Do They Buy Now, or Wait for Prices to Drop?
Question: My wife and I have decided to change our lifestyle and buy our first home. The fact that she is three months pregnant influenced us greatly. We’ve been married for three years, living in a 200-unit apartment complex that offers amenities such as pool, gym, tennis courts and spacious grounds. But we’re tired of paying high rent and having nothing to show for our money.
Following your advice, we got pre-approved for 90 days with a major bank for a 97% home loan. However, friends at work tell me we should wait to buy a home because prices might drop if the economy falters. What do you suggest we do?
Answer: Even in areas hard hit by job layoffs, there has not been any significant drop in home prices. However, in many areas homes aren’t selling for the inflated asking prices that could have been obtained a year ago.
The inventory of homes for sale in most cities has significantly increased. This is very good for buyers. A year ago, it wasn’t unusual for several bids to be placed on a home during its first week on the market. Today, sellers (and their agents) are thrilled to receive any purchase offer within the first month.
You were smart to get pre-approved in writing by the actual lender for your home loan. Now you know what price range you can afford. That 90-day approval period (which can probably be extended) shows how eager lenders are. In the past, most lenders only pre-approved home loans for 30 or 60 days.
No, I don’t think you should wait to buy a home, especially with your baby on the way. Home prices are not likely to drop significantly. However, you can now negotiate aggressively with sellers without having to worry about competition from other buyers for the home you want to purchase.
Record Proper Document When Loan Is Paid Off
Q: When we sold our home 29 years ago, we carried back the first mortgage for our buyer. That loan will soon be paid in full. We know we need to give the homeowners the promissory note, marked paid in full. What else do we need to do?
A: When the loan is paid in full, you need to record either a deed of reconveyance (to cancel a deed of trust) or a satisfaction of mortgage (to cancel a mortgage). Such a recorded document clears the deed of trust or mortgage from the title.
If Borrower Falls Behind, Lender Can Foreclose
Q: My son was laid off his job and later rehired. During the layoff, he got behind on his mortgage payments. He received a notice of default from his mortgage lender. I thought lenders are supposed to advise borrowers of foreclosure plans. What can my son do to stop the foreclosure?
A: Legally, when a borrower falls behind on mortgage payments, the lender can proceed with the mortgage foreclosure. Proceedings can take as little as 21 days (in Texas). In most states, borrowers have three to six months to cure their default to avoid a foreclosure sale.
Lenders have no legal duty to work with borrowers who default. However, if your son has a VA or FHA home loan, there are procedures to delay foreclosure if the borrower cooperates. Your son should contact his lender, explain the reason for his default, and attempt to work out a mortgage reinstatement. Because he is back at work, he should pay the missing mortgage payments as quickly as possible to stop the foreclosure.
Obtain a Home LoanBefore You Retire
Q: I will be retiring in less than two years. My wife and I plan to sell our current free-and-clear home so we can then buy a smaller home. However, we don’t want to tie up all our equity in a retirement house, as we want to have adequate liquid cash reserves after retirement.
Should we buy our retirement home now and obtain a modest mortgage, perhaps 50%, while I’m still working? Or should we wait until we sell our home after I retire and have very limited income?
A: If you won’t have enough retirement income to make the mortgage payments on the retirement home, you won’t be able to qualify for a mortgage for its purchase.
My suggestion is, if you can qualify for a mortgage now, buy the retirement home today while your income can qualify you for a modest mortgage for its purchase. Of course, I’m presuming you’ve figured out how you’ll be able to afford the mortgage payments on two homes now and on the retirement home after you retire.
Keep House as a Rental Without Losing Benefit
Q: You recently advised “keep your old house as a rental if you are moving up to a better house.” But then you mentioned the $250,000 principal residence per seller tax exemption.
If a homeowner has owned and lived in a home for several years, if it has a significant value increase and if the owner converts the house to a rental, is the $250,000 per owner tax-free profit benefit lost?
A: Not necessarily. There is an inherent conflict between my advice to own several rental houses and claiming the $250,000 per seller principal residence sale tax exemption when you “move up” to a better home.
The article you refer to suggested that, when “moving up” to a better home, it might be smart to keep your old residence and convert it to a rental property. Then you will have two houses that are probably appreciating in market value.
However, there is a compromise. After you move out of your principal residence, you can keep it as a rental property for up to three years before losing the $250,000 per qualified seller tax exemption.
To illustrate, suppose you move up to a better home today but your former residence is in a great neighborhood where home values are appreciating. You might wish to rent your old home to tenants for up to three years.
If you sell within three years of moving out, you can still claim up to $250,000 per seller tax-free profits. This presumes you meet the Internal Revenue Code 121 test of owning and occupying your principal residence at least two of the five years before its sale. For full details, please consult your tax advisor.
Reconsider ConditionalHome Sale to Adult Child
Q: If my wife and I sell our home, worth $225,000, to our daughter for $1, will this create any tax liability? The conditions on our sale would be 1) both or either spouse can live in the house rent-free as long as they desire; 2) all insurance, taxes and maintenance will be paid by us; 3) after we both die or move out of the home, the sales proceeds are to be divided 50% percent to our daughter and 25% percent each to our two grandchildren.
A: Why sell your house for $1 to your daughter now? You might later need your home equity or want to sell the house for tax-free cash.
If your home is worth $225,000 and you sell it to your daughter for $1 now, with conditions, no federal capital gains tax is due because you are far below the maximum $500,000 joint tax-free principal residence sale exemption. Such a sale doesn’t even get reported to the IRS.
It’s Time to Get Tough With Bad Loan Servicer
Q: Several weeks ago you ran a letter from a lady who bought a home, and after a short time her mortgage was sold to a new loan servicer. That happened to me, too. The new loan servicer doesn’t mail a monthly statement, and when I phone, they are very rude to me.
Following your instructions, I asked them, “Who now owns my mortgage?” They told me they now own my mortgage, but I haven’t received any mortgage statement for at least eight months.
I mail my mortgage payment on time each month. After three address changes for the loan company, they finally admit they are having “problems.” I am a 74-year-old widow and am very frustrated. What can I do?
A: There is no reason why you should be subjected to such abuse by your mortgage loan servicer. Unfortunately, thousands of other home loan borrowers have similar problems. I’ve been through the same circumstances with several loan servicers, so I share your frustration.
Congratulations on making your monthly payments on time so the loan servicer can never impose late fees. But it’s time for you to get tough with your loan servicer.
Some day when you are rested and relaxed, phone your loan servicer to again politely ask, “Who owns my mortgage?” Chances are it is a “good guy” investor, such as Fannie Mae or Freddie Mac.
If the loan servicer refuses to tell you, keep your cool and ask to speak with a supervisor. Then politely ask, to show you know what you’re doing, “Which state or federal regulator regulates your operations, and what is your license number?”
If he or she refuses to disclose your loan owner (so you know where to complain about incompetent loan servicing), write a polite letter addressed to the president of your loan servicer. Mail it certified mail, return receipt requested. I’ll bet that solves your loan servicing hassles. Then your next step is to complain to the loan servicer’s state or federal regulator.
Keep Tax Records LongerThan 3-Year Minimum
Q: Before we retired, we owned several rental houses that appreciated handsomely in market value. But when we retired, we sold the rental houses, carrying back mortgages for income. Now most of those mortgages have been paid off in full. How long do we need to keep records on those purchases and sales? I don’t want to throw away anything the IRS might need to see.
A: Except for fraud, the IRS can only audit your income tax returns for up to three years after you filed. If fraud is suspected, however, the IRS can audit you as far back as necessary. But it’s best to keep your tax records longer than the three-year minimum.
For example, a few years ago I sold a rental house I had owned for about 14 years. In calculating my capital gains, I had to go back over my depreciation deductions for the previous 13 years of tax returns because the depreciation deduction was different each year. I’m sure glad I had all those tax returns and other essential tax records. If you’ve ever been audited, as I have, you’ll know how important your past tax records can become.
Keeping your important income tax returns for at least 15 to 20 years shouldn’t be a severe burden. I keep mine in the garage where they don’t take up much space. But I know where they are when needed.
‘Teaser’ Rates on ARMs Come With Drawbacks
Q: We are in the process of buying our first home. We can obtain a fixed-rate home loan at about 6.75% interest. But the mortgage broker offered us an adjustable-rate mortgage at 4.5% interest. The monthly payment is much lower. The adjustable interest rate is tied to the Treasury bill index. Is a fixed-or adjustable-rate mortgage best today?
A: I suspect that ultra-low 4.5% interest adjustable-rate mortgage (ARM) is just for six to 12 months. It’s called a “teaser rate.” Did the lender tell you the ARM index and the margin? After the initial teaser period, the ARM interest rate will probably jump to near 6% interest.
That isn’t much less than the 6.75% fixed interest rate, which is an excellent bargain. The big drawback of an ARM is the interest rate risk shifts to borrowers if interest rates rise, as they eventually will. In today’s home loan market, most borrowers are selecting fixed-rate home loans because there is no interest-rate risk of rising payments for the borrower.
Reverse Mortgage Needs No Monthly Payments
Q: Please clarify your recent brief mention of the Fannie Mae reverse mortgage for home purchase with no monthly payments. Suppose I am a senior citizen who wants to buy a condo on this reverse mortgage plan. Would I have to sell my current residence first? Or could I buy the condo using Fannie Mae’s reverse mortgage money?
A: Reverse mortgages are available only for senior citizens’ principal residences. Assuming you are 62 or older, the reverse mortgage Fannie Mae HomeKeeper for Home Purchase program will pay about 50% of your principal residence’s purchase cost. There will be no monthly payments. You must pay the balance in cash, probably from your savings or proceeds of your current home.
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Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to 251 Park Road, Burlingame, CA 94010, or visit https://www.bobbruss.com. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.
