Rule Change Lets Owners Get Rid of Unneeded Mortgage Insurance

QUESTION: I am so frustrated I could scream. When we bought our home several years ago for $122,500, we paid $12,250 down and got a $110,250 mortgage. Since then, we added a family room, another bedroom and a second bathroom. We recently had the house appraised by the original appraiser who says it is now conservatively worth at least $155,000. But our problem is we want to save the PMI (private mortgage insurance) premium since our loan-to-value ratio is now only about 71%. I wrote our mortgage servicer and received a computerized reply, which said our loan has been sold in the secondary mortgage market, and we cannot cancel our PMI for seven years. I feel there must be some way to save this unnecessary PMI expense. What can we do?

ANSWER: Thousands of other borrowers share your frustrations because your PMI insurance is obviously unnecessary. There are two major buyers of home mortgages in the secondary mortgage market. The “good guy” is Fannie Mae. If your loan has been sold to Fannie, your PMI could be easily canceled when your loan-to-value ratio dropped below 80%, based on a new appraisal of your home.

But, the “bad guy” is Freddie Mac. On behalf of you and many other innocent Freddie Mac borrowers, I have been pressing Freddie Mac to change its unfair PMI rules.

Until recently, Freddie’s rules didn’t permit PMI cancellation until the loan was at least seven years old, and then Freddie allowed cancellation only if the loan-to-value ratio was below 80% of the original appraisal.

In response to your request and many others, James Croft, Freddie Mac’s executive vice president for loan operations, has radically improved the PMI removal rule for mortgages owned by Freddie Mac. Now PMI is no longer required in situations like yours where the loan-to-value ratio is below 80% if the loan is at least 2 years old and the increased value is due to property improvements.

Also, Freddie Mac now says the PMI fee can be dropped when the loan is over 2 years old and the loan-to-value ratio is below 80% of the property’s original value, the loan is over 5 years old and the loan-to-value ratio is below 80% of the current value or the loan is over 2 years old and the loan-to-value ratio is less than 75% of present value, as determined by a new appraisal paid for by the borrower.

Lenders Reject Loans for Trivial Reasons

Q: I am a frustrated mortgage broker dealing with more than 20 mortgage lenders. My aim is to find the best loans for my borrowers while giving the lenders safe mortgages. However, lately the lenders have rejected many loan applications due to trivial items, such as a missing borrower’s bank deposit verification even though the borrower is making a $75,000 down payment on a $220,000 house. Why are lenders becoming so fussy?

A: Many mortgage lenders are dumb. If you doubt that, consider the hundreds of recent S&L; failures. They forgot the loan security is the property, not the borrower. Any lender who rejects a $145,000 “easy qualifier” loan on a $220,000 home sale should be banished from your list of lenders. Shame on you for even trying to do business with a lender who didn’t grab that mortgage and thank you for it.

How Divorce Affects IRS Replacement Rule

Q: My wife and I are in the process of getting a divorce. We agreed to sell our home, worth about $175,000. I plan to buy a condo for about $90,000. But my wife doesn’t plan to buy another home. Can I avoid tax on my profit share?

A: Yes. Your half of the home sale price is $87,500. Using the roll-over residence replacement rule of Internal Revenue Code 1034, your share of the profit is tax-deferred if you buy a replacement home costing at least $87,500 within 24 months before or after the home sale. Your ex-wife’s home replacement plans are irrelevant. Ask your tax adviser for further details.

Why Do Lenders Not Look at Home’s Value?

Q: We own a home in an area where houses are selling slowly. A buyer offered us our asking price with a 10% down payment, assumption of our VA mortgage and a second mortgage for the balance of the price, due in two years. What do you think?

A: Grab it before the buyer withdraws the offer. But be sure to obtain a release of liability on that VA mortgage. Ask your real estate attorney to explain further.

Appraiser Ignored Neighborhood Prices

Q: Recently we had our home appraised so we could get a home-equity loan. The S&L; sent a novice appraiser who was not familiar with the neighborhood. I gave him a list of recent sales, which a local realtor periodically sends us. When the appraisal was completed, the S&L; called to say the appraisal came in $34,000 less than we estimated for the value of our home. After looking at the appraisal, it is obvious the appraiser didn’t even list some of the recent sales that I gave him. Because I paid $200 for this appraisal, don’t you think I am entitled to a decent appraisal?

A: Yes. Some mortgage lenders instruct their appraisers to value homes low, but a few appraisers go overboard in being conservative. I’ve told the story before about the appraiser who appraised my home $50,000 below what I thought it was worth. Like you, I refused to accept the low appraisal, so the lender (who wanted my loan business) had the appraisal redone to reflect the sales information I provided.

There is no reason you should accept a low appraisal when you have evidence of recent nearby home sales at higher prices, especially when you are paying for the appraisal.

Can Tenant in Common Sell Home Alone?

Q: I own my home as a tenant in common with my ex-husband. He owes me $40,000 to buy out my share of the equity, but he doesn’t have the money. As he is a merchant seaman, he is often overseas. I haven’t heard from him in six months, he is behind on the child support and I have no idea where to find him. But, I must sell the house, as I am broke. Can I sell without his signature?

A: No. You can sell only your share of the house. But there isn’t much demand from buyers who want to purchase half a house. I suggest you consult a real estate attorney. He might suggest a quiet-title lawsuit where the court could order your ex-husband’s share of the sales proceeds held in trust until he can be located. You also may want to consult your divorce lawyer to learn if your ex-husband’s share of the sale proceeds can be attached for the unpaid child support payments.

Finding Experienced Real Estate Attorney

Q: You often advise readers to consult a real estate attorney. Other than looking in the Yellow Pages, how can I find an experienced realty lawyer to take my case, so I don’t have to pay for his research education?

A: To find a local real estate attorney, I suggest you phone the local Board of Realtors to learn the name of their attorney, who is usually very knowledgeable in real estate law, the local community college to find out who teaches the course in real estate law and ask local real estate brokers, title insurance companies and investors for a recommendation.

I do not recommend calling the local bar association for realty lawyer recommendations. These lawyers are usually fresh out of law school and do not have much practical real estate experience. When you find a real estate attorney, be sure the fee arrangement is specified in writing, so there is no misunderstanding.

How to Find Insider Deals in Real Estate

Q: How can one find all “insider deals” on bargain properties?

A: I hope you won’t be too disappointed, but there really is no secret to finding the good deals in real estate other than to make your purchase desires known to as many real estate people as possible.

When talking with a realty salesperson, I never let the conversation conclude without saying “what bargains have you got for sale today?” Usually they laugh and say they don’t have any. But, you would be surprised how many agents phone me later when they learn of a truly good deal.

Also, attend the weekend open houses, always leave your name and phone number with each agent you meet, read the newspaper want ads religiously every day and follow up on every lead you obtain. You will soon have more bargain properties than you can buy.

Unadvertised Homes Often Best Bargains

Q: I want to buy a small house. Every weekend I religiously read the newspaper want ads and inspect the realty open houses, but everything seems so overpriced. However, the local weekly newspaper carries lists of home-sale prices that are often much less than asking prices of homes I’ve seen for sale. How can I find these below-market homes?

A: The primary reason most realty agents advertise homes is to make their phone ring. They have many unadvertised residences that are often much better bargains. If an advertised house isn’t what you want, be sure to ask agents if they have any unadvertised houses that meet your needs. Often, these unadvertised properties are better buys.

Is Relying on Single Agent a Mistake?

Q: By July 1, we must find a new home because our old home is being condemned for a street-widening project. So far we have been relying on just one agent, but I have my doubts about her. She seems to show us listings only from her company and rarely shows us houses listed by other brokerages. From reading your articles, I know she and her company make the biggest fee on a sale within the office. My question is do you think we are making a mistake relying on just one agent?

A: Yes. It is time to expand your horizons and work with several. The argument agents make for dealing with one agent is that the agent will work very hard to find you the right house if there is no other competition, but each agent won’t work hard if they know other agents are competing. That is nonsense. Unless an agent is extremely busy, the sales commission is so big he or she will call you every time a listing remotely meeting your needs becomes available, whether you are working with one or 100 agents.

Owning Makes More Sense Than Renting

Q: I am 28, single, earning about $40,000 annually, and realize I should buy a home of some type. However, I now rent a nice townhouse, which costs me about half what my monthly payments would be to buy a modest single-family house after making a 20% cash down payment. As I do not expect to get married anytime soon, do you think I should buy a house even though the monthly cost will be double what I now pay for rent?

A: Yes. If you continue renting, you will have nothing to show for your money but a pile of worthless rent receipts. But you are comparing apples with oranges. Of course, rent for a townhouse is much cheaper than mortgage payments on a single-family house. However, even if you compare rent for a single-family house, you would find it is cheaper than mortgage payments for a similar house. The reason is: Rents in most communities are too low in relation to the market value of houses. This problem is caused by too many houses available for rent because smart investors have realized rental houses can be great investments.

After you consider all cost aspects of buying a home, including the probable appreciation in market value, tax benefits and the security of owning your own home, I think you will agree a home is the best investment you can make, even if it costs a little more than renting.

How to Buy a Home and Not Get ‘Lemon’

Q: Since my husband and I decided to buy a home, we have become avid readers of your articles. As novice home buyers, we would like to know how to best protect ourselves in case we can’t get the mortgage to buy a home and from defects in the house, so we don’t get stuck with a lemon.

A: When you find a home you want to buy, be sure your purchase offer bid contains a finance contingency clause. Such a contingency means that you can cancel the purchase if the required mortgage cannot be obtained.

Such a clause might read: “This purchase offer is contingent upon buyers and the property qualifying within 14 business days for a new first mortgage of at least $100,000 at a fixed-interest rate not exceeding 10.5% for a term of 30 years with a monthly payment not more than $914.74 and a loan fee not exceeding two points.”

As for how you can best protect yourself against getting stuck with a “lemon,” there are two approaches to use. One is to place a clause in your purchase offer such as: “Seller represents that all defects in this property known to the seller have been disclosed to buyer in writing.” The best real estate agents, when obtaining a listing for sale, insist the seller fill out a seller’s disclosure statement. Some states, such as California, now require these statements.

The second approach is to put a contingency clause in your purchase offer, such as: “This purchase offer is contingent upon buyer obtaining a satisfactory inspection report on the property from a professional property inspector of buyer’s choice at buyer’s expense within five business days.”

If the inspection report reveals any surprises, then you can disapprove the report and get your earnest-money deposit refunded.Don’t Buy Land That You Can’t Use Soon

Q: In January, we inspected a new land-development project in Florida. The developer has an excellent reputation. However, we are concerned about buying a lot in a development where there are no houses built yet. What do you think of buying a lot for $15,000 in such a project? We would build on the lot in about 12 years when I retire.

A: Please don’t buy unless you plan to use the lot within six months. The reason is that too many things can happen to change your retirement plans within the next 12 years. If you insist on buying, invest only money you can afford to lose, because that is probably what will happen.

A week never goes by when I don’t receive at least one letter, from a person who wants to know how to sell a lot in a retirement development. Unfortunately, most of these lots are virtually unsaleable because the owner is competing with the developer who has hundreds, sometimes thousands, of lots for sale.

Mortgage Insurance Is Hard to Get Rid Of

Q: We are considering buying a two-bedroom home with a 10% down payment and a 90% mortgage. Our idea is to add a third bedroom and a second bathroom. This will greatly increase the home’s value and also meet the needs of our family. However, when we talked to the lender about getting rid of the PMI (private mortgage insurance) premium, she said we could be locked in as long as seven years. As the PMI cost is very high, how can we be sure of canceling this when we complete the improvements?

A: Congratulations for planning ahead. Most home buyers who pay 10% down are not aware of the difficulty of getting rid of the unnecessary PMI premium when their loan-to-value ratio drops below 80%.

Most lenders will allow dropping the PMI premium when a new appraisal is obtained and the loan balance is below 80% of the appraised market value. However, if you have the misfortune of having your loan sold to the notorious Federal Home Loan Mortgage Corp., then current rules lock you into seven years of unnecessary PMI premiums. Therefore, when you obtain your PMI loan, be sure to insist on the lender’s written promise that the loan will not be sold to Freddie Mac.

Excess Mortgage Can Result in Tax Bill

Q: We sold our home in 1986, took a 10% cash down payment, let the buyer assume our first mortgage, and we carried back an installment-sale second mortgage. However, when the IRS audited our tax returns, they zinged us for taxes because they said our refinanced first mortgage, which the buyer assumed, exceeded our cost basis, so we owe tax on the $14,000 excess. Does this sound reasonable to you?

A: Yes. You should have consulted your tax adviser before you let the buyer assume your “excess mortgage.” Such a mortgage usually is created, as in your situation, when the mortgage is refinanced for an amount larger than your home’s purchase price. This circumstance is not unusual if the home has appreciated in market value.

When you sell in an installment sale, the taxable portion of your profit includes the buyer’s down payment, plus the amount of your excess mortgage that exceeds your home’s adjusted cost basis. Ask your tax adviser to explain further.

Good Landscaping Well Worth the Cost

Q: We plan to sell our home soon. However, our yard is rather bare. When the weather gets better, a landscape architect says she can improve our yard with new shrubs, plants and lawn with underground sprinklers for a total cost of $2,450. While this seems high to us, she says it will add at least $5,000 to the value of our home. Do you agree?

A: Of course I can’t give specific advice, but I have learned that professional landscaping pays many times its cost. While $2,450 seems like a lot of money, if the landscaper knows what she is doing, you could add several times the cost to the value of your home.

I suggest you ask the landscaper for references from her previous clients and ask them if they were satisfied. Having personally seen how quickly and profitably landscapers can transform a property, I am an enthusiastic advocate of hiring a professional landscape architect.

Both Claim $125,000 Profits Tax-Free

Q: My friend and I have owned and lived in our home about 14 years. Recently we decided to split up. We put a lot of money into our house and greatly increased its value. Our net profit will be about $300,000. As we are both over 55, can we each use that “over 55 rule” $125,000 exemption you often discuss or can only one of us use it?

A: Yes, you can each claim up to $125,000 of tax-free home sale profits. The “over 55 rule” is available to any home seller, age 55 or older, who has lived in his principal residence three of the five years before the sale and never used this tax break before. You and your co-owner appear to both qualify.

However, only one “over 55 rule” tax benefit is available to married couples. Because you and your friend are not married, each of you can claim up to $125,000 of tax-free home sale profits or $250,000 total tax-free profits. Please consult your tax adviser for further details.

Tax Must Be Paid on Property Profits

Q: I have been acquiring income properties, mostly apartments, for more than 10 years, and have not made tax-deferred exchanges. I estimate my equities are over $2 million. My question is, how can I sell out without paying huge taxes?

A: You can’t. If you want to liquidate, you will pay at least 28% federal tax plus any state tax. Of course, the ultimate tax shelter of all is to die. Then, Uncle Sam will forgive tax on your capital gain.

Presuming that you don’t want to use the ultimate tax shelter of death, another alternative is to refinance your mortgages to take out tax-free cash. However, such refinancing will increase your mortgage payments, but you will then have tax-free cash to spend as you wish.

Tenant in Common Can Designate Heir

Q: Please unconfuse me. I read in a magazine article that a tenant in common cannot pass his interest in a property to an heir by will. I always thought a tenant in common can will his property interest. Who is correct?

A: You are. That writer is wrong. Tenant-in-common co-owners can pass the property ownership share to whomever they wish by will.

However, the will of a joint tenant with right of survivorship has no effect, and the property title passes automatically at death to the surviving joint tenant. Please consult your attorney for further details.

Should a Home Be Refinanced Before Sale?

Q: We have over $100,000 equity in our home. As we plan to sell it in September, do you think we should refinance now with an assumable mortgage which the buyer can take over?

A: No. Let the buyer obtain his own financing. After you go through the hassle of refinancing your mortgage, the buyer probably won’t like your loan and will want to obtain his own. Only if you have better mortgage finance sources than the buyer would it be advisable for you to refinance the mortgage before the home sale.

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to the Real Estate Section, Los Angeles Times, Times Mirror Square, Los Angeles 90053.