The Rules Have Changed for Loan Assumptions by Home Buyers With Poor Credit
Q In a recent column you talked about how someone with a poor credit rating could qualify for a mortgage loan. What about simply assuming the loan of the home seller? My wife and I did this years ago. Can you still do it today?
--F.G.
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A Assuming a home seller’s existing mortgage isn’t as easy for a buyer with credit blotches as it used to be, but it is still possible.
For starters, you should know that lenders generally do not treat loan assumptions differently than new loan applications when evaluating an applicant’s qualifications, according to Mark Schuerman, president of Royal Thrift & Loan, a Los Angeles lender specializing in borrowers who have some credit woes.
An applicant must still meet minimum loan qualifications and must still secure the lender’s approval before assuming the mortgage. That said, you should also know that lenders are generally predisposed to favor a loan assumption because it generates additional processing fees and lengthens the life of the loan, which increases the time during which the lender can collect residual fees for having originally created the mortgage.
However, according to Schuerman, borrowers with credit problems will most likely qualify for anassumption only on a mortgage that carries a higher-than-market interest rate, a fact that reflects the greater security risk these borrowers pose to the lender.
The “B- or C-grade borrower can get a B- or C-grade loan, but not an A-grade loan,” he says. The lower your grade as a borrower, the higher the rate you’ll be forced to pay on your mortgage.
Schuerman acknowledges that loan assumptions were probably easier when you did yours. But the rules changed about 15 years ago when lenders tightened their evaluations to reduce their exposure to foreclosures and repossessions.
IRA Limits Depend on Other Pension Plans
Q My wife has a 403(b) pension plan with her employer. May I open an individual retirement account and make a deductible contribution? I am not covered by a pension plan at my job. What about a single person who has a 403(b) plan? Can he or she make deductible IRA contributions?
--B.Q.
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A We’ll take your questions in order.
If your wife is covered by a qualified pension plan, such as a 403(b) or 401(k), you are not entitled to make a fully tax-deductible IRA contribution unless your combined family income is less than $40,000 per year, the federal maximum imposed for full IRA deductibility. The fact that you are not similarly covered through your own employment doesn’t matter.
Partial deductions are available for IRA contributions for combined family incomes of up to a maximum of $50,000 per year and are eliminated entirely for families with earnings above that.
Why? Under the reasoning ofthe tax code, if one spouse is covered by a pension plan, the couple are treated as though both spouses were covered. The logic, if that word can be applied, is supposed to take into account community property laws and the fact that spouses generally benefit from each other’s pension plans.
The only exception covers aspouse filing a separate tax return who is deemed not to be covered by the other spouse’s plan. However, in these circumstances, the spouse seeking the tax-deductible IRA is limited to annual earnings of $10,000 or less.
A single worker covered by a qualified plan may not make a fully tax-deductible IRA contribution unless his or her annual income is less than $25,000 per year. Partial deductions are available for those earning up to $35,000, after which they are eliminated entirely.
Remember that you may still make a non-tax-deductible IRA contribution. Why might you consider doing this? Because these contributions generate tax-deferred earnings.
Sisters Each Qualify for Home Sale Exemption
Q My sister and I are joint owners of our home. We are both over age 55 and have lived in and owned this home for many years. Can we each qualify for a $125,000 exemption on the profits when we sell our home or must we share a single $125,000 exemption?
--G.P.
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A Each of you is entitled to a $125,000 exemption on your respective halves of the profit from the home sale. With the notable exception of married couples, any two or more homeowners over 55 who have lived in a home as their principal residence for three of the last five years and who hold title to that residence are entitled to the full $125,000 exemption. Married couples are entitled to a single $125,000 exemption.
2-Year Period to Defer Home Sale Capital Gains
Q My wife and I want to sell our home and move to a more expensive home. If we purchase a new home before we sell the old one, will we have to pay a capital gain once the sale is completed? Our gain will be significant.
--K.L.
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A To qualify for a tax deferral on any gain from a home sale, homeowners must purchase and move into their new home within 24 months of the home sale. That period can run either forward or backward from the date of the home sale. You would qualify for the latter. This means that you must sell your existing home within 24 months of moving into your new home. In all but the very worst real estate markets, this should not pose a great difficulty. But remember, once you move, the clock begins ticking and you should waste no time getting your home on the market and sold.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. Or send e-mail to carla.lazzareschi@latimes.com
