Unless Congress extends the expiration deadline, Federal Housing Administration (FHA) loan limits set in 2008 will drop significantly beginning October 1. Congress raised the loan limit amount in response to the housing crisis to help spur the homebuying market. FHA loans offer borrowers very competitive rates and terms, and they only require a 3.5% down payment. Allowable debt ratios are higher than the typical debt-ratio limits imposed for conventional loans, and there are no income limit qualifications, so more people can qualify for them.
If the loan limit drops on October 1, many California homebuyers will face higher down payments, higher mortgage rates and stricter loan qualification requirements. Borrowers seeking larger mortgages will have to apply for conventional loans or jumbo loans, which may be subject to higher interest rates and down payments.
The maximum FHA loan limit for Tulare county starting October 31, 2011 will be $271,050. The current loan limit set to expire on September 30, 2011 is $325,000.
Tuesday, September 6, 2011
Wednesday, July 27, 2011
2nd Lien Holder's Can No Longer Pursue Deficiency in CA
Effective July 15, 2011, California has prohibited Junior Lenders (2nds, HELOCs, etc) from having any deficiency recourse claims against the borrower if the lender agrees to take part in a short sale. Gov. Jerry Brown signed SB 458 (Corbett) into law and it took effect immediately. In January, 2011, SB 931 (2010) was put into effect requiring that any First lender that agrees to a short sale must accept the agreed upon short sale payment as payment in full of the outstanding balance of all loans. But unfortunately, the rule did not apply to junior lien holders. SB 458 extends the protections of SB 931 to junior liens. Both laws only apply to one to four unit residential properties.
Whether this is a victory for sellers and the real estate industry remains to be seen.
California Association of Realtors President Beth L. Peerce stated: “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
But the real question is whether this will in fact make short sales harder to get done. For any lender being asked to take the loss of the deficiency in a short sale, their only obligation is to determine whether a short sale will get more money back for their investors than a foreclosure. For first lenders on one to four unit residential properties, short sales are almost always better because: 1) Buyers pay more at a short sale than at a foreclosure sale; and 2) almost all foreclosures of these type of properties in California are done using a Trustee Sale from which there is no deficiency recourse. So for the foreclosing first lender, the short sale will generally bring them more money than a foreclosure. That is not necessarily the case with junior lenders.
Junior lenders would wait until the 1st lien foreclosed then they were free to pursue a deficiency judgement to get back the balance owed (unless the seller filed Bankruptcy). Now the 2nd lien does not have this option. So, it will be interesting to see how well they cooperate with short-sales. Still, the upside for a short-sale for a 2nd lien is at least they get "some" money from the short-sale proceeds from the 1st lien holder. Something is always better than nothing.
I am still not clear on whether or not the 2nd lien holder can send out a 1099 to the Seller/Borrower after they agree to a short-sale. Prior to SB 458 being passed a lender would either write off the balance owed to them via a 1099 to the Borrower or reserve the right to pursue deficiency. If they write off the balance as a loss and send the Borrower a 1099 that shows as ordinary income for that year for the borrower. It was my understanding that if they send out a 1099 they could not also pursue deficiency because they wrote the deficiency off as a loss.
As with anything else...only time will tell how this all plays out.
Note: I am not an attorney or accountant. This is for informational purposes only. Please contact your own attorney or accountant for advice regarding your specific situation.
Whether this is a victory for sellers and the real estate industry remains to be seen.
California Association of Realtors President Beth L. Peerce stated: “SB 458 brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lienholders – those in first position and in junior positions – will consider the outstanding balance as paid in full and the homeowner will not be held responsible for any additional payments on the property.”
But the real question is whether this will in fact make short sales harder to get done. For any lender being asked to take the loss of the deficiency in a short sale, their only obligation is to determine whether a short sale will get more money back for their investors than a foreclosure. For first lenders on one to four unit residential properties, short sales are almost always better because: 1) Buyers pay more at a short sale than at a foreclosure sale; and 2) almost all foreclosures of these type of properties in California are done using a Trustee Sale from which there is no deficiency recourse. So for the foreclosing first lender, the short sale will generally bring them more money than a foreclosure. That is not necessarily the case with junior lenders.
Junior lenders would wait until the 1st lien foreclosed then they were free to pursue a deficiency judgement to get back the balance owed (unless the seller filed Bankruptcy). Now the 2nd lien does not have this option. So, it will be interesting to see how well they cooperate with short-sales. Still, the upside for a short-sale for a 2nd lien is at least they get "some" money from the short-sale proceeds from the 1st lien holder. Something is always better than nothing.
I am still not clear on whether or not the 2nd lien holder can send out a 1099 to the Seller/Borrower after they agree to a short-sale. Prior to SB 458 being passed a lender would either write off the balance owed to them via a 1099 to the Borrower or reserve the right to pursue deficiency. If they write off the balance as a loss and send the Borrower a 1099 that shows as ordinary income for that year for the borrower. It was my understanding that if they send out a 1099 they could not also pursue deficiency because they wrote the deficiency off as a loss.
As with anything else...only time will tell how this all plays out.
Note: I am not an attorney or accountant. This is for informational purposes only. Please contact your own attorney or accountant for advice regarding your specific situation.
Monday, July 11, 2011
How do I get a Home Loan if I'm Self-Employed?
You would think that there would be a great loan option for self-employed borrowers. With the shift in the economy and real estate market I have noticed a huge void in the lending market...loan products for self-employed borrowers! So many of my self-employed clients have plenty of assets, money in the bank, and great credit. The problem is they can't get a loan. Why is this? Well, I will explain below:
Many self-employed individuals report expenses on their taxes in order to reduce their tax liability, but this can backfire when they apply for a mortgage. For tax purposes it might be beneficial to to write off as many expenses as possible to make your net income low (gross income - expenses = net income). Unfortunately, when it comes to qualifying for a loan the net income is what is used for qualification.
“Self-employed people typically report their gross income minus expenses to generate a net income,” says McDonough. “For tax purposes, it may be beneficial to have net income as low as possible, but the net income is the number used for income qualification.”
Even borrowers with $1 million in the bank and a credit score of 800 may not be approved for a mortgage if they do not have a qualifiable income stream. In addition to proving that you have enough income to qualify you must show that you have been self-employed for at least two years (this can be done with tax returns).
Self-employed borrowers who apply with a co-applicant still need to follow the same process of proving income. Those who report a loss on their taxes may be better off applying only with the co-applicant’s income. For example, if one borrower earns $100,000 and the other has declared a loss of $10,000, their combined income is $90,000. Also,making a larger down payment can help if the borrowers are close to qualifying and the smaller loan size lowers their debt-to-income ratio enough.
So, if you have plans to purchase a home make sure you plan ahead with your tax returns.
Many self-employed individuals report expenses on their taxes in order to reduce their tax liability, but this can backfire when they apply for a mortgage. For tax purposes it might be beneficial to to write off as many expenses as possible to make your net income low (gross income - expenses = net income). Unfortunately, when it comes to qualifying for a loan the net income is what is used for qualification.
“Self-employed people typically report their gross income minus expenses to generate a net income,” says McDonough. “For tax purposes, it may be beneficial to have net income as low as possible, but the net income is the number used for income qualification.”
Even borrowers with $1 million in the bank and a credit score of 800 may not be approved for a mortgage if they do not have a qualifiable income stream. In addition to proving that you have enough income to qualify you must show that you have been self-employed for at least two years (this can be done with tax returns).
Self-employed borrowers who apply with a co-applicant still need to follow the same process of proving income. Those who report a loss on their taxes may be better off applying only with the co-applicant’s income. For example, if one borrower earns $100,000 and the other has declared a loss of $10,000, their combined income is $90,000. Also,making a larger down payment can help if the borrowers are close to qualifying and the smaller loan size lowers their debt-to-income ratio enough.
So, if you have plans to purchase a home make sure you plan ahead with your tax returns.
Thursday, March 24, 2011
Can the bank come after me for more money after a short sale?
California Homeowners have always been protected on “purchase money” loans
Traditionally, California has been an anti-deficiency, or non-recourse state when it comes to “purchase money” loans. Purchase money loans are loans taken out to buy a home, or residential property of one to four units. Purchase money loans can include second and third mortgages. If the loans were used to purchase a residential property, California homeowners are 100% protected from future deficiency judgments from their lender after foreclosure or short sale.
Prior to Senate Bill 931, California Homeowners were NOT protected on “refinance” loans
In the past, refinance loans were not included in California’s anti-deficiency laws. Refinance loans did not fall in the same group as “purchase money” and were considered recourse loans. Unlike purchase money loan, the lender can pursue a deficiency judgment against the homeowner, or borrower, after foreclosure or short sale.
Senate Bill 931 changes that: First mortgages, or first deeds of trust, on a refinance loan are now considered the same as “purchase money” loans and are non-recourse. Under the new California law, a homeowner’s lender can no longer pursue a deficiency judgment on a first mortgage of a refinance after foreclosure or short sale.
Difference between first and second mortgages
Second mortgages are generally excluded from the new law, but if the second mortgage was used to improve the property in some way, it would be included and considered non-recourse. Other uses, such as bill consolidation, or cash out, would be excluded, and the homeowner may be legally liable if their lender decides to pursue a deficiency judgment. In a short sale transaction, lenders usually will waive their right to pursue a deficiency judgment in the future.
Expert advice about short sales
If considering a short sale of a refinance loan on a residential property that includes a second mortgage, consult with a knowledgeable real estate attorney about deficiency liability.
If considering a short sale and later tax consequences, it is broker advised to consult with a licensed tax preparer, or tax attorney.
For more information:
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation (IRS website)
Information from California State Franchise Tax Board
Traditionally, California has been an anti-deficiency, or non-recourse state when it comes to “purchase money” loans. Purchase money loans are loans taken out to buy a home, or residential property of one to four units. Purchase money loans can include second and third mortgages. If the loans were used to purchase a residential property, California homeowners are 100% protected from future deficiency judgments from their lender after foreclosure or short sale.
Prior to Senate Bill 931, California Homeowners were NOT protected on “refinance” loans
In the past, refinance loans were not included in California’s anti-deficiency laws. Refinance loans did not fall in the same group as “purchase money” and were considered recourse loans. Unlike purchase money loan, the lender can pursue a deficiency judgment against the homeowner, or borrower, after foreclosure or short sale.
Senate Bill 931 changes that: First mortgages, or first deeds of trust, on a refinance loan are now considered the same as “purchase money” loans and are non-recourse. Under the new California law, a homeowner’s lender can no longer pursue a deficiency judgment on a first mortgage of a refinance after foreclosure or short sale.
Difference between first and second mortgages
Second mortgages are generally excluded from the new law, but if the second mortgage was used to improve the property in some way, it would be included and considered non-recourse. Other uses, such as bill consolidation, or cash out, would be excluded, and the homeowner may be legally liable if their lender decides to pursue a deficiency judgment. In a short sale transaction, lenders usually will waive their right to pursue a deficiency judgment in the future.
Expert advice about short sales
If considering a short sale of a refinance loan on a residential property that includes a second mortgage, consult with a knowledgeable real estate attorney about deficiency liability.
If considering a short sale and later tax consequences, it is broker advised to consult with a licensed tax preparer, or tax attorney.
For more information:
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation (IRS website)
Information from California State Franchise Tax Board
Friday, February 11, 2011
Wait...I Just Found Out I Have Mortgage Insurance
I keep running into short-sale with loans that have Mortgage Insurance (M.I.). More often than not the Seller is aware of the mortgage insurance that they are paying. The general rule of thumb is a home purchase with less than 80% equity is required by the lender to carry M.I. While there are still a lot of loans that were 100% financing the lenders solved the M.I. problem by giving the Buyer two loans, with the 2nd loan being at a higher rate since it was more risk in case of default.
Now that the market has declined I am also seeing that a few of these second lien holders, that did not require the Buyer to pay M.I., have purchased the insurance themselves. This practice is called "lender-paid" mortgage insurance coverage. It is actually very smart on the part of the lender because it covers them in case the homeowner defaults. So, what happens if you are trying to short-sale and this issue comes up? One of the more known M.I. companies is Radian. If the home is owner occupied they tend to work a little more with the Seller and offer decent terms to the Seller in order to cooperate with the short-sale. Below are some frequently asked questions that will help explain the process with Radian:
What information does Radian require to consider a short sale?
Since short sales are time sensitive, Radian accepts minimal information to consider a request. The next payment due date, outstanding mortgage balance, property value, purchase amount, estimated net proceeds and settlement date are the basics needed along with a borrower financial statement. Additional information may be required to make a final decision.
How long does it take Radian to respond to a short sale request?
Radian responds within two business days, but if additional information is needed to evaluate a request, a response can’t be provided until the requested information is delivered.
Will Radian discuss its approval terms directly with the REALTOR® or seller?
Yes, Radian Workout Specialists will speak with the agent or seller to clarify approval terms and negotiate a mutually acceptable arrangement. The specialist’s name and phone number can be obtained from the mortgage servicer and it’s also important to obtain the Radian Certificate Number so the specialist can quickly identify the case.
What terms and conditions are included in Radian’s approval?
Radian’s approval terms and conditions generally consist of the purchase amount, required net proceeds, a projected settlement date and, if applicable, the seller financial participation requirement and specified funds to the junior lien holder.
Are Radian approval terms negotiable?
Yes, and Radian makes every effort to offer favorable approval terms acceptable to the seller.
Does Radian’s approval of a short sale include a release from mortgage liability?Yes, but only to the extent of Radian’s loss. A release of mortgage liability should be obtained, in writing, from the mortgage servicer.
Why does Radian sometimes require the seller to contribute financially to a workout?
A short sale is an alternative to foreclosure—a settlement of a financial obligation and workout that requires compromise by all parties. If in a position to do so, the seller should participate financially by paying a reasonable portion of what they owe in exchange for approval of a transaction that has value. However, more often than not, Radian does not require seller financial participation. They will look at your credit and if they see anything fishy (such as a recent home purchase) you can bet they are going to require a promissory note before cooperating with the short-sale and possibly for the full amount of their loss.
How does Radian determine the amount of required seller financial participation?
Seller financial participation requirements are negotiated on a case-by-case basis after a careful review of available information regarding the seller’s financial and default situation.
How does Radian determine the promissory note and/or cash payment terms?Radian is flexible with payment terms in an effort to work out a settlement with the seller that allows the sale to move forward. The promissory note is unsecured and interest-free.
Now, if you are looking to short-sale your home and you know or think you might have M.I. on your loan the most important thing that you can do is to find a VERY qualified agent to handle the process for you. Many agents do not understand Mortgage Insurance themselves so they are not going to be able to help you. Make sure to ask questions...if your agent doesn't know...find another!
Now that the market has declined I am also seeing that a few of these second lien holders, that did not require the Buyer to pay M.I., have purchased the insurance themselves. This practice is called "lender-paid" mortgage insurance coverage. It is actually very smart on the part of the lender because it covers them in case the homeowner defaults. So, what happens if you are trying to short-sale and this issue comes up? One of the more known M.I. companies is Radian. If the home is owner occupied they tend to work a little more with the Seller and offer decent terms to the Seller in order to cooperate with the short-sale. Below are some frequently asked questions that will help explain the process with Radian:
What information does Radian require to consider a short sale?
Since short sales are time sensitive, Radian accepts minimal information to consider a request. The next payment due date, outstanding mortgage balance, property value, purchase amount, estimated net proceeds and settlement date are the basics needed along with a borrower financial statement. Additional information may be required to make a final decision.
How long does it take Radian to respond to a short sale request?
Radian responds within two business days, but if additional information is needed to evaluate a request, a response can’t be provided until the requested information is delivered.
Will Radian discuss its approval terms directly with the REALTOR® or seller?
Yes, Radian Workout Specialists will speak with the agent or seller to clarify approval terms and negotiate a mutually acceptable arrangement. The specialist’s name and phone number can be obtained from the mortgage servicer and it’s also important to obtain the Radian Certificate Number so the specialist can quickly identify the case.
What terms and conditions are included in Radian’s approval?
Radian’s approval terms and conditions generally consist of the purchase amount, required net proceeds, a projected settlement date and, if applicable, the seller financial participation requirement and specified funds to the junior lien holder.
Are Radian approval terms negotiable?
Yes, and Radian makes every effort to offer favorable approval terms acceptable to the seller.
Does Radian’s approval of a short sale include a release from mortgage liability?Yes, but only to the extent of Radian’s loss. A release of mortgage liability should be obtained, in writing, from the mortgage servicer.
Why does Radian sometimes require the seller to contribute financially to a workout?
A short sale is an alternative to foreclosure—a settlement of a financial obligation and workout that requires compromise by all parties. If in a position to do so, the seller should participate financially by paying a reasonable portion of what they owe in exchange for approval of a transaction that has value. However, more often than not, Radian does not require seller financial participation. They will look at your credit and if they see anything fishy (such as a recent home purchase) you can bet they are going to require a promissory note before cooperating with the short-sale and possibly for the full amount of their loss.
How does Radian determine the amount of required seller financial participation?
Seller financial participation requirements are negotiated on a case-by-case basis after a careful review of available information regarding the seller’s financial and default situation.
How does Radian determine the promissory note and/or cash payment terms?Radian is flexible with payment terms in an effort to work out a settlement with the seller that allows the sale to move forward. The promissory note is unsecured and interest-free.
Now, if you are looking to short-sale your home and you know or think you might have M.I. on your loan the most important thing that you can do is to find a VERY qualified agent to handle the process for you. Many agents do not understand Mortgage Insurance themselves so they are not going to be able to help you. Make sure to ask questions...if your agent doesn't know...find another!
Wednesday, February 2, 2011
The Homeowner’s “Secret” Tax Deductions
If you own a home you are probably already aware of the tax advantages associated with deducting your mortgage interest payments. After all, this is the big deduction that has been in the news lately and is often touted as a great reason to become a homeowner. However, there are a couple other deductions that are available to homeowner’s that you might not be aware of.
Did you purchase or refinance your home? Did you pay points? More than likely you did and they are in most cases tax deductible. Each point is 1 percent of the loan amount. Lenders charge points as a way to make a profit, and borrowers generally pay points in exchange for lower mortgage rates.
If you paid points, the amount should be listed on the 1098 statement from your lender. This document also notes how much mortgage interest you paid. You can also find this information on your Settlement Statement that you received at closing. Even if the seller pays all the points, the buyer gets the deduction. Exactly how much of one and when you can take the deduction depends on your loan circumstances.
If you purchased the home as your primary residence you should be able to deduct the points paid in the same tax year as the purchase as long as you meet all of the requirements (see IRS publication 936). If you refinanced or do not occupy the home as a primary residence then you still have the opportunity to deduct the points over the life of the loan.
Lastly, don’t forget to deduct property taxes. This amount will also show up on the tax form you receive from your lender. If you purchased a home in the current tax year you can find the amount on your Settlement Statement. Taxes are an annual deduction for as long as you own the home.
As with all tax related deductions there are rules and stipulations. Contact a qualified Accountant to see how these deductions pertain to your particular situation. After you complete your taxes and you find yourself needing more deductions…contact me…it might be time to buy a home!
Did you purchase or refinance your home? Did you pay points? More than likely you did and they are in most cases tax deductible. Each point is 1 percent of the loan amount. Lenders charge points as a way to make a profit, and borrowers generally pay points in exchange for lower mortgage rates.
If you paid points, the amount should be listed on the 1098 statement from your lender. This document also notes how much mortgage interest you paid. You can also find this information on your Settlement Statement that you received at closing. Even if the seller pays all the points, the buyer gets the deduction. Exactly how much of one and when you can take the deduction depends on your loan circumstances.
If you purchased the home as your primary residence you should be able to deduct the points paid in the same tax year as the purchase as long as you meet all of the requirements (see IRS publication 936). If you refinanced or do not occupy the home as a primary residence then you still have the opportunity to deduct the points over the life of the loan.
Lastly, don’t forget to deduct property taxes. This amount will also show up on the tax form you receive from your lender. If you purchased a home in the current tax year you can find the amount on your Settlement Statement. Taxes are an annual deduction for as long as you own the home.
As with all tax related deductions there are rules and stipulations. Contact a qualified Accountant to see how these deductions pertain to your particular situation. After you complete your taxes and you find yourself needing more deductions…contact me…it might be time to buy a home!
Tuesday, August 24, 2010
Big Changes to FHA Loans Ahead
If you are currently in the market to purchase a new home and intend on using FHA financing you might want to take note! Consumers looking for home loans backed by the Federal Housing Administration (FHA) will face tougher hurdles and higher costs under new legislation and new rules that could take effect as soon as this month. Below is a list of changes that are anticipated:
1. The biggest impact on borrowers will be the change to the allowable seller contribution amount. Currently FHA allows up to 6% of the purchase price to be paid by the seller to help cover the buyer's closing costs, pre-paid items(mortgage insurance premium, homeowners insurance, and property tax reserves), etc. This contribution amount will change to 3% allowable contribution from the seller. If you are purchasing a home below the $200,000 range this will make a difference to you! Your closing costs for a loan under $200,000 are closer to 5-6% of the purchase price. That would mean that on top of the 3.5% down payment you would need to come up with an additional 1-2% more.
2. The FHA would require borrowers to have at least a 500 score for FHA backing. At 580 and above, borrowers would be eligible for the 3.5% down payment. But those who fall between 500 and 580 would see their down payments jump to 10%. That, however, is still well below scores of 660 to 720 that most lenders already look for to accept only a 10% down payment.
3. FHA-backed loans have looser restrictions than other mortgages on down payments -- now at 3.5% of the home's selling price -- but require borrowers to pay an upfront fee and a monthly fee. The legislation allows the FHA to hike the monthly fee (this is to cover Mortgage Insurance on the loan) to as much as an annualized 1.5% of the loan balance, up from 0.55%, though initially it will go only to 0.9%. The initial fee was increased earlier this year to 2.25% from 1.75%, though the FHA has said it will bring it down to 1% with the higher monthly fee.
1. The biggest impact on borrowers will be the change to the allowable seller contribution amount. Currently FHA allows up to 6% of the purchase price to be paid by the seller to help cover the buyer's closing costs, pre-paid items(mortgage insurance premium, homeowners insurance, and property tax reserves), etc. This contribution amount will change to 3% allowable contribution from the seller. If you are purchasing a home below the $200,000 range this will make a difference to you! Your closing costs for a loan under $200,000 are closer to 5-6% of the purchase price. That would mean that on top of the 3.5% down payment you would need to come up with an additional 1-2% more.
2. The FHA would require borrowers to have at least a 500 score for FHA backing. At 580 and above, borrowers would be eligible for the 3.5% down payment. But those who fall between 500 and 580 would see their down payments jump to 10%. That, however, is still well below scores of 660 to 720 that most lenders already look for to accept only a 10% down payment.
3. FHA-backed loans have looser restrictions than other mortgages on down payments -- now at 3.5% of the home's selling price -- but require borrowers to pay an upfront fee and a monthly fee. The legislation allows the FHA to hike the monthly fee (this is to cover Mortgage Insurance on the loan) to as much as an annualized 1.5% of the loan balance, up from 0.55%, though initially it will go only to 0.9%. The initial fee was increased earlier this year to 2.25% from 1.75%, though the FHA has said it will bring it down to 1% with the higher monthly fee.
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