a professional home inspector, and a termite inspector. Obtaining any other inspections you deem necessary. If major problems are discovered, you do not have to buy the home or you can renegotiate the contract.
Conducting a title search and ensuring the property is free of any legal claims against it. You will also have to buy title insurance for yourself and the lender, in case a problem with the title arises after you purchase the house.
Purchasing homeowner's or hazard insurance is required by the lender.
Asking and receiving satisfactory answers to any and all questions you have about the property.
Obtaining disclosures from the seller informing the buyer of any fact which the seller is aware of that would materially affect the value of the property.
The seller must make any repairs to the home which are agreed upon in the contract, you may purchase property in its present condition or ask the seller to credit money in escrow for repairs.
Just prior to close of escrow, your loan becomes effective (it "funds"). The escrow officer will explain the closing documents which you must sign. One of these is a HUD-1 settlement form from the lender. This form, required by federal law, itemizes the services and costs to the buyer and seller. You will also be required to pay the closing costs and the rest of the downpayment, either wired or by a cashier's check, to the title company at least 2 days prior to closing escrow.
The title company formally records the new deed of trust, and you go "on record" as the new owner. You get the keys to your new home and, it's yours!
How important is my credit?
In addition to verifying income, a lender will want a credit report showing that a borrower has repaid monthly debts on a timely and regular basis. It would be a good idea to examine your credit history prior to submitting a mortgage application. If you discover any discrepancies, be sure to notify the credit bureau to correct them, because any unexplained credit delinquencies can be a basis for a disapproval by a lender.
Many delinquent or late payment accounts can be resolved by writing a detailed explanatory letter to the credit bureau. There are several national credit bureaus that provide credit reports for a nominal fee. Listed below are the credit bureaus commonly used by the lending industry.
Equifax Information Service
P.O. Box 740241 Atlanta, GA 30374-0241
(800) 685-1111 ($8.00 service charge)
TRW Credit Data
P.O. Box 749029Dallas,TX 75374-9029
(800) 392-1122
(1 free yearly)
When writing to the above agencies, provide your full name, present address, previous 5 year addresses, social security number, date of birth, and a verification of your name and present address (e.g. a copy of a billing statement).
How do I find the best loan?
Loans are available from a number of sources, including banks, mortgage companies, federal credit unions and financial companies. Your Realtor can be a good source of information about various lenders.
Assessing current needs and future objectives
You can simplify your search for the right loan if you start with a clear understanding of your plans for the property. Such an understanding requires some soul-searching on you part as to your personal and financial goals.
Ask yourself:
Are you looking to build equity quickly? Are you expecting increases in your income?
Is there a strong possibility of a career change or other situation which might cause you to have to move in the near future?
To what extent will the tax deductions from your home's interest payments affect your present and future tax situation?
Are you planning any major improvements? If so, how will they be financed?Before you start looking for homes, it is important to have a good idea of how much you can put down and how much you can afford in monthly payments.
Downpayment
You may intend to put 20% of the purchase price as a downpayment. There are loans available with as little as 5% down, although lenders may charge somewhat higher fees or interest on these. Also, a downpayment less than 20% often includes a requirement from the lender that you purchase private mortgage insurance (PMI) as a protection against possible default.
Monthly Payments
In addition to the downpayment, lenders want to determine if a borrower has enough stable income to make payments on a mortgage. Typically, they do not want a borrower's total housing costs, principal, interest, taxes, and insurance (PITI), to exceed 33 percent of his/her monthly income. The "33" is sometimes called a "top" ratio. Also, total housing costs plus other monthly expenses (car payments, student loans, credit cards, etc.) should not exceed 38 percent of the borrower's total gross income. These parameters are not absolute. Some buyers may qualify at a higher debt-to-income ratio
Types of loans
Today's borrower can choose from several types of loans. Some loans feature the same rate and payment amount for the duration of the loan (Fixed). Others are more flexible. Their rates and payment schedules can adjust to reflect changing economic factors (Adjustable). Still others offer a convertible feature, enabling you to convert from one type of loan to another after a period of time.
Fixed rate loans
Predictability is the key feature of a fixed rate loan. You can be certain that your rate and payment will never change as long as you have the loan. This makes it easier to plan and budget your finances.
Adjustable rate loans (ARMs)
ARM interest rates are tied to-and fluctuate to reflect changes in-a published financial index. When those index rates go up or down, ARM rates do too. By law, the index a lender uses cannot be controlled by that lender (e.g. a bank cannot use its prime rate as an index). Common indices include 11th District Cost of Funds, one-year T-note, and six-month T-bill. ARMs are easier to qualify for than fixed rate loans because the interest start rate is lower.
Glossary of lending terms
Annual payment capsAn annual cap limits the amount of change in payment that can occur. The maximum amount of change is usually 7.5% of the previous year's monthly payment. Payments cannot exceed that cap, no matter what the index rate does during the year. If, for example, your monthly payment is $1,000, it cannot go up by more than $75 per month the following year.
Annual percentage rate (APR)
APR is the effective interest rate over its projected life. It includes interest plus all other costs such as lender fees and closing costs (escrow, title insurance, appraisal fee, processing, etc.) Your loan's APR is a reflection of what you'll be paying annually for the loan and a good way to compare with other loans. Your lender is required by law to quote the APR when quoting an interest rate.
Closing costs
Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.
Index
There are a number of them. Some move sharply over relatively short time spans. Others change more slowly over longer period of time.
Interest rate adjustment caps
ARMs that don't have an annual payment cap will usually offer an annual cap of up to 2% of interest rates adjustments.
Lifetime interest rate caps
This feature puts a ceiling on the rate to which an ARM loan can be adjusted over the life of the loan. If the rate ever reaches the lifetime cap, the borrower has a fixed rate loan at that rate until the index falls again, and the rate can be adjusted downward.
Loan assumability
Unlike fixed rate mortgages, many ARM loans can be assumed by a qualified borrower. This can be a valuable benefit when the time comes to sell the home.
Margin
The interest rate for an ARM loan reflects the index plus a fixed margin. The margin covers the lender's operating expenses and profit. The margin amount must be included in the loan document, and can not change once the loan is funded.
Negative amortization
Negative amortization can occur when the payment is not large enough to cover the full amount of interest due. The borrower can choose whether he wants to pay the additional amount or have it added to the loan balance.
No prepayment penalty
Most ARMs can be paid off either fully or partially with no penalty.
Points
One point equals 1 percent of the mortgage amount. Typically lenders charge from zero to two points. Loan points are tax deductible.
Locking in
Also called a rate-lock, this is a lender's promise to commit to a certain interest rate on a loan, usually for 30 to 60 days.
Deciding on a Lender
It is important to find a lender you can depend on to provide you a loan at a competitive rate. In addition, you want your application processed swiftly and accurately at reasonable cost. The lending institution's stability, experience and commitment should also be examined.
Your Realtor can help you find a lender with a financing package that meets your needs.
What is an escrow and why is it needed?
An escrow is an arrangement in which a disinterested third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer's and seller's instructions.
People buying and selling real estate often open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed until the seller's requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.
An escrow is convenient for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds, and many other items using the escrow holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves much time and facilitates the closing of the transaction.
Who may hold escrows
The escrow holder may be any disinterested third party (some states require escrow holders to be licensed). Escrow officers with established firms generally are experienced and trained in real estate procedures, title insurance, taxes, deeds and insurance.
Impartiality
An escrow officer must remain completely impartial throughout the entire escrow process.He or she must follow instructions of both parties without bias.
Escrow instructions
Escrow instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow can be closed. Typical instructions might include: the method by which the escrow holder is to receive and hold the purchase price to be paid by the buyer; the conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing; instructions on the payment of prior liens.
Closing the escrow
Once the terms and conditions of the instructions of both parties have been fulfilled, the escrow is closed and the safe and accurate transfer of property and money has been accomplished.
In summary
The escrow holder facilitates real estate sales or purchases by:
Acting as the impartial depository of documents and funds.- Keeping all parties informed of progress on escrow.
Responding to lender's requirements
Securing a title insurance policy
Prorating and adjusting insurance, taxes, etc
Recording the deed and loan documents
It's not always that simple
Every escrow is unique and most are more complex than explained here. If you have further questions, contact an escrow officer or attorney to provide more detailed information.
What protection does title insurance provide?
Title insurance protects against any matter affecting the past ownership of the property. Title insurance is issued after the title company carefully examines copies of the public record. However, even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge ad experience of professional title examiners. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.
Some common hidden risks that can cause a loss of title or create an encumbrance on title:
False impersonation of the true owner of the property
Forged deeds, releases, or wills
Undisclosed or missing heirs
Instruments executed under invalid or expired power of attorney
Mistakes in recording legal documents
Misinterpretations of wills
Fraud
Deeds by persons of unsound mind
Deeds by minors
Deeds by persons supposedly single, but in fact married
Liens for unpaid estate, inheritance, income or gift taxes
Title insurance will pay for defending against any lawsuit attacking your title problems or pay the insured's losses. For a one time premium, and owner's title insurance policy remains in effect as long as you or your heirs retain an interest in the property, or have any obligation under a warranty in any conveyance of it.
By combining expertise in risk elimination at the time of issuing a policy, and protection against hidden risks as long as the policy remains in effect, your title insurer protects against title loss.For more detailed information on title insurance, contact a title officer at your title company.
I hope you have found this information helpful. It is designed to be of general interest, and while the content is reliable, it is not intended as a substitute for the advice of professional lenders, accountants, escrow officers, attorneys, etc. Before acting on any matter contained herein, you should consult with your professional adviser.
Do not hesitate to call or email me if you have any questions .
Homes@JeanPowers.com
510.908.9002 Cell
800.378.7800 Bus.
For many, beginning the homebuying process can be overwhelming. You may be uncertain about taking the initial steps. I hope this guide will help clear up some of those uncertainties by providing you with some useful information about the homebuying process.
When is the right time to start talking to a professional, and who do I choose?
Anytime you have questions you want answered is the right time to start. You can begin with either a Realtor or a lender. A Realtor can help you assess your financial picture, counsel you through the entire homebuying process, find a home that suits you and introduce you to a lender who can work with you on a financing package that meets your needs. A Realtor will work through all the intricacies of the transaction until close of escrow. A lender will work with you on the loan process and can preapprove you for a loan before you even begin house-hunting.
If it happens that you are not ready for any of this, both professionals will be happy simply to provide you with information.
How do I choose a Realtor?
In today's market, finding and purchasing a home can be a very involved and a complicated process. It is essential to find a Realtor who is qualified and dedicated to providing you with the best representation. It is best that you hire a Realtor who is a Broker. A Broker has more education, knowledge and skills than a Realtor who only has a Sales license. Always check the Department of Real Estate to see how long the Realtor has had a license and if they are in good standing. You can go to: www.dre.org . Once you have found that the Realtor is experienced and a full-time professional who knows the market in the area in which you are interested, determine if they know the available inventory in your location and price range. Ask for and check for references.
Your Realtor should have the time and energy to devote to you and your search for a home. Perhaps most importantly, choose an agent with whom you have a personal rapport.
Buying a home is an intimate type of business transaction. Trying to go through the process with someone you can't relate to will not work. Find a qualified Broker who you like, one who matches your personality and meets your individual needs. This will make the home purchase experience much more enjoyable.
What happens after I have chosen a Broker Realtor and spoken with a lender?
Given your price range, decide what kind of home you want and need. Think about size, location, special features such as fireplace and garage.
Begin looking at properties with your Realtor Broker so you have a good basis for making a final decision. Assess whether the home you can afford to purchase is the right home for you. If this is not the case, you may be unrealistic in your expectations and may need to adjust them to suit your budget.
When you find the home you like, make an offer to purchase. Your Realtor Broker's knowledge of the market and market values will assist you in making sure the price you offer represents good value for the property.
I've found the home I want. I've made the offer. What happens next?
The seller may accept your offer, reject your offer, or make a counter offer. If your offer is rejected, you can make another offer or look for a different house. If the seller makes a counter offer, you can either accept that offer or counter with yet another offer. Negotiations may continue back and forth until you and the seller agree to a final purchase price and terms of the contract. When this agreement is reached, the offer is "ratified". Your Realtor will now be required to deposit the specifed amount as per your contract, into an escrow account with a Title Company. During the escrow period, which is usually 30 to 40 days, certain conditions ("contingencies") specified in the contract must be met or waived within agreed-upon time periods.
These conditions typically include: having a professional inspection of the property, obtaining formal loan approval from the lender, and reviewing the seller's disclosures.
When Will I Actually Own The Home?
You will own the home when all conditions of the contract are met and escrow closes. The following are some of the conditions commonly found in home purchase contracts:
Finding a loan for the amount and at the terms stated in the contract. You should have a pre approved loan with a lender prior to submitting an offer to purchase the property.
Receiving a satisfactory report on the condition of the home by a professional home inspector, and a termite inspector. Obtaining any other inspections you deem necessary. If major problems are discovered, you do not have to buy the home or you can renegotiate the contract.
Conducting a title search and ensuring the property is free of any legal claims against it. You will also have to buy title insurance for yourself and the lender, in case a problem with the title arises after you purchase the house.
Purchasing homeowner's or hazard insurance is required by the lender.
Asking and receiving satisfactory answers to any and all questions you have about the property.
Obtaining disclosures from the seller informing the buyer of any fact which the seller is aware of that would materially affect the value of the property.
The seller must make any repairs to the home which are agreed upon in the contract, you may purchase property in its present condition or ask the seller to credit money in escrow for repairs.
Just prior to close of escrow, your loan becomes effective (it "funds"). The escrow officer will explain the closing documents which you must sign. One of these is a HUD-1 settlement form from the lender. This form, required by federal law, itemizes the services and costs to the buyer and seller. You will also be required to pay the closing costs and the rest of the downpayment, either wired or by a cashier's check, to the title company at least 2 days prior to closing escrow.
The title company formally records the new deed of trust, and you go "on record" as the new owner. You get the keys to your new home and, it's yours!
How important is my credit?
In addition to verifying income, a lender will want a credit report showing that a borrower has repaid monthly debts on a timely and regular basis. It would be a good idea to examine your credit history prior to submitting a mortgage application. If you discover any discrepancies, be sure to notify the credit bureau to correct them, because any unexplained credit delinquencies can be a basis for a disapproval by a lender.
Many delinquent or late payment accounts can be resolved by writing a detailed explanatory letter to the credit bureau. There are several national credit bureaus that provide credit reports for a nominal fee. Listed below are the credit bureaus commonly used by the lending industry.
Equifax Information Service
P.O. Box 740241 Atlanta, GA 30374-0241
(800) 685-1111 ($8.00 service charge)
TRW Credit Data
P.O. Box 749029Dallas,TX 75374-9029
(800) 392-1122
(1 free yearly)
When writing to the above agencies, provide your full name, present address, previous 5 year addresses, social security number, date of birth, and a verification of your name and present address (e.g. a copy of a billing statement).
How do I find the best loan?
Loans are available from a number of sources, including banks, mortgage companies, federal credit unions and financial companies. Your Realtor can be a good source of information about various lenders.
Assessing current needs and future objectives
You can simplify your search for the right loan if you start with a clear understanding of your plans for the property. Such an understanding requires some soul-searching on you part as to your personal and financial goals.
Ask yourself:
Are you looking to build equity quickly? Are you expecting increases in your income?
Is there a strong possibility of a career change or other situation which might cause you to have to move in the near future?
To what extent will the tax deductions from your home's interest payments affect your present and future tax situation?
Are you planning any major improvements? If so, how will they be financed?Before you start looking for homes, it is important to have a good idea of how much you can put down and how much you can afford in monthly payments.
Downpayment
You may intend to put 20% of the purchase price as a downpayment. There are loans available with as little as 5% down, although lenders may charge somewhat higher fees or interest on these. Also, a downpayment less than 20% often includes a requirement from the lender that you purchase private mortgage insurance (PMI) as a protection against possible default.
Monthly Payments
In addition to the downpayment, lenders want to determine if a borrower has enough stable income to make payments on a mortgage. Typically, they do not want a borrower's total housing costs, principal, interest, taxes, and insurance (PITI), to exceed 33 percent of his/her monthly income. The "33" is sometimes called a "top" ratio. Also, total housing costs plus other monthly expenses (car payments, student loans, credit cards, etc.) should not exceed 38 percent of the borrower's total gross income. These parameters are not absolute. Some buyers may qualify at a higher debt-to-income ratio
Types of loans
Today's borrower can choose from several types of loans. Some loans feature the same rate and payment amount for the duration of the loan (Fixed). Others are more flexible. Their rates and payment schedules can adjust to reflect changing economic factors (Adjustable). Still others offer a convertible feature, enabling you to convert from one type of loan to another after a period of time.
Fixed rate loans
Predictability is the key feature of a fixed rate loan. You can be certain that your rate and payment will never change as long as you have the loan. This makes it easier to plan and budget your finances.
Adjustable rate loans (ARMs)
ARM interest rates are tied to-and fluctuate to reflect changes in-a published financial index. When those index rates go up or down, ARM rates do too. By law, the index a lender uses cannot be controlled by that lender (e.g. a bank cannot use its prime rate as an index). Common indices include 11th District Cost of Funds, one-year T-note, and six-month T-bill. ARMs are easier to qualify for than fixed rate loans because the interest start rate is lower.
Glossary of lending terms
Annual payment capsAn annual cap limits the amount of change in payment that can occur. The maximum amount of change is usually 7.5% of the previous year's monthly payment. Payments cannot exceed that cap, no matter what the index rate does during the year. If, for example, your monthly payment is $1,000, it cannot go up by more than $75 per month the following year.
Annual percentage rate (APR)
APR is the effective interest rate over its projected life. It includes interest plus all other costs such as lender fees and closing costs (escrow, title insurance, appraisal fee, processing, etc.) Your loan's APR is a reflection of what you'll be paying annually for the loan and a good way to compare with other loans. Your lender is required by law to quote the APR when quoting an interest rate.
Closing costs
Expenses in addition to the price of the home incurred by buyers and sellers when a home is sold. Common closing costs include escrow fees, title insurance fees, document recording fees and real estate commissions.
Index
There are a number of them. Some move sharply over relatively short time spans. Others change more slowly over longer period of time.
Interest rate adjustment caps
ARMs that don't have an annual payment cap will usually offer an annual cap of up to 2% of interest rates adjustments.
Lifetime interest rate caps
This feature puts a ceiling on the rate to which an ARM loan can be adjusted over the life of the loan. If the rate ever reaches the lifetime cap, the borrower has a fixed rate loan at that rate until the index falls again, and the rate can be adjusted downward.
Loan assumability
Unlike fixed rate mortgages, many ARM loans can be assumed by a qualified borrower. This can be a valuable benefit when the time comes to sell the home.
Margin
The interest rate for an ARM loan reflects the index plus a fixed margin. The margin covers the lender's operating expenses and profit. The margin amount must be included in the loan document, and can not change once the loan is funded.
Negative amortization
Negative amortization can occur when the payment is not large enough to cover the full amount of interest due. The borrower can choose whether he wants to pay the additional amount or have it added to the loan balance.
No prepayment penalty
Most ARMs can be paid off either fully or partially with no penalty.
Points
One point equals 1 percent of the mortgage amount. Typically lenders charge from zero to two points. Loan points are tax deductible.
Locking in
Also called a rate-lock, this is a lender's promise to commit to a certain interest rate on a loan, usually for 30 to 60 days.
Deciding on a Lender
It is important to find a lender you can depend on to provide you a loan at a competitive rate. In addition, you want your application processed swiftly and accurately at reasonable cost. The lending institution's stability, experience and commitment should also be examined.
Your Realtor can help you find a lender with a financing package that meets your needs.
What is an escrow and why is it needed?
An escrow is an arrangement in which a disinterested third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer's and seller's instructions.
People buying and selling real estate often open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed until the seller's requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.
An escrow is convenient for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds, and many other items using the escrow holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves much time and facilitates the closing of the transaction.
Who may hold escrows
The escrow holder may be any disinterested third party (some states require escrow holders to be licensed). Escrow officers with established firms generally are experienced and trained in real estate procedures, title insurance, taxes, deeds and insurance.
Impartiality
An escrow officer must remain completely impartial throughout the entire escrow process.He or she must follow instructions of both parties without bias.
Escrow instructions
Escrow instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow can be closed. Typical instructions might include: the method by which the escrow holder is to receive and hold the purchase price to be paid by the buyer; the conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing; instructions on the payment of prior liens.
Closing the escrow
Once the terms and conditions of the instructions of both parties have been fulfilled, the escrow is closed and the safe and accurate transfer of property and money has been accomplished.
In summary
The escrow holder facilitates real estate sales or purchases by:
Acting as the impartial depository of documents and funds.- Keeping all parties informed of progress on escrow.
Responding to lender's requirements
Securing a title insurance policy
Prorating and adjusting insurance, taxes, etc
Recording the deed and loan documents
It's not always that simple
Every escrow is unique and most are more complex than explained here. If you have further questions, contact an escrow officer or attorney to provide more detailed information.
What protection does title insurance provide?
Title insurance protects against any matter affecting the past ownership of the property. Title insurance is issued after the title company carefully examines copies of the public record. However, even the most thorough search cannot absolutely assure that no title hazards are present, despite the knowledge ad experience of professional title examiners. In addition to matters shown by public records, other title problems may exist that cannot be disclosed in a search.
Some common hidden risks that can cause a loss of title or create an encumbrance on title:
False impersonation of the true owner of the property
Forged deeds, releases, or wills
Undisclosed or missing heirs
Instruments executed under invalid or expired power of attorney
Mistakes in recording legal documents
Misinterpretations of wills
Fraud
Deeds by persons of unsound mind
Deeds by minors
Deeds by persons supposedly single, but in fact married
Liens for unpaid estate, inheritance, income or gift taxes
Title insurance will pay for defending against any lawsuit attacking your title problems or pay the insured's losses. For a one time premium, and owner's title insurance policy remains in effect as long as you or your heirs retain an interest in the property, or have any obligation under a warranty in any conveyance of it.
By combining expertise in risk elimination at the time of issuing a policy, and protection against hidden risks as long as the policy remains in effect, your title insurer protects against title loss.For more detailed information on title insurance, contact a title officer at your title company.
I hope you have found this information helpful. It is designed to be of general interest, and while the content is reliable, it is not intended as a substitute for the advice of professional lenders, accountants, escrow officers, attorneys, etc. Before acting on any matter contained herein, you should consult with your professional adviser.
Do not hesitate to call or email me if you have any questions .
Homes@JeanPowers.com
510.908.9002 Cell
800.378.7800 Bus.
Sunday, February 17, 2008
Critical Considerations When Purchasing a Home!
Thinking about purchasing a home of your own? Keep these critical considerations in mind:
*How long you plan to live in the home? If you purchase a home and get a job transfer or decide to move after only a short time, you may end up paying money in order to sell it. The value of your home may not have appreciated enough to cover the costs that you paid to buy the home and the costs that it would take you to sell your home. The length of time that it will take to cover those costs depends on various economic factors in the area of the home. Most parts of the country have an average of 5% appreciation per year. In this case, you should plan to stay in your home at least 5 to 7 years to cover buying and selling costs. If the area you buy your home in experiences an economic up turn, the length of the time to cover these costs could be shortened, and the opposite is also true. *How long the home will meet your needs? What features do you require in a home to satisfy your lifestyle now? Five years from now? Depending on how long you plan to stay in your home, you'll need to ensure that the home has the amenities that you'll need. For example, a two-bedroom dwelling may be perfect for a young couple with no children. However, if they start a family, they could quickly outgrow the space. Therefore, they should consider a home with room to grow. Could the basement be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you'll need will help you find a home that will satisfy you for years to come.
*Your financial health - your credit and home affordability. Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? While you can always find a lender to lend you money, solid lenders are more skeptical if your credit history is not good. Generally, a couple of blemishes on a credit report will make you a good credit risk and could qualify you for the lowest interest rates. If you have more than a couple of blemishes on your report, some lenders may still provide you with a loan, but you may just have to pay a higher interest rate and fees. Some say that you should refrain from borrowing as much as you qualify for because it is wiser not to stretch your financial boundaries. The other school of thought says you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow. This is a decision only you can make. Are you in a position where you expect to make more money soon? Would you rather be conservative and fairly certain that you can make your payment without stretching financially? Make sure that whatever you do, it's within your comfort zone. *To determine how much home you can afford, talk to a lender or go online and use a "home affordability" calculator. Good calculators will give you a range of what you may qualify for. Then call a lender. While some may say that the "28/36" rule applies, in today's home mortgage market, lenders are making loans customized to a particular person's situation. The "28/36" rule means that your monthly housing costs can't exceed 28 percent of your income and your total debt load can't exceed 36 percent of your total monthly income. Depending on your assets, credit history, job potential and other factors, lenders can push the ratios up to 40-60% or higher. While we're not advocating you purchase a home utilizing the higher ratios, its important for you to know your options. *Where the money for the transaction will come from. Typically homebuyers will need some money for a down payment and closing costs. However, with today's broad range of loan options, having a lot of money saved for a down payment is not always necessary - if you can prove that you are a good financial risk to a lender. If your credit isn't stellar but you have managed to save 10-20% for a down payment, you will still appear to be a very good financial risk to a lender.
*The ongoing costs of home ownership. Maintenance, improvements, taxes and insurance are all costs that are added to a monthly house payment. If you buy a condominium or a townhouse, a monthly homeowner's association fee might be required. If these additional costs are a concern, you can make choices to lower or avoid these fees. Be sure to make your Realtor and your lender aware of your desire to limit these costs. If you are still unsure and want buy a home after making these considerations, you may want to consult with an accountant or financial planner to help you assess how a home purchase fits into your overall financial goals.
I am here to help!
Jean Powers Broker Associate, CRS, ASP, LTG, PMN, Windermere Welcome Home Please Remember ....I am never too busy for Your referrals! Successfully Serving Alameda County Since 1984
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