New homeowners’ fees to increase

Let’s start with the good news first.  If you are in a home, paying a regular mortgage, nothing’s changed, you don’t have to worry.  No added fees for you.  

However, those that are purchasing a new home at the beginning of this year or planning to refinance, you’ll be paying an additional fee in your mortgage to help fund the payroll tax cut bill that the Senate passed over the weekend.

A quick review.  Originally planning to expire on January 1 (Sunday), a payroll tax cut and long-term unemployment benefits were extended two months when the Senate voted this weekend.  It should go through the House this week.  With this extension comes a $33 billion price tag.  So who pays for it?  Yep, you guessed it.  New homeowners and those refinancing.  That fee rises about a tenth of 1 percentage point and, therefore, increases the fee that Freddie Mac and Fannie Mae charge to insure home mortgages.  It will also increase if your loan is backed by the Federal Housing Administration.

So on a $200,000 mortgage, your rate will increase approximately $17 a month.  Nothing huge but still considerable in the scheme of things.  Obviously, for a higher mortgage it goes up and a lower mortgage will have a smaller fee.  About 9 in 10 mortgages are backed by Freddie Mac, Fannie Mae, or the Federal Housing Administration.

So my question is, is this fair?  Is it the homeowners’ responsibility to pay for this?  Looking at the large picture, I’m sure many people are thrilled that these benefits have been extended, given the state of the current economy.  And if it’s not covered this way, I would think Congress would tax us higher on something else, such as gasoline, income tax, or property tax.  They’ll get their money some way.  I’m curious to hear if you think this is right or if you have a better solution.  Please leave me a comment!  You can also reach me via my Web site.

How the foreclosure process works

A new report from the U.S. Treasury Department shows that Chicago ranks 3rd, behind Los Angeles and New York, of cities whose homeowners needed assistance from the Obama administration’s mortgage assistance program.  These are people who are going through loan modifications to be able to stay in their homes.

While that’s good news for those struggling to make payments, it just proves the amount of people who are still losing their homes to foreclosure on a daily basis.  I thought I’d give a quick overview on the 6 phases of a foreclosure, for those of you who know somebody going through it or might be going through it yourself.  This will give you a full understanding of how the process works.

1. Missing a payment.  This happens after the first missed mortgage payment.  Your lender will usually send a letter or statement indicating that they have not received the payment.  After two payments are missed, you will likely receive a demand letter.  At this point there’s still a good chance the lender will work with you on catching up with payments.

2. Notice of default.  After 3 months without a payment, the loan is transferred to the foreclosure department.  The notice will be recorded that money is owed and you’ll typically receive another 3 months to catch up and to make the payments.  This is known as the reinstatement period.

3. Notice of trustee’s sale.  So now it’s been 180 days, or 6 months, since the first payment was missed.  This gives you an idea of how long the foreclosure process takes from beginning to end.  At this point they’ll advertise the trustee’s sale in the county the home is located in.  You’ll see this notices in your local newspaper that includes the owner’s names, property address, and sale information.  The lender has to publish this information for three weeks prior to the sale date.

4. Trustee’s sale.  This is the actual sale.  The property is sold to the highest bidder who meets all the requirements.  The lender will determine what is a fair opening bid.  If sold at this sale, the home now belongs to that purchaser who can immediately take possession and evict the previous homeowners.

5. Real estate owned.  If the home was not sold at auction, the lender now owns the home.  They’ll most likely put it up for sale with a Realtor.  Most of the time, the current owners are already gone from the home.  Sometimes these homes will be in very poor shape, left that way by the previous owners.  Other times the bank will have paid money to make changes to make the home more attractive to new buyers.  If you’re looking to purchase a home and your Realtor tells you it’s an REO or real estate owned, you will now know what that means.

6. Eviction.  You can usually remain in the home until it’s either sold through the trustee’s sale or as an REO.  Once it’s been sold, the sheriff will come to evict anyone still in the house.  They can remove people and their belongings that are left in the home.  If you’ve left the home on your own and there are belongings still there, once the home is sold, those belongings will most likely get thrown out.  So be aware of that.

If you know that you are going to have trouble making payments, do your best to speak to the lender beforehand to try to work out an arrangement.  It’s worth talking about a temporary or permanent relocation.  There are even companies nowadays that can help speak to the lender on your behalf.  More information can be found in this MSN article. If you have any more questions, please leave me a comment or visit me online.

Buyers hope for extension of tax credit

A lot of the buyers that were guaranteed the Federal tax credit by being under contract on a house and closing by June 30th are getting very nervous.  As the deadline is approaching, many feel they won’t be able to close on their home in time to be eligible for the credit all for circumstances out of their control.

They’re hoping Congress extends the deadline for closing through the end of September, giving them at least 3 more months to maintain their eligibility.  This week the Senate approved a 3 month extension, but they’re still waiting on word from the House to have it passed.

What’s taking so long?  Those buyers who went under contract on houses that were short sales are waiting for responses from the bank, which can take months and months to hear back.  On top of that, once they hear, they need to move forward with the process, which generally includes a home inspection and other contingencies that have to be met.

The National Association of Realtors is saying that up to 180,000 buyers who were hoping to close by June 30 and get the tax credit are likely to miss the deadline.  But even 3 months might not be enough time for many buyers, especially those dealing with a short sale.  A short sale deal can take months and in some cases, even a year or more.  Realtors are worried that if the extension doesn’t get approved or isn’t long enough, buyers will cancel contracts because they were counting on that money to help with a down payment or even to do some repairs or cosmetic updates in the houses they’re buying.  Not getting the tax credit will have a negative impact causing a lot of canceled contracts. 

If the extension is passed, it is only for those who were already under contract by the previous April 30th deadline.  No new buyers are eligible.

Do you know someone who is affected by this?  Please leave me a comment below or visit me online .


Congress considers possible real estate tax burdens

Congress is considering two new tax burdens, both of which will have a significant effect on real estate and real estate owners. 

The first will mainly affect those who are landlords or those who own rental properties.  Anyone owning real estate that collects rental income will be affected.  If you have had any work done by anyone on your rental property, you would be required to fill out the proper 1099 forms for all service providers who performed work on the property.  This can include regular handymen, roofers, electricians, painters, etc.  You must have paid them at least $600 in the last calendar year.  Landlords would be charged a penalty for failing to fill out these forms.  Most people haven’t used these forms before and could require them to have to hire a tax professional for assistance.  This creates a financial burden on many.

The second proposal is to tax carried interest rates at a higher rate than the current capital gains rate.  This is when you go to sell an investment property and are taxed on any money you have gained.  For example, if you bought a property for $100,000 and later sold it for $200,000, you have gained $100,000, which is what you’d be taxed on.  This money is considered a capital gains, and taxed at a lower amount.  Congress is proposing to get rid of the capital gains rate.

The National Association of Realtors strongly opposes these two proposals.  Aside from not wanting to see clients negatively affected by this, the market is still in flux.  We’re still dealing with many foreclosures and home values decreasing across the country.  These proposals will only delay getting the market back to a stable position. 

We’re asking for you to write to your senators and Congress representatives to let them know how strongly you oppose this.  I’ve included a sample letter below, thanks to Creative Real Estate Investing Guide.  Please let them know your thoughts on this issue.  You can find the contact information for your State representatives here. I’d also love to hear any comments.  You can leave a comment or visit me online.

Sample letter:

Dear [decision maker name inserted here],

I am a property owner and your constituent. Reports indicate that Congress may vote this week on a spending and tax measure that could include two harmful tax provisions directly affecting real estate. I urge you to oppose these changes.

The first would require that ALL landlords provide an IRS Form 1099 to all contractors they do business with if they pay that contractor $600 or more in any given year. The proposal would apply even to those who own just one property. This is a trap for the unwary. Since many of my clients are “little guys” looking to supplement their income with real estate investments, any proposal requiring them to file Forms 1099 would impose new expenses and subject them to penalties they are ill-equipped to pay. Often these small landlords don’t use tax professionals; if adopted, this proposal could force them to incur the expense of hiring tax professionals. This proposal is burdensome and overreaching. Oppose it.

I also oppose a proposed change to tax carried interest at ordinary income rates. A real estate investment however, is fundamentally different from a hedge fund or financial instrument investment. An investment in real estate is nothing like playing with other people’s money. Real estate is a fixed asset held for a long period of time. The worst thing about this proposal is that, for the first time, a particular type of real estate investment gain would no longer qualify for capital gains treatment. This is a terrible precedent. Oppose it.

The real estate industry, in all its commercial, multi-family and individual investment categories, is still very fragile and likely to remain so. These proposals are ill-advised, inopportune and potentially destructive. Keep our real estate market recovery on track by opposing these measures.


[Your name here]

Government proposal to help with short sales

If you’ve been a buyer looking to purchase a home and put an offer in on a short sale, you know that the paperwork and the wait times can be excruciating.  I’ve seen cases where buyers have had to wait months – as many as 6 – to hear from the lender about whether the short sale has been approved.  The Obama administration is working on a new proposal that would help streamline the short sale process and hopes to roll it out over the next few months.

As a reminder, a short sale is when the lender is willing to accept a less amount of money for the property than what is currently owed.  The lender needs to determine if they will make more money this way than if the home went into foreclosure by the homeowner no longer making payments and then being able to resell it.  This is what can lead to extremely long wait times. 

So what the government is proposing is quicker turnaround times.  They haven’t named a figure yet, but hopefully it will be a maximum of X number of days to get a response from the lender.  They’re also proposing uniform documents required by everyone.  No more specific paperwork for each lender that makes each short sale request different.  They’re proposing to pre-approved short sale terms.  This has the potential to mean that it will be accepted no matter what if it meets a certain percentage back to the lender or if the buyer has a certain amount of financing covered.  That’s still up in the air.

The proposal also includes financial incentives for everyone who takes part.  This includes $1,500 back to the homeowners to help out with relocation costs and having to move.  So a benefit to having to short sale your house will help a lot of people out.  Especially if they need to rent right away and don’t have any money at their fingertips.

Mortgage servicers would earn $1,000.  Investors purchasing the home would get $1,000.  That can help with a lot of remodeling costs, if they’re needed.  Even real estate agents wouldn’t be forced to cut their commission if the bank asked them to.  We’re still waiting to see all the details related to the plan, but the news seems positive thus far.  A streamlined process and money for all involved … what’s the negative?

I’d love to hear your thoughts on this.  Please leave me a comment or visit me online.  More info can be found here.

Tax credit extended and expanded

Just last week I blogged about how the first time buyer tax credit was set to expire on November 30, 2009.  Well, a lot has happened in the past week.  Earlier in the week the House of Representatives passed an extension.  And Barack Obama signed it into law early on Friday. 

The extension now runs through June.  In order to take advantage of the tax credit up to $8,000, you will need to sign a contract by April 30, 2010 and close by June 30, 2010.  Just be careful.  If you are signing a contract to purchase a home that is going through a short sale, please beware.  A lot of banks can take longer than 60 days to approve a short sale or that closing.  So you’ll need to get everything signed prior to April 30.  April 30 is the last day you can have a contract signed and June 30 is the last possible day to close to take advantage.

8000-tax-creditAgain, how the credit works is this.  If you purchase a home for $80,000 or more, you are eligible for an $8,000 tax credit on your 2009 taxes.  Remember, you file 2009 taxes in 2010.  If it’s a home for less than $80,000, you can get a credit for up to 10% of the purchase price.  If the home is $59,000, you will receive $5,900.

Obama also extended the income limits of who is eligible.  Single buyers can now earn up to $125,000 per year in income and married couples up to $225,000 to be able to receive it.  If your income level is above those amounts, you are not eligible to receive the credit.

Obama also extended the credit to move-up buyers, not just first time buyers.  In order to qualify for this $6,500 credit, you must have owned and occupied a principal residence for at least 5 of the last 8 years.  So many more people will qualify under the new rules.  Congress and the President are hoping the economy will get stimulated a bit by this expansion.

Originally, Congress was hoping that this tax credit would start a domino-like reaction.  First time buyers would purchase homes from sellers who would then choose to purchase homes and so on.  Unfortunately, a lot of buyers turned to vacant/foreclosed/short sales, so these homes didn’t have sellers who needed to move up.  But they’re hoping that offering a tax credit to move-up buyers will start this domino effect again.

More information on the expansion can be found in this article. I also have lots of great info on my Web site.

New appraisal rules can hurt borrowers

houseNew rules have been developed by the Federal Housing Finance Authority, Fannie Mae, Freddie Mac, and the New York State Attorney General to ensure there’s a solid boundary between the mortgage industry and the home appraisal process.  It’s called the HVCC, or Home Valuation Code of Conduct.  The new rules apply to all conventional single-family loans that began after May 1st and were sold to either Fannie Mae or Freddie Mac.  It does not apply to VA or FHA loans.

Here is some more of what’s covered under this new policy:

1. It forbids anyone from the lender’s staff choosing an appraiser or heavily communicating with an appraiser about the home valuation.  The lender can now get a middleman to order an appraisal from a management company which will then choose an individual appraiser. 

2. Real estate agents and mortgage brokers can not order or pay directly for an appraisal.

3. Lenders can not conduct value checks prior to an appraisal being ordered.  This is where they pulled comps to see if the numbers would work.  Many were doing this prior to appraisals being ordered.

4. Borrowers will receive a copy of their appraisal at least 3 days prior to closing and it will be free of charge.  This gives them some time to fight the number if they believe the appraisal was incorrect for any reason. 

So what are the negatives?  Realtors and mortgage brokers can no longer “recommend” an appraiser they’ve worked with in the past to conduct the appraisal.  Obviously, this prevents anyone from pressuring appraisers to determine a certain value, but it comes at a cost to everyone else. 

More appraisers are going to earn less money by working directly with the management companies instead of on their own. 

Appraisals will begin to cost a little more money.  And, now the whole process is almost guaranteed to take longer.  This means that borrowers will have to lock in rates for a longer period of time which could cost them more money. 

At least this will prevent some more foreclosures by allowing people who aren’t qualified to pay for a house to obtain it.  And appraisals should be much more straightforward and not influenced by any particular individual.  This Chicago Tribune article does a really good job of explaining more of the positives and negatives.

If you do have more questions, please be sure to visit me online.