Dean's Blog

Last March, we reported that the housing affordability index was at a 40 year high. Since then, this indicator has remained at historically high levels, and February 2010's index came in at 176.0.

Take a look at the index over the last three years:

• 2009   171.6
• 2008   137.8
• 2007   115.4

An index of exactly 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home, assuming a 20% down payment. An index of 176.0 mean a family earning the median family income has 76.0% more income necessary to qualify for that home.

What does this mean for the home buyer? Not only are houses the most affordable they've been in 40 years, but the time to buy is sooner than later. Not only to economists expect the housing market to start recovering this year, we can also show how buyers have a stronger negotiating position BEFORE the housing market proves that its recovering.

Contact your local Realtor^® for more information on buying a home in this extremely favorable market.

This is the last of a three-part series on different ways to purchase a home in reverse. Today, we’re going to talk about a Reverse 1031 Exchange.

As a recap, the 3 ways I mentioned to purchase in reverse are:

• Reverse mortgage
• Bridge loan
• Reverse 1031 Exchange

A 1031 Exchange refers to Section 1031 of the Internal Revenue Code which allows an investor to defer the gains or losses on an investment sale, thus deferring potential capital gains taxes that may be due.

In a typical 1031 Exchange, the first house is sold, the proceeds are held in trust by a qualified exchange intermediary, and the second house is then purchased, at which time the intermediary transfers the funds to escrow for closing. Using this method ensures the funds never get into the hands of the investor.

To elect a 1031 recognition, a taxpayer must identify the property for exchange before closing, identify the replacement property within 45 days of closing, and acquire the replacement property within 180 days of closing. Remember, I don’t provide tax advice, so you should always seek the counsel of a tax attorney or CPA.

A Reverse 1031 Exchange works exactly the same way, except the new home is purchased before the first home is sold. All the other steps remain the same – the investor never touches the proceeds from the sale, and the intermediary ensures a proper chain of custody of those funds. However, the reverse exchange must be set up before any home is purchased or sold, so it’s better to plan early.

Using a Reverse 1031 Exchange can be powerful when an investor has identified a property they wish to purchase, they haven’t yet sold the original property, and they are concerned they may miss out on the purchase by waiting until the original property sells.

Consult your tax attorney or CPA as well as your local, professional mortgage advisor for more information on using a Reverse 1031 Exchange for your investment properties.

In my last post, I identified at least 3 ways to purchase a home in reverse. This post is going to focus on a bridge loan and how it can be used.

As a recap, the 3 ways I mentioned to purchase in reverse are:

• Reverse mortgage
• Bridge loan
• Reverse 1031 exchange

A bridge loan is a loan that bridges the gap between the sale of an existing home and the purchase of a new home. The lender takes into consideration the equity in the home for sale when looking at the purchase. Effectively, you are purchasing your new home before you have sold your existing home.

There are different types of bridge loans and different options.

Some are short-term and is payable in one to two years. When the original house is sold, then the borrower uses the proceeds from the sale as their down payment on a new conventional mortgage, and the bridge loan is refinanced away. However, the note does expire, and the lender will expect full repayment at the end of the note.

Other lenders will offer a full 30 year term with a fixed rate. When the original house is sold, the borrower can take the proceeds from the sale and provide it to the bridge loan lender to reduce the principal balance. Often, the lender will recalculate the monthly payments to a lower amount (for a small fee), and they may even reduce the interest rate.

While the bridge loan is in place, the payments on the original house still need to be made. Additionally, interest on the bridge loan is due. Some lenders require a full payment on the bridge loan each month. Others will defer the payment until the bridge loan is due or until it's paid off - the missed payments get added to the principal balance which results in a higher payoff.

Not every lender offers bridge loans, and they can be confusing and more expensive than a conventional forward mortgage. However, this is a great tool that has worked wonderfully for many people over the years. Of course, you should always consult with your professional mortgage advisor about which option is best for your particular financial structure.

Did you know there are at least 3 ways to purchase a home in reverse?

• Reverse mortgage
• Bridge loan
• Reverse 1031 exchange

This is the first of a three part series where we break down each of these options. Let's start with a reverse mortgage.

The majority of all home purchases today are closed with either all cash or a forward mortgage. A forward mortgage is where the loan proceeds are advanced by a bank, and the borrower makes regular monthly payments to the bank.

In a reverse mortgage, the home owner makes no payments, and all interest is added to the lien on the property. To qualify for a reverse mortgage, the borrower must be at least 62 years of age, and there needs to be a certain equity position in the property. The older the borrower, the less equity that is required.

How does a purchase with a reverse mortgage work?

Let's assume we have a $400,000 purchase price, and the buyer has $250,000 to invest as a down payment. The buyer could then take out a $150,000 reverse mortgage and never have any payments. The reverse mortgage will only need to be paid off when:

• the last remaining borrower dies
• the home is sold
• the borrower permanently moves out of the home (e.g. into assisted care)

A reverse mortgage typically has higher closing costs than a forward mortgage, and it may not be right for every individual. A counseling class is required, and the borrower should always consult their tax professional, attorney, financial planner, and their professional mortgage advisor to make sure it's a good fit for them.

From the perspective of the seller or Realtor^®, the method of paying for the house - forward mortgage, reverse mortgage, cash - should not change the course of the transaction. Realtor.com has an article called Reverse Mortgages Give Seniors Income which provides more information.

We hear it time and time again - housing is the key to our economic recovery. So, how are we doing on that front? There are two major obstacles that is staring the housing market in the face, and some economists believe both can and will be overcome:

• Federal Reserve ending their $1.25 trillion mortgage backed security purchase program
• Tax credits for home purchases ending

These economists believe a pickup of employment this spring, cheap credit and a glut of affordable homes will allow housing to not only withstand the two aforementioned challenges, but also to contribute to U.S. annual economic growth for the first time since 2006.

Employment is key to this outlook. The jobs report released last Friday announced 162,000 new jobs. There is a temporary hiring of census workers to consider, but if we remove these 48,000 jobs, we still have a net sum gain of 114,000 jobs, a significant increase over the 14,000 jobs lost in February's report. March also marks the third increase in jobs in the past five months, which indicates the labor market has begun to stabilize.

An improving job market would spur household formation and help absorb the excess supply. While that doesn't portend a robust rebound, it suggests the worst may be over for housing.