Dean's Blog

Recently, I was asked to sit on a lender’s panel for the North Puget Sound Association of Realtors^® to answer questions from the audience and the moderator.

One of the questions I was asked was this: “Sellers involved in a short sale are finding out they are obligated for the difference between what they owe and what the lien holder (the existing mortgager) is getting paid. Do you see this changing?”

In those brief seconds, I had outlined a comprehensive answer to explain:

• the misconceptions and misinformation about short sales
• the steps a lender must go through before accepting a short sale offer
• the obligations the seller has when agreeing to a short sale
• the tax implications that have been temporarily lifted against the seller

Unfortunately, I found out I was offered only 3 seconds for a response after I started my prose with “I don’t know…” The rest of the story was going to be lost forever.

As I started putting together this blog post to pick up where I left off was cut off, I found an excellent summary posted by Ardell DellaLoggia in her blog post on Rain City Guide of the short sale process and why it takes the lender so much time to consider one.

Remember, just because the lender is agreeing to sell the house for less than what is owed on it, doesn’t necessarily mean that lender will give up on trying to collect the difference. If the seller has the means, the lender may require the seller to sign a note to pay back the difference over time.

By the way, in the past, if the lender decided to forgive the difference, that amount was considered income to the seller and they had to pay income tax on it the next year. This has been temporarily lifted courtesy of the Mortgage Debt Relief Act of 2007 and is set to expire in 2012.

Contact your local professional mortgage advisor or your Realtor^® for more information.

The Washington Realtors^® have been working to try to get the $8,000 first-time home buyer tax credit available at the closing table, either for use as additional down payment or towards a buyer’s closing costs. Unfortunately, those efforts have hit a brick wall.

Instead, if buyers want to come to the closing table with no money out of their pocket, they will need to continue to look towards the Rural Housing program or negotiate with the seller to pay for their closing costs and pre-paid items.

After closing, the buyer can then file an addendum to their 2008 taxes and claim the $8,000 tax credit right away (as always, I’m a mortgage professional – you should always consult your tax professional for all tax related advice).

The following update was provided by Greg Wright, the Washington Realtor^® President:

 

Efforts to get the $8,000 first time homebuyer credit available to the buyer at closing have ended at the IRS office.  During the 2009 session of the Legislature the Washington Realtors Government Affairs members and staff were able to persuade the Legislature to take several steps to expand the state's capacity to assist home buyers. Tax Credit Advance Loan Program: In the final days of session we convinced lawmakers to support the creation of the Tax Credit Advance Loan program through an amendment to budget. We did this by creating a coalition that included the Washington State Treasurer, Housing Finance Commission, and Washington REALTORS®. We also worked with the Office of the Governor to ensure Gov. Gregoire's support of the program when the budget came before her for signature. At each step, we were fortunate to have the support of members who talked with legislators and participated in key policy meetings. The last step in making the program a reality was, however, out of our hands. The program required an administrative change by the Internal Revenue Service (IRS), allowing the assignment of tax refund checks directly to the Housing Finance Commission rather than individuals who used the tax credit for down payment assistance. On June 2, the U.S. Department of the Treasury notified the Washington State Treasurer that the IRS will not make the required administrative change because federal law requires tax credit payments to be sent directly to the taxpayer, not third parties such as the Housing Finance Commission. The letter further states Congress had considered but rejected a proposed mechanism for advance payment of the credit, "instead choosing to use ordinary refund procedures to implement the credit." WR leadership will continue to work with the State Treasurer and Housing Finance Commission to provide tools and programs essential for re-building the housing market and members' business.

Fannie Mae issued Announcement 09-19 amending some very basic underwriting guidelines that will not only impact conventional financing, it will apply to FHA insured loans that are underwriting using Fannie Mae’s automated underwriting engine.

Here are some of the changes:

• Credit documents will be valid for 90 days instead of the current 120 for existing construction. The age of the document is measured from the date of the document to the date the Note is signed.
• IRS Form 4506-T is required at application and at closing. This is due to past fraud issues (misrepresentation of income).
• Age of appraisal is reduced from 6 months to 4 months.
• Trailing Secondary Wage Earner Income is eliminated. Now with a relocation, only the income of the spouse with actual employment may be considered. Previously, it was possible to use the relocating spouse’s income from their employment prior to the relocation without having an actual job.
• Verbal Verification of Employment required within 10 days of signing the note for employment income and within 30 days for self-employed income. (Our company has always performed a verbal VOE prior to funding).
• Stocks, bonds and mutual funds to be used as reserves now valued at 70% instead of 100%. Due to market volatility, Fannie Mae is devaluing your portfolio. This means that if you provide your mortgage originator with a stock, bond or mutual fund statement showing an ending balance of $10,000, the figure used for qualifying and on the application will be $7,000 (70% of the value). Stock options and non-vested restricted stocks are no longer eligible to use as reserves.
• Retirement accounts to be used as reserves now valued at 60% instead of 70%.

Fannie Mae’s effective dates are to follow…if the loan is manually underwritten, this applies to applications dated on or after September 1, 2009. However, expect to see lenders and banks to adopt these guidelines early.

And what Fannie Mae does, Freddie Mac soon follows – and vice-versa. Expect Freddie to come out with similar changes soon.

Yes, it’s still possible to finance the purchase of your home with 100% financing – zero money down!

Believe it or not, it’s through the United Stated Department of Agriculture, and it’s called Rural Housing. As with any program, there are limitations. With Rural Housing, the goal is to provide zero down loans to people who otherwise could not qualify for another loan and for properties in the open country or towns with a population of less than 10,000.

The Northwest Washington State, that includes just about everywhere north of Marysville, including Island County and San Juan County except:

• City of Mount Vernon
• City of Bellingham

Here’s a map showing the eligible areas. You can even type in an address at the Rural Housing website to see if a particular property is eligible.

There are also income limits, and it goes by the number of people in the home (counting kids, grandparents and that live-in brother-in-law that just cannot seem to find a job). For example, if there are between 1 and 4 people in the house, the maximum total household income for a Skagit County property is $73,600. In Island County, it’s $89,550. There’s also an online calculator to determine if your household is eligible, but we aware that you must count ALL income (disability income that brother-in-law is receiving, the $50/week your kids is making at McDonald’s and so on).

These income limits were just regrouped (effectively raised), so many more families qualify for this program. As a result, the few lenders that offer this program are backed up in underwriting with the increased surge in applications. Yes, that’s right – not every lender offers government sponsored programs. Even if they do, they may not offer Rural Housing financing (we have at least 3 lenders that offer Rural Housing).

And, once the application gets past the lender, it has to move on to USDA for their review of the file. Of course, their fixed-sized staff is being overwhelmed with applications, so their normal 2 day turn time has increased to 7 days, and they say to expect longer waits in the future.

The key here is to allow yourself plenty of time to close on your new purchase with this financing product.

Other key benefits include:

• No minimum credit score
• No waiting period from a discharged bankruptcy

Now, most lenders are mandating at least a 620 score and a 2 year waiting period from the BK discharge. We do have at least one lender that does not have any minimum score requirement (although the fee to the borrower is higher) and will review an application if that client is just emerged from bankruptcy.

There are other limitations to this program, including:

• manufactured homes – can only be brand new on the lot, installed by the dealer
• properties in flood plains – ground floor must be above the 100-year flood plain (requires an elevation certificate and new construction is not eligible)
• older homes – homes over 50 years old must be reviewed the historical society before closing, adding additional time to the closing process

Again, if you qualify for any other program (FHA, conventional, VA, etc.), then you probably won’t qualify for this program. For all others, it’s a great option to consider. Talk to your professional mortgage advisor about this option.

There are some advantages, and some disadvantages, of family getting involved with the financing of your new home purchase.

Advice

On the advice front, family can be a great source of comfort, especially if you’re buying your first home. The process can seem complicated and overwhelming at times. Of course, a great Realtor® and an experienced mortgage advisor can be an integral part of your real estate team, walking you through the steps and helping you be at ease at each step of the way.

But family always wants to help out. While they mean well, they often overlay their prior experiences, good and bad, accurate and inaccurate, onto your current situation, adding confusion and causing a spike in Tums sales:

• “I don’t know why your mortgage guy is asking for that. I didn’t have to supply that when I did my loan 4 years ago.”
• “Make sure you talk to a bunch of lenders before you decide on doing work with someone.”
• “Always pay off your mortgage as fast as you can.”
• “Back in my day… (fill in the blank)”

Better yet, there are other ways that family can help with your home purchase:

Gifting of money

Most programs allow gifts of money to be used as a source of down payment. Current conventional loan guidelines require that if a gift is less than 20% of the purchase price of the home, then at least 5% of the purchase price must be invested as a down payment from the borrower. So, if you’re getting a gift of less than 20% and you don’t have 5% to throw in yourself, a conventional loan is not for you.

Some government programs allow you to receive gift funds without having to use any of your own money.

CAUTION: Don’t have your parents give you the gift funds or deposit it in your account. Rather, this should be clearly documented and handed over to the escrow company handling the closing of your transaction. Your mortgage professional will guide you here.

Gift Taxes

As of 2009, each person in the US is allowed to gift $13,000 during the year to as many individuals as they choose with no gift tax implications (of course, I’m a mortgage professional and not a tax attorney – please consult your tax professional for all tax related advice).

Now, if mom and dad want to gift funds to junior and his wife, they could give $52,000 without paying any gift taxes:

• Mom to Junior = $13,000
• Mom to Junior’s wife = $13,000
• Dad to Junior = $13,000
• Dad to Junior’s wife = $13,000

TOTAL = $52,000

If they want to gift more than the $13,000 per person per year, they can file IRS form 709 which reduces their lifetime gift tax exemption by the excess amount gifted.

Non-Occupant Co-Borrower

FHA also allows a direct family member to be on the loan as a non-occupant co-borrower, meaning they can be on the loan without having to live with you. While you cannot add a non-occupant co-borrower to improve a poor credit situation, you may be able to add them to help with income qualification issues.

CAUTION: In this instance, the family member is as equally liable and responsible for the timely monthly payments as the home buyer. If a mortgage payment is 30 days late, all parties on the loan will suffer from a lower credit score.

$8,000 First-Time Home Buyer tax credit

If you have not owned your primary residence at any time in the last three years, you may be eligible for a tax credit of $8,000 if you buy a home (or complete construction of a new home) by November 30, 2009.

However, you will be ineligible for this tax credit if you purchase the house or property from a family member. Again, please consult your tax professional for all tax related advice.

As always, consult the members of your real estate team before taking any action you might regret later.