Lenders Squeamish About Renter-Occupied Condos
Questions about financing a condominium, the rules for taking an important tax break and a congressional attempt to make it easier to tap a retirement account to buy a house have arrived in the mail.
Sharon Ebert of Los Angeles recently agreed to buy a condominium for $125,000, with a 10% down payment of $12,500.
But when the lender she was planning to use found out that more than 30% of the units in the building were occupied by renters instead of owners, it refused to give her a loan despite her good credit record.
“I’m supposed to close escrow on Nov. 15, and now I’ve got to start looking for a brand-new lender,” she writes. “I’m afraid I might lose the condo and my deposit. Are all lenders going to give me this kind of trouble?”
Not all lenders are going to automatically reject Ebert’s loan request, but it may take a little work to find a bank or savings and loan to provide the needed financing.
Most lenders like to see at least 65% or 70% of the units in a condo complex occupied by owners instead of renters, in part because they feel a person who has a financial stake in their home will take better care of the property than someone who doesn’t.
In addition, many loan officers theorize that an unusually high percentage of renters in a development could make the units less marketable and drive down values--which, in turn, could cause a bank to lose money if a borrower defaults and the condo can’t be sold for enough cash to fully repay the loan.
Fortunately, not all lenders feel this way. Ebert might have to call several financial institutions or enlist the help of a good mortgage broker to get a loan, but sooner or later she’ll find one that doesn’t have such strict rules.
Ebert’s problems bring up a good point. Any offer a buyer makes for a home--be it a condo or a single-family house--should always be contingent on the buyer’s being able to line up suitable financing to complete the transaction.
“If you can’t get a loan to close the deal, the contingency should let you back out without losing your deposit,” said Steve Eglash, a mortgage broker at Rockland Financial in Sherman Oaks.
Terry Patterson of Riverside has found herself in a situation that almost all homeowners will be in sooner or later. She and her husband are selling their current home and plan to “trade up” to a nicer, more-expensive house.
“We still owe about $70,000 on the home we’re selling, and we’ll get about $140,000 for it,” she writes. “We want to buy something for about $200,000, but we only want to make a down payment of about $40,000.
“Will the size of the loan we take out have any bearing on our ability to avoid paying taxes on our resale profits?”
No, it won’t. And fortunately, the “rollover residence replacement rule”--technically known as Internal Revenue Service Code 1034--that Patterson and so many other readers often ask about is fairly easy to understand.
In a nutshell, the code allows home-sellers to defer paying taxes on their resale profits if the purchase price of the new home is equal to, or higher than, the adjusted sales price of their current home.
Let’s assume that the Pattersons sell their home for $140,000 and pay a 6% sales commission of $8,400. They wouldn’t have to pay a nickel in taxes as long as their new home cost at least $131,600.
“It doesn’t matter whether they borrow to the hilt to buy their new house, or whether they pay all-cash,” said Terry Krupczak, a partner in the Los Angeles office of accounting giant Ernst & Young.
“What’s important is that the purchase price of the new home is at least as high as the adjusted sales price of the old one.”
Krupczak adds two caveats, though. “First, the Pattersons will have to buy their new house within 24 months of the time they sell their current one.”
Second, he notes, most homeowners who trade-up into a more-expensive house don’t really avoid paying taxes on their gain: They merely defer Uncle Sam’s bite.
If the Pattersons eventually “trade-down” into a less-expensive house--perhaps when they retire--they’ll probably have to pay taxes on at least part of their resale profits.
Earlier this year, we wrote about a bill that had been introduced in Congress that would allow first-time home buyers to tap their retirement accounts without penalty as long as the money would be used to buy a home. Several readers have since written in, asking for an update on the legislation’s progress.
The bill’s chances of passage got a boost last week, when its author--U.S. Sen. Lloyd Bentsen (D-Texas)--publicly began touting the plan at a banking convention in Dallas.
The Bentsen bill is part of a tax-cutting proposal that some analysts say could become the focus of the 1992 presidential election.
Bentsen, chairman of the tax-writing Senate Finance Committee, hopes to allow first-time buyers to tap their individual retirement accounts or other retirement plans without paying the 10% penalty currently levied by the IRS.
The measure would also allow parents and even grandparents to make penalty-free withdrawals from their own accounts if the money would be used to help their offspring buy a house.
Significantly, Bentsen has finally said how he’d pay for the measure--by reducing military spending 5% over the next five years.
Under a measure signed into law last year, any bill that might result in a loss of tax revenues must be paid for out of other sources.
President Bush is expected to offer his own tax-cutting proposal soon. It, too, is expected to include some type of “homeowner IRA” plan, although it isn’t expected to be as generous.
Differences between the plans will have to be ironed out by Congress. If a compromise is reached, the legislation could go into effect as early as next year.
Letters and questions may be sent to Myers at the Real Estate section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053. Questions cannot be answered individually. Average Rates for Residential Mortgages Average rates for residential mortgages as of Oct. 18, 1991.
Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 8.56% 8.90% 8.74% 6.61% 6.88% California 8.72 9.06 8.90 6.81 6.78 Connecticut 8.57 8.90 8.76 6.62 6.79 Wash. D.C. 8.43 8.76 8.61 6.33 6.71 Florida 8.49 8.84 8.67 6.48 6.61 Mass. 8.51 8.85 8.69 6.60 7.06 New Jersey 8.57 8.92 8.76 6.59 7.09 N.Y. Metro 8.64 8.97 8.82 6.66 7.01 New York 8.72 9.04 8.90 6.73 7.01 N.Y. Co-ops 8.77 9.05 9.02 7.20 7.62 Pa. 8.37 8.74 8.56 6.49 6.75 Texas 8.41 8.81 8.61 6.48 6.78
SOURCE: HSH Associates, Butler, N.J.
