‘Commitments’ by Lenders Need Careful Study
Q: I was recently in escrow to refinance my home mortgage. My lender had “locked in” loan terms with my mortgage broker and escrow closing was near. Then the lender said it would not honor the deal and escrow fell through. I see ads indicating that the lender is still making mortgage loans, so I’m not entirely sure what happened with my loan. Do I have any recourse with the lender, or is the borrower at the mercy of the institutions? --R.B.
A: Your rights at this point depend on the type of “locked-in” arrangement you had with the lender. Did you have a written commitment specifying the terms of the loan and the lender’s obligation to honor that commitment? If so, you may have strong grounds for legal action, particularly if you can show that the institution harmed you by forcing you to pay a higher interest rate elsewhere or by losing some business opportunity.
But be careful. Not all written commitments are what they seem. Some “commitment” letters specifically state that they are not binding. Others give the institution several grounds for canceling or altering the terms of the deal. Obviously you should read the letter carefully before discussing your options with a lawyer.
Even if you had only a verbal commitment for the loan terms, you may still have a potential suit, depending on what was said, how well you documented the discussions and the extent of damages you suffered as a result of the institution’s action. In this case, you would be wise to consult an attorney.
Renting a Room May Not Affect Tax Deferral
Q: In 1988 I began renting out a room in my house. I reported the income and expenses and depreciated that portion of the house as allowed. Now I plan on selling the house and am concerned that I will not be able to qualify for the untaxed profit roll-over allowed on the sale of your principal residence. I only rented the room for one year. Is there anything I can do to still qualify for the tax break allowed on principal residence sales? --B.B.
A: The real issue, say our experts, is the status of the house when you move to sell it. If you’re renting any part of the house when you put it on the market, the Internal Revenue Service isn’t likely to allow you to treat the entire house as your principal residence. If you remove your tenant just days before putting the house up for sale, the IRS might reasonably question your motives.
However, in your case it would appear that your tenant is gone and the house is all yours again. In this case, you should be able to roll over any profits, tax deferred, toward the purchase of a new house. Whatever amount you depreciated the house while it was a rental would decrease your taxable basis in it. If you repurchase another residence you carry that basis with you and ultimately, when you and the IRS settle your lifetime real estate gains, you are liable for taxes on those gains, minus whatever deductions and offsets are permitted.
Penalty on Early Use of IRA Can’t Be Avoided
Q: I took a special early-retirement package from my employer several years ago. I put my pension distribution into an individual retirement account and lived on my savings while I looked for other work.
I am still unable to find work and have used up my savings. I figure that if I could use my IRA to pay off my mortgage I could take one of the lower-paying jobs that seem so prevalent. Is there any way I can get a variance from IRS rules imposing a 10% penalty on early withdrawals from IRAs? --J.L.B.
A: There is no way for you to get the variance you want. If you want a big chunk of your IRA funds before turning age 59 1/2, you should be prepared to pay a 10% penalty on whatever you withdraw. Remember too that you will owe ordinary income taxes on whatever you withdraw because these funds have been sitting in a tax-deferred account.
There is one possible way around the penalty, but it may not do you much good since you appear to need a substantial amount of money to pay off your mortgage. The IRS allows taxpayers to withdraw funds, without penalty, from their IRAs before turning age 59 1/2 if they take out each year “substantially equal” amounts based on their life expectancy and the size of their accounts.
Let’s say you’re 50 years old and have an IRA of $100,000. According to IRS life expectancy tables, you will live another 33 years. So you would divide your IRA into 33 relatively equal distributions of $3,030, not accounting for interest accumulation. While these withdrawals would be subject to taxation as ordinary income, they would not be slapped with the 10% penalty. The $3,030 each year probably isn’t going to go very far in paying off your mortgage, but that’s the best you’re going to be able to do unless you’re willing to pay the penalty.
