Here's a great article from THe Wall Street Journal, By S. MITRA KALITA And CARRICK MOLLENKAMP.
http://online.wsj.com/article_email/SB10001424053111904006104576500170808091148-lMyQjAxMTAxMDEwMjExNDIyWj.html?mod=wsj_share_email_bot#printMode
A couple of observations from me:
I am concerned about Appraisal Management Companies using the cheapest appraiser, not the BEST appraiser.
I am concerned about AMC's using appraisers from outside the local market who are not familiar with the area, usually because they are the cheapest.
I understand that enough forclosures in a concentrated area can become "the market" but one isolated sale should not kill a deal. This gets back to the appraiser being an expert in the market they are appraising.
William Maxwell is an expert in finance. He's a professor at Southern Methodist University's business school, has co-authored a book on high-yield debt and spent years calculating values of financial markets.
Yet there's one valuation he can't understand: the appraisal of his Dallas home.
In August 2010, Mr. Maxwell's home was appraised at $790,000 as part of a mortgage refinancing. Yet this past spring, when he tried to sell the four-bedroom home for $756,500, the appraisal commissioned by the buyer's lender, Bank of America Corp., came up with a value of $730,000. Mr. Maxwell said the appraisal killed the sale.
WSJ's Nick Timiraos reports many analysts believe low appraisals are one factor weighing on the housing market and recovery of the sector.
Weak appraisals are "driving down the real-estate market," Mr. Maxwell says. Saying the appraisal process "borders on buffoonery," he's appealing his home's valuation to the Texas regulator.
One of the conclusions from the housing bust: The appraisal system was broken. One of the conclusions some have drawn from the struggling recovery since then: The appraisal system is still broken, but in a different way.
There is little doubt that home values have depreciated sharply in recent years for the most basic of economic reasons: excess supply of homes on the market and weak demand. But some realtors, home-sellers and economists believe low-ball appraisals also are undermining a housing recovery.
Appraisals are supposed to be unbiased assessments of a property's value. The housing bubble that burst a few years ago was inflated, in part, by overly generous appraisals. Now, lenders are pressuring appraisers to come in with lower estimates, some real-estate professionals say. Banks also are using less-experienced appraisers, who often don't appreciate factors that make a home worth more, they say. And valuations are being heavily influenced by distressed sales priced at a discount to the rest of the market.
Lenders are "instructing appraisers to be a little conservative, and that responsibility on the one hand is seen as credit tightening and, on the other, as exacerbating the housing problem," says Columbia Business School economist Chris Mayer. A research paper last year titled "How Much Is That Home Really Worth?" by economist Leonard Nakamura at the Philadelphia Federal Reserve also cited a downward bias in appraisals.
This 7,000-square-foot house on four acres in Orlando, Fla., was appraised by the builder for $1.2 million in 2008.
It went under contract for $650,000.
But another appraisal valued it at just $380,000.
Disputes over valuations are rising. The National Association of Realtors said that 16% of realtors surveyed reported a cancellation in June of this year, and chief economist Lawrence Yun blamed the unusually large number on low appraisals. In June of 2010, only 9% of those surveyed reported a cancellation.
A survey by the group earlier this year found that 10%-12% of members had a contract canceled last year as a result of a low appraisal; 10%-13% had a contract delayed; and 16%-20% reported that the sales price was negotiated lower due to a low appraisal.
Not everyone agrees the appraisal system is broken. The Mortgage Bankers Association, an industry trade group, concedes that appraisals are conservative but says they need to be, partly to protect the banks from future problems with investors who buy mortgages. "There's an extra note of caution," said Steve O'Connor, a senior vice president at the association.
And some appraisers say homeowners are just having trouble facing reality. "It's the market. It's not the changes" in the appraisal process, says Charles MacPhee, a partner with Buttler Appraisals LLC.
Mr. MacPhee's company performed an appraisal in Decatur, Ga., last year that drew ire. John and Michelle Pennie were about to give up on selling their house last spring when an offer came in—just in time to qualify for the 2010 federal tax credit.
The two sides agreed on a sale price of $365,000, with the Pennies paying $8,000 in closing costs. "We were ecstatic," Mr. Pennie says.
But the appraisal put the home's worth at $327,000. And the deal ultimately collapsed. "Understandably in a declining market, you're going to have declining appraisals," Mr. Pennie says. "But when you have two parties who agree on a price, to then have an appraiser come in and make it $40,000 below…how do you ever get out of a falling market?"
For decades, appraising a home was both an art and a science, executed primarily by independent professionals who were experts on their local markets. Designed to protect both the borrower and lender, appraisals were based largely on selling prices of comparable homes. But appraisers also combed through property records and interviewed brokers, buyers, sellers—and even other appraisers. Banks selected the appraiser and often had influence over the outcome. Home buyers paid the fee.
In the aftermath of the housing bust, then-New York State Attorney General Andrew Cuomo sought to reform the appraisal industry by convincing Fannie Mae and Freddie Mac to bar loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. Besides combating inflated and sometimes fraudulent appraisals, the goal was to eliminate pressure on appraisers to provide estimates that match the contract price, which would increase chances that the mortgage loan would get approved. The sweeping Dodd-Frank financial-overhaul law that went into effect in 2010 went one step further to bolster appraiser independence by regulating both the industry and the fees they are paid.
Rather than hire appraisers whose work is known to them, banks now outsource their selection to appraisal-management companies, which are often units of other banks and financial companies. These appraisal-management companies take a sizable cut of the fee, leaving the appraisers under pressure to work faster and cheaper.
The result has been that appraisers with less experience or who are unfamiliar with a community—but who work cheap—are getting assignments while more experienced appraisers are going out business. That, say critics, is producing appraisals that are less accurate.
"We've lost the best quality appraisers," said Leslie Sellers, the immediate past president of the Appraisal Institute, a trade group. "The people doing it are the ones who have cut overhead to bone, are working out of basements and many of them are not properly educated." The Institute estimates there are currently under 90,000 certified appraisers, down from nearly 100,000 in 2007.
In Mr. Maxwell's case, he says that the appraiser, Jim Applegate, works in Plano, a suburb 20 miles from Dallas, and was unfamiliar with Mr. Maxwell's Dallas neighborhood of Lakewood, an affluent community near a picturesque lake. Mr. Maxwell also claims that Mr. Applegate improperly used less desirable homes as comparables, or "comps," to arrive at a value. In a June 17 formal letter of complaint with the Texas Appraiser Licensing and Certification Board, which regulates the industry, Mr. Maxwell said that Mr. Applegate had used a home near an elementary school that encounters a lot of traffic. Mr. Maxwell's home, by comparison, sits on a quiet, quarter-acre lot.
Calls to Mr. Applegate were returned by a Bank of America spokeswoman, who declined to comment on Mr. Maxwell's situation. She did say the lender has received feedback from customers asking it to reevaluate "geographic competency in our appraisal reports." She said efforts are being made to find appraisers who generally work within 15 miles of a property; if no appraiser is available, the company assigns alternate appraisers with local experience.
Others complain that appraisers are using foreclosures and other distress sales as comps when coming up with estimates. Because foreclosures tend to sell at big discounts from the actual value, some argue that shouldn't be used.
At least four states—Illinois, Nevada, Missouri and Maryland—have considered legislation that would bar appraisers from using distress sales when drawing estimates.
Some economists disagree. They argue that foreclosures account for such a large share of housing sales that it's perfectly acceptable to use them as comps, or to use them but adjust pricing accordingly. "A third of transactions are previously foreclosed homes. In some markets, it's close to 50%," said Columbia's Mr. Mayer. "It would be one thing if you're talking about throwing out a small number of transactions."
Another complaint is that appraisers are increasingly relying on automated valuation models, or AVMs, computer programs that extrapolate home values based on reams of property data, and public and privately compiled databases. The industry began automating in the mid-1990s, but it wasn't until a few years ago that AVMs took hold in a big way.
AVMs are most reliable when there are a larger number of typical transactions to observe. But during the housing slump, typical transactions have been scarce while distressed sales have been abundant.
One of the biggest complaints is that appraisers, in their haste, are overlooking or missing important elements that could add substantial value to a home.
Erin Wanner, a sales executive with Stirling Sotheby's International Realty in Orlando, Fla., says one of her deals fell through when an appraisal came in 40% lower than expected. The property, a custom-built lakefront, 7,000-square-foot home on four acres was appraised by the builder in 2008 at $1.2 million. Ms. Wanner's clients went under contract on the property for $650,000 in a short sale—one in which the bank agrees to receive less than the amount owed on the mortgage. The appraisal came in at $380,000.
"When I first heard it, I thought it was a joke," Ms. Wanner says. She noticed that a guest house on the property and total lot size—as well as the number of fireplaces and its heated pool—weren't included in the valuation, which would have sharply boosted the appraised value. She also thinks the appraiser wasn't familiar enough with the community and may have used comparisons with less affluent houses nearby, such as homes situated on ponds versus lakes.
Ms. Wanner says appraisers today seem less knowledgeable. "Real estate is a neighborhood business," she said. "One neighborhood can be hit, another can be flourishing." She said the new laws prevent lenders and agents from contracting the appraiser directly, which has been especially frustrating. "Once we get the report, it states that individual's opinion of value, and that's that."
Write to S. Mitra Kalita at mitra.kalita@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com
Saturday, August 13, 2011
Friday, August 5, 2011
Borrowers, Are you confused? Help is on the way.
In their never ending quest to “simplify” the confusion surrounding the borrowing of money, the Fed has released their Final Rule for Risk Based Pricing Notices, as well as Adverse Action Notices.
More paper work filled with CYA, legal terminology that winds up baffling people more than giving them any clarity. Let’s take a peek….
Risk Based Pricing Notices are required under the Fair Credit Reporting Act (FCRA), and now, because of provisions in the Dodd-Frank Act, they must include language that relates to credit scores IF those scores were used to determine the interest rate (and resultant APR) given the customer. Also, the language can’t simply be “the lower your credit score, the higher rate you will pay”. That would be too easy. You see…lower credit scores have statistically proven to have higher defaults (more risk), so charging those clients more makes sense. But in the world we live in, the government wants to inundate the customer with mumbo jumbo, and insists on a form that gives the following information:
The credit score used in making the credit decision;
The range of possible credit scores under the model used to generate the credit score;
All of the key factors that adversely affected the credit score. Note that the risk-based pricing notice generally may not list more than four key factors. However, if one of the key factors is the number of inquiries made with respect to the consumer report, up to five key factors may be used.
The date on which the credit score was created; and The name of the consumer reporting agency or other person that provided the credit score. Further, if there is more than one borrower, each receives their own, personalized disclosure.
Adverse Action Notices are basically Rejection Letters. They used to say things like “your file was turned down because your credit/income/assets/appraisal does not fit the guidelines under which we approve borrowers”. Now, when credit scores are a reason for denial the language is slightly more confusing but essentially the same 5 things stated above for Risk Based Pricing. But, the really good news is that they added up to 5 different, new forms to tell the consumer where they can inquire about the score in their “consumer report” (the new term that replaces the old “credit report”).
Who gets paid for this stuff? More paper work, more muddied explanations, all to protect the consumer? Or to protect the jobs of the bureaucrats and law makers? Am I alone in thinking that often the efforts to protect wind up frustrating instead?
Simply stated, if your credit is bad because you made late payments, you can be turned down or your may be approved and be forced to pay a higher rate. Now, if your credit score is bad because of errors in the credit report, you should be directed on how to fix it. But that’s a topic for a different day.
I'm sure it will add another 5 disclosures to your application package.
More paper work filled with CYA, legal terminology that winds up baffling people more than giving them any clarity. Let’s take a peek….
Risk Based Pricing Notices are required under the Fair Credit Reporting Act (FCRA), and now, because of provisions in the Dodd-Frank Act, they must include language that relates to credit scores IF those scores were used to determine the interest rate (and resultant APR) given the customer. Also, the language can’t simply be “the lower your credit score, the higher rate you will pay”. That would be too easy. You see…lower credit scores have statistically proven to have higher defaults (more risk), so charging those clients more makes sense. But in the world we live in, the government wants to inundate the customer with mumbo jumbo, and insists on a form that gives the following information:
The credit score used in making the credit decision;
The range of possible credit scores under the model used to generate the credit score;
All of the key factors that adversely affected the credit score. Note that the risk-based pricing notice generally may not list more than four key factors. However, if one of the key factors is the number of inquiries made with respect to the consumer report, up to five key factors may be used.
The date on which the credit score was created; and The name of the consumer reporting agency or other person that provided the credit score. Further, if there is more than one borrower, each receives their own, personalized disclosure.
Adverse Action Notices are basically Rejection Letters. They used to say things like “your file was turned down because your credit/income/assets/appraisal does not fit the guidelines under which we approve borrowers”. Now, when credit scores are a reason for denial the language is slightly more confusing but essentially the same 5 things stated above for Risk Based Pricing. But, the really good news is that they added up to 5 different, new forms to tell the consumer where they can inquire about the score in their “consumer report” (the new term that replaces the old “credit report”).
Who gets paid for this stuff? More paper work, more muddied explanations, all to protect the consumer? Or to protect the jobs of the bureaucrats and law makers? Am I alone in thinking that often the efforts to protect wind up frustrating instead?
Simply stated, if your credit is bad because you made late payments, you can be turned down or your may be approved and be forced to pay a higher rate. Now, if your credit score is bad because of errors in the credit report, you should be directed on how to fix it. But that’s a topic for a different day.
I'm sure it will add another 5 disclosures to your application package.
Wednesday, July 20, 2011
Top 10 Cities that escaped the recession
Here's a good article about Augusta, GA being one of the top 10 least affected markets in the economic downturn.
Business has been good. Call me if you are looking to purchase or refinance a home.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/cities-that-escaped-recession-intro&topic=economy&ccsource=email
Business has been good. Call me if you are looking to purchase or refinance a home.
https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/cities-that-escaped-recession-intro&topic=economy&ccsource=email
Saturday, June 25, 2011
Americans See Debt Threat as They Reject ‘Scare Tactics’ on Higher Taxes
Here's a great article from Bloomberg News.
I would like to know your opinion on the massive debt our government is racking up. Personally, I am concerned about the effects this will have on our already stuggling economy.
http://www.bloomberg.com/news/2011-06-24/americans-see-debt-threat-reject-tax-scare-.html
Post your comments below.
I would like to know your opinion on the massive debt our government is racking up. Personally, I am concerned about the effects this will have on our already stuggling economy.
http://www.bloomberg.com/news/2011-06-24/americans-see-debt-threat-reject-tax-scare-.html
Post your comments below.
Wednesday, June 15, 2011
Beware of ARM loans.
Here is a good article from CNN Money. I know the low teaser rate seems appealing for an adjustable rate mortgage but beware.
http://money.cnn.com/2011/06/02/real_estate/ARM_adjustable_rate_mortgage_tips.moneymag/index.htm
Call me if you want to discuss this in person.
http://money.cnn.com/2011/06/02/real_estate/ARM_adjustable_rate_mortgage_tips.moneymag/index.htm
Call me if you want to discuss this in person.
Saturday, June 4, 2011
New Initial Loan Application Disclosure Article.
Here's a great article from Mortgage News Daily regarding the new disclosures.
http://www.mortgagenewsdaily.com/channels/community/213289.aspx
http://www.mortgagenewsdaily.com/channels/community/213289.aspx
Monday, May 30, 2011
Does it make sense to pay off your mortgage?
Interesting pros and cons of paying off your mortgage.
http://www.gobankingrates.com/mortgage-rates/does-it-make-sense-to-pay-off-your-mortgage/
http://www.gobankingrates.com/mortgage-rates/does-it-make-sense-to-pay-off-your-mortgage/
Sunday, May 29, 2011
For Retirees, A New Mortgage Presents Challenges.
Good article about the reality of obtaining a mortgage in today's market.
http://www.cleveland.com/business/index.ssf/2011/05/for_retirees_a_new_mortgage_pr.html
If you are well prepared, mortgage loans are not hard to obtain. You will be asked more questions, and you will need to be preparded to document income and non-payroll related deposts, but with interest rates being so low, it will be worth the effort.
http://www.cleveland.com/business/index.ssf/2011/05/for_retirees_a_new_mortgage_pr.html
If you are well prepared, mortgage loans are not hard to obtain. You will be asked more questions, and you will need to be preparded to document income and non-payroll related deposts, but with interest rates being so low, it will be worth the effort.
Wednesday, May 11, 2011
Vacation-home market faces long road to recovery
Here's an article from USA Today regarding second homes.
http://www.usatoday.com/money/economy/housing/2011-05-08-cnbc-vacation-homes_n.htm
The buyers' market for vacation homes is likely to continue for years, with activity largely limited to buyers with enough cash to circumvent a tighter, post-recession lending environment.
Thirty-six percent of all vacation-home buyers in 2010 did not use a mortgage — versus 29 percent the year before — while more than half of them financed less that 70 percent of the purchase price, according to the National Association of Realtors.
Of those who bought a second home as a rental investment, 59 percent paid cash.
http://www.usatoday.com/money/economy/housing/2011-05-08-cnbc-vacation-homes_n.htm
The buyers' market for vacation homes is likely to continue for years, with activity largely limited to buyers with enough cash to circumvent a tighter, post-recession lending environment.
Thirty-six percent of all vacation-home buyers in 2010 did not use a mortgage — versus 29 percent the year before — while more than half of them financed less that 70 percent of the purchase price, according to the National Association of Realtors.
Of those who bought a second home as a rental investment, 59 percent paid cash.
"Mortgage lending in the past three years has been pretty rough, with much higher underwriting standards," says Paul Bishop, NAR's vice president for research. "People drawn into the market at this point are buyers with substantial cash, or people not dealing with a mortgage. If your credit is strong and you put down a sizeable down payment, lenders are more interested."
Vacation homes remain the hardest-hit sector of the U.S. real estate market. Sales fell 1.8 percent to 543,000 in 2010, according to the NAR's 2011 Investment and Vacation Home Buyers Survey. The median price was $150,000 in 2010, down 11.2 percent from $169,000 in 2009.
"Vacation homes are one of the truest forms of discretionary purchases," says Bishop. "No one needs one."
"Anywhere you look, you are going to find prices we haven't seen since 2001," says Michael Sanders, a Sarasota, Fla. broker active in second-home sales. He say that's largely because of foreclosures and short sales of homes for less than what's owed on them.
The market decline has slowed but it was fast and furious at its worst. By 2008, sales of second homes and investment properties at resorts were down to half of their 2006 highs, when a better economy and easy credit turned over 1.7 million units.
"That was the peak of a very robust market," says Bishop. "After the tech-stock bust, there was a desire on the part of many people for another way to invest. As we saw, many people took equity out of their primary residences and bought another."
For years, anyone affluent enough to cover the monthly costs was rewarded by the eventual sale of that unit, adds Ralf Garrison, owner of The Advisory Group, a Denver-based resort consulting firm. "That model is broken. Anyone who bought a vacation home in 2007-2008 is not very happy about it."
Now, as with other parts of the housing market, negative equity and foreclosures are common. Foreclosure or trustee sales in 2010 amounted to 11 percent of vacation home sales.
Bargain hunters also appear to be selective. Sales and prices are up at least in the high single digits over 2009 at such well-known resort areas as Hilton Head, Palm Beach, Cape Cod and Palm Springs, according to brokers there. Ditto for Lake Tahoe, Napa Valley, Scottsdale, Oahu, Pebble Beach and the Pocono Mountains.
Today's buyers are also different than the past, when many bought a second home as an investment.
More than eight in ten buyers of vacation homes plan to use their property for vacations or family retreats. Three in ten expect to convert their vacation home to a principal residence in the future.
In many other areas, any rebound is still down the road.
"In some areas of the country - California, Arizona Nevada, Florida - there was unrealistic growth based on cheap money and little risk," says Garrison. "
Now, the depressed second-home market threatens the very health of some U.S. resorts, where real estate and construction provide the main lynchpins to the local economy.
In Colorado ski country, the Vail area employed 31,000 people in 2008. By the third quarter of 2010, employment was down 20 percent, with construction jobs down 46 percent.
"If you lose construction, you lose the locals," Garrison said. "It's a fragile economy, with an imbalance that's particularly acute in those areas that have all their eggs in the one basket of real estate and tourism."
After his $200-million residence hotel project in Telluride, Colo. ended up in bankruptcy, Alain Longatte, a veteran resort developer and founder of Scottsdale-based Resort Advisory Group International, is now concentrating his efforts in Brazil and Uruguay.
Langatte said. ""Since year end 2008 development for destination resorts has come to a screeching halt in this country. The money dried up. There are lots of very good projects in the U.S. at standstill. I suspect it will remain nonexistent for the foreseeable future."
Vacation homes remain the hardest-hit sector of the U.S. real estate market. Sales fell 1.8 percent to 543,000 in 2010, according to the NAR's 2011 Investment and Vacation Home Buyers Survey. The median price was $150,000 in 2010, down 11.2 percent from $169,000 in 2009.
"Vacation homes are one of the truest forms of discretionary purchases," says Bishop. "No one needs one."
"Anywhere you look, you are going to find prices we haven't seen since 2001," says Michael Sanders, a Sarasota, Fla. broker active in second-home sales. He say that's largely because of foreclosures and short sales of homes for less than what's owed on them.
The market decline has slowed but it was fast and furious at its worst. By 2008, sales of second homes and investment properties at resorts were down to half of their 2006 highs, when a better economy and easy credit turned over 1.7 million units.
"That was the peak of a very robust market," says Bishop. "After the tech-stock bust, there was a desire on the part of many people for another way to invest. As we saw, many people took equity out of their primary residences and bought another."
For years, anyone affluent enough to cover the monthly costs was rewarded by the eventual sale of that unit, adds Ralf Garrison, owner of The Advisory Group, a Denver-based resort consulting firm. "That model is broken. Anyone who bought a vacation home in 2007-2008 is not very happy about it."
Now, as with other parts of the housing market, negative equity and foreclosures are common. Foreclosure or trustee sales in 2010 amounted to 11 percent of vacation home sales.
Bargain hunters also appear to be selective. Sales and prices are up at least in the high single digits over 2009 at such well-known resort areas as Hilton Head, Palm Beach, Cape Cod and Palm Springs, according to brokers there. Ditto for Lake Tahoe, Napa Valley, Scottsdale, Oahu, Pebble Beach and the Pocono Mountains.
Today's buyers are also different than the past, when many bought a second home as an investment.
More than eight in ten buyers of vacation homes plan to use their property for vacations or family retreats. Three in ten expect to convert their vacation home to a principal residence in the future.
In many other areas, any rebound is still down the road.
"In some areas of the country - California, Arizona Nevada, Florida - there was unrealistic growth based on cheap money and little risk," says Garrison. "
Now, the depressed second-home market threatens the very health of some U.S. resorts, where real estate and construction provide the main lynchpins to the local economy.
In Colorado ski country, the Vail area employed 31,000 people in 2008. By the third quarter of 2010, employment was down 20 percent, with construction jobs down 46 percent.
"If you lose construction, you lose the locals," Garrison said. "It's a fragile economy, with an imbalance that's particularly acute in those areas that have all their eggs in the one basket of real estate and tourism."
After his $200-million residence hotel project in Telluride, Colo. ended up in bankruptcy, Alain Longatte, a veteran resort developer and founder of Scottsdale-based Resort Advisory Group International, is now concentrating his efforts in Brazil and Uruguay.
Langatte said. ""Since year end 2008 development for destination resorts has come to a screeching halt in this country. The money dried up. There are lots of very good projects in the U.S. at standstill. I suspect it will remain nonexistent for the foreseeable future."
Don't tap 401(k) to pay off mortgage
Q. How can we take money out of 401(k), pay off our mortgage and not pay taxes on it all if we do it all at the same time? Can any of it be deferred? The amount we'd want to take out is $105,000.
Unless you're in danger of losing your house, you generally shouldn't take money out of a 401(k) and use it to pay off a home loan.
Why? Because your money is growing inside your 401(k) at a faster rate than you're paying out for your loan. Also, your mortgage interest may be deductible if you itemize on your federal income tax return.
If you've recently refinanced, you're probably paying less than 5 percent for your mortgage. (I just refinanced to a 15-year at 3.75 percent.)
If you itemize, your net interest rate is somewhere around 3.5 to 4 percent. That's basically like free money, and over time you'll do a lot better by keeping the cash inside your 401(k).
In addition, if you're under 59 1/2, you'll not only pay taxes, but you'll also pay a 10 percent penalty on your withdrawal.
So the real question is why would you want to take out that much money to pay off your mortgage? And if you did, that much of a withdrawal from your 401(k) would probably put you in a higher tax bracket, causing you to pay even more federal income taxes on the amount you take out.
The only way to get tax-free cash is to borrow from your 401(k). But, again, I don't recommend it. If you lose your job, you'll have to replace all the cash within 60 days, plus you'll be losing out on any return your retirement cash would generate inside your 401(k).
The risks are extremely high that you could be caught short and wind up losing your home if you couldn't come up with enough cash.
My suggestion is to keep your 401(k) money where it is and focus on finding additional ways to save in your budget to throw more cash at your mortgage.
Unless you're in danger of losing your house, you generally shouldn't take money out of a 401(k) and use it to pay off a home loan.
Why? Because your money is growing inside your 401(k) at a faster rate than you're paying out for your loan. Also, your mortgage interest may be deductible if you itemize on your federal income tax return.
If you've recently refinanced, you're probably paying less than 5 percent for your mortgage. (I just refinanced to a 15-year at 3.75 percent.)
If you itemize, your net interest rate is somewhere around 3.5 to 4 percent. That's basically like free money, and over time you'll do a lot better by keeping the cash inside your 401(k).
In addition, if you're under 59 1/2, you'll not only pay taxes, but you'll also pay a 10 percent penalty on your withdrawal.
So the real question is why would you want to take out that much money to pay off your mortgage? And if you did, that much of a withdrawal from your 401(k) would probably put you in a higher tax bracket, causing you to pay even more federal income taxes on the amount you take out.
The only way to get tax-free cash is to borrow from your 401(k). But, again, I don't recommend it. If you lose your job, you'll have to replace all the cash within 60 days, plus you'll be losing out on any return your retirement cash would generate inside your 401(k).
The risks are extremely high that you could be caught short and wind up losing your home if you couldn't come up with enough cash.
My suggestion is to keep your 401(k) money where it is and focus on finding additional ways to save in your budget to throw more cash at your mortgage.
Sunday, May 8, 2011
3 Steps to a More Productive Day
I define productivity as "doing what I said I was going to do in the time frame I said I was going to do it". Your definition may be a little different but the end result is the same for you to feel your day was productive.
Here are the 3 steps I feel are necessary for me to be productive:
1. Start with a "To Do" list and identify the highest priorities. Next, tackle the most difficult items first. Ever read the book "Eat That Frog"? http://www.amazon.com/That-Frog-Great-Ways-Procrastinating/dp/1583762027/ref=sr_1_1?s=books&ie=UTF8&qid=1304864287&sr=1-1
The tendency is to take care of the easy ones first but I have found it is best to work from toughest to easiest. Give it a try!
2. Time Block. Turn off your phones,, exit out of your email, and put a "Do Not Disturb" sign on your door if you need to. I try to target 30 minute increments several times a day, then I reward myself by setting a goal. For example, I may say, I am going to devote 30 minutes to this project and when I finish I will go to lunch. Sounds simple enough, but how many times have you said I will go to lunch first and tackle the task when I get back, only to have an interruption come up and your day ends without completing the task you set as a high priority at the beginning of the day?
3. Minimize office Chit Chat. Sure, it's fun to discuss the latest episode of American Idol, but leave that to after hours if you want to have a more productive day.
I hope these steps help you take on your day in a more productive manner!
Here are the 3 steps I feel are necessary for me to be productive:
1. Start with a "To Do" list and identify the highest priorities. Next, tackle the most difficult items first. Ever read the book "Eat That Frog"? http://www.amazon.com/That-Frog-Great-Ways-Procrastinating/dp/1583762027/ref=sr_1_1?s=books&ie=UTF8&qid=1304864287&sr=1-1
The tendency is to take care of the easy ones first but I have found it is best to work from toughest to easiest. Give it a try!
2. Time Block. Turn off your phones,, exit out of your email, and put a "Do Not Disturb" sign on your door if you need to. I try to target 30 minute increments several times a day, then I reward myself by setting a goal. For example, I may say, I am going to devote 30 minutes to this project and when I finish I will go to lunch. Sounds simple enough, but how many times have you said I will go to lunch first and tackle the task when I get back, only to have an interruption come up and your day ends without completing the task you set as a high priority at the beginning of the day?
3. Minimize office Chit Chat. Sure, it's fun to discuss the latest episode of American Idol, but leave that to after hours if you want to have a more productive day.
I hope these steps help you take on your day in a more productive manner!
Sunday, May 1, 2011
Some signs of life in housing, credit drought goes on
The housing market in the Augusta, GA area remains relatively strong in comparison to other parts of the country, but it's not necessisarily an easy process. Here’s an interesting article from Reuters regarding the effects of the tightening of credit. It’s not impossible to obtain a mortgage these days, but expect the process to be detailed. You may feel as if you have been through an IRS audit or head-to-toe medical exam.
http://www.reuters.com/article/2011/04/25/us-usa-housing-market-idUSTRE73O0YF20110425
By Nick Carey
CHICAGO Mon Apr 25, 2011
(Reuters) - Like an increasing number of well-heeled Americans, the Hodgsons decided it was time to buy a new home, even if most of the U.S. housing market remains in the dumps.
After years in an apartment building, "we were just tired of sharing space with other people," says Cari Hodgson, 32. "It was time to have space of our own."
She and her commodities trader husband sold the condo and recently bought a $1.2 million, five-bedroom home in Chicago's north side, sealing the deal with the kind of big down-payment that is heating up the high-end of the U.S. property market.
Cari, a part-time nurse, declined to say how much of their own money the couple put into the house. But she did say the mortgage was less than a so-called jumbo loan, which are bigger than most U.S. mortgages and currently start at $730,000.
That means the Hodgsons put down at least 40 percent of the house's value, a chunk far out of reach for most Americans.
"We were told by a number of people that it was very difficult to qualify for a jumbo loan," Cari Hodgson said. "So we didn't even try to get one."
Four years after U.S. housing prices began to nose-dive, eventually triggering a global financial crisis, signs of life are appearing at the top and the bottom ends of the market.
By contrast, a sustained recovery remains far off for the vast middle ground of the U.S. housing sector.
Affluent Americans are feeling more secure as the impact of the recession fades and the stock market racks up big gains.
"People who have decent income are saying, maybe I can trade up, buy a better property," said Bill Hardin, director of the real estate program at Florida International University.
"Some people are even saying, I'm willing to take a loss on the property I'm selling now to get something I couldn't buy during the housing peak."
Sales of homes worth over $1 million, which account for about 1.5 percent of total U.S. sales, have risen in most states so far in 2011.
Realtors, brokers and others in the housing industry report the first bidding wars for expensive homes since the crash.
"There is a surge of confidence among high-end buyers and we're unfortunately short on inventory," said Pamela Liebman, chief executive of New York property firm The Corcoran Group.
Her firm saw a doubling in the sale of luxury co-ops, worth more than $10 million, in the first three months of 2011.
At the bottom end, homes are also on the move as investors pay cash for foreclosed properties to rent them out.
It's a different story in the middle of the market.
Properties worth between $100,000 and $500,000 make up more than 60 percent of U.S. housing. Sales in that category in March were down across every region of America from the same month a year earlier, when tax breaks were propping up demand.
Foreclosures and short sales -- whereby struggling homeowners sell their homes for below what they owe, with the consent of their lenders -- are still a big drag. Credit remains tight and middle-income families are more pessimistic than their wealthier compatriots about the economy.
So this year's Spring selling season, when buyers typically start to look for a home after winter, has mostly been a dud.
Access to credit is cited as a broad problem. While the rich can simply put more money down, for most would-be buyers the need for more 'skin in the game' is a deal-breaker.
Realtors and brokers complain that the credit drought is as extreme as the flood of loose lending
of the boom years.
"The pendulum has swung from too far to the left to too far to the right," Corcoran's Liebman said. "We need to find some balance in lending."
"IT'S HARD TO BE POSITIVE"
On a recent sunny Sunday afternoon, in Leawood, near Kansas City, realtor Ted DeVore patiently waited inside an elegant ranch home priced at $344,900, eager to point out the lush backyard, new roof, remodeled kitchen and updated bathrooms.
But most of the visitors to the open house were curious neighbors, not would-be buyers.
Middle-income Americans in Middle America are not yet ready to get back into the market. Homes that do sell in the Kansas City area are often going for between 20 percent to 30 percent below the listed price.
"There are so many people questioning things right now, asking themselves, am I going to have my job in six months?" DeVore said, affable but seemingly resigned to a slow Spring. "The indicators are very mixed for the whole economy and the real estate market very closely follows the overall economy."
"It's hard to be positive," he added.
http://www.reuters.com/article/2011/04/25/us-usa-housing-market-idUSTRE73O0YF20110425
By Nick Carey
CHICAGO Mon Apr 25, 2011
(Reuters) - Like an increasing number of well-heeled Americans, the Hodgsons decided it was time to buy a new home, even if most of the U.S. housing market remains in the dumps.
After years in an apartment building, "we were just tired of sharing space with other people," says Cari Hodgson, 32. "It was time to have space of our own."
She and her commodities trader husband sold the condo and recently bought a $1.2 million, five-bedroom home in Chicago's north side, sealing the deal with the kind of big down-payment that is heating up the high-end of the U.S. property market.
Cari, a part-time nurse, declined to say how much of their own money the couple put into the house. But she did say the mortgage was less than a so-called jumbo loan, which are bigger than most U.S. mortgages and currently start at $730,000.
That means the Hodgsons put down at least 40 percent of the house's value, a chunk far out of reach for most Americans.
"We were told by a number of people that it was very difficult to qualify for a jumbo loan," Cari Hodgson said. "So we didn't even try to get one."
Four years after U.S. housing prices began to nose-dive, eventually triggering a global financial crisis, signs of life are appearing at the top and the bottom ends of the market.
By contrast, a sustained recovery remains far off for the vast middle ground of the U.S. housing sector.
Affluent Americans are feeling more secure as the impact of the recession fades and the stock market racks up big gains.
"People who have decent income are saying, maybe I can trade up, buy a better property," said Bill Hardin, director of the real estate program at Florida International University.
"Some people are even saying, I'm willing to take a loss on the property I'm selling now to get something I couldn't buy during the housing peak."
Sales of homes worth over $1 million, which account for about 1.5 percent of total U.S. sales, have risen in most states so far in 2011.
Realtors, brokers and others in the housing industry report the first bidding wars for expensive homes since the crash.
"There is a surge of confidence among high-end buyers and we're unfortunately short on inventory," said Pamela Liebman, chief executive of New York property firm The Corcoran Group.
Her firm saw a doubling in the sale of luxury co-ops, worth more than $10 million, in the first three months of 2011.
At the bottom end, homes are also on the move as investors pay cash for foreclosed properties to rent them out.
It's a different story in the middle of the market.
Properties worth between $100,000 and $500,000 make up more than 60 percent of U.S. housing. Sales in that category in March were down across every region of America from the same month a year earlier, when tax breaks were propping up demand.
Foreclosures and short sales -- whereby struggling homeowners sell their homes for below what they owe, with the consent of their lenders -- are still a big drag. Credit remains tight and middle-income families are more pessimistic than their wealthier compatriots about the economy.
So this year's Spring selling season, when buyers typically start to look for a home after winter, has mostly been a dud.
Access to credit is cited as a broad problem. While the rich can simply put more money down, for most would-be buyers the need for more 'skin in the game' is a deal-breaker.
Realtors and brokers complain that the credit drought is as extreme as the flood of loose lending
of the boom years.
"The pendulum has swung from too far to the left to too far to the right," Corcoran's Liebman said. "We need to find some balance in lending."
"IT'S HARD TO BE POSITIVE"
On a recent sunny Sunday afternoon, in Leawood, near Kansas City, realtor Ted DeVore patiently waited inside an elegant ranch home priced at $344,900, eager to point out the lush backyard, new roof, remodeled kitchen and updated bathrooms.
But most of the visitors to the open house were curious neighbors, not would-be buyers.
Middle-income Americans in Middle America are not yet ready to get back into the market. Homes that do sell in the Kansas City area are often going for between 20 percent to 30 percent below the listed price.
"There are so many people questioning things right now, asking themselves, am I going to have my job in six months?" DeVore said, affable but seemingly resigned to a slow Spring. "The indicators are very mixed for the whole economy and the real estate market very closely follows the overall economy."
"It's hard to be positive," he added.
Monday, April 25, 2011
FICO Improves Way to Predict Strategic Mortgage Defaults
Interesting article in National Mortgage News regarding prediticing strategic mortgage defaults.
http://www.nationalmortgagenews.com/dailybriefing/2010_332/fico-improves-way-1024457-1.html
FICO launched an analytic advance that substantially improves lenders’ ability to identify borrowers at risk of strategic default on mortgages.
The analytics provider is now consulting with mortgage lenders to offer custom analytic solutions for their mortgage portfolios. This would allow these originators to take preventative action and limit the costly effect of strategic defaults.
A strategic default is when a borrower who has the capacity to make mortgage payments chooses to default, usually because the property value is less than the mortgage’s outstanding principal.
Lenders have traditionally utilized the degree of home price depreciation to predict strategic defaults. However, new FICO Labs research showed that borrowers whose homes have lost the most value are only two times as likely to default as those whose houses have lost the least value. By using custom analytic models, FICO Labs researchers have shown the ability to identify borrowers who are over 100 times more probable to strategically default versus others.
Additionally, FICO Labs researchers have also found that strategic defaulters as a group are usually more savvy managers of their credit compared with the general population, with higher FICO scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This means that strategic defaulters have shown a different type of credit behavior versus distressed consumers who miss payments.
“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs.
“Before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them. Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future.”
Experts said that the persisting mortgage sector weakness is driving more strategic defaults. Studies from the University of Chicago Booth School of Business showed that in September 2010, 35% of mortgage defaults were strategic, increasing from 26% in March 2009.
Meanwhile, CoreLogic's March 2011 study showed that the number of residential mortgages with negative equity totaled 11.1 million in 4Q10, or 23.1% of all residential mortgages in the U.S., rising from 22.5% in 3Q10.
The FICO Labs team built strategic default analytics that test the ability to rank-order both current and delinquent borrowers in terms of their likelihood of strategically defaulting on their mortgage. These custom models separated borrowers into high versus low strategic default risk bands. Among current borrowers (i.e., those not delinquent on any loans):
The riskiest borrowers are 110 times more likely to strategically default versus the least risky borrowers. The riskiest 20% of borrowers comprised 67% of those who later committed a strategic default. In short, FICO said that a servicer could reach two-thirds of those who would commit strategic default by focusing on just 20% of its borrowers.
“The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early,” Jennings said. “Strategic defaults are bad for lenders and investors, they’re bad for the homeowners who elect to default, and they’re bad for neighborhoods and cities. Preventing them is in the interests of everyone involved.”
By Structured Finance News Staff
http://www.nationalmortgagenews.com/dailybriefing/2010_332/fico-improves-way-1024457-1.html
FICO launched an analytic advance that substantially improves lenders’ ability to identify borrowers at risk of strategic default on mortgages.
The analytics provider is now consulting with mortgage lenders to offer custom analytic solutions for their mortgage portfolios. This would allow these originators to take preventative action and limit the costly effect of strategic defaults.
A strategic default is when a borrower who has the capacity to make mortgage payments chooses to default, usually because the property value is less than the mortgage’s outstanding principal.
Lenders have traditionally utilized the degree of home price depreciation to predict strategic defaults. However, new FICO Labs research showed that borrowers whose homes have lost the most value are only two times as likely to default as those whose houses have lost the least value. By using custom analytic models, FICO Labs researchers have shown the ability to identify borrowers who are over 100 times more probable to strategically default versus others.
Additionally, FICO Labs researchers have also found that strategic defaulters as a group are usually more savvy managers of their credit compared with the general population, with higher FICO scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This means that strategic defaulters have shown a different type of credit behavior versus distressed consumers who miss payments.
“Mortgage payment patterns have shifted, and some borrowers are intentionally defaulting on their mortgages because they believe it is in their best financial interest, and because they believe the consequences will be minimal,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs.
“Before mortgage servicers can work effectively with potential strategic defaulters, they must first be able to identify them. Our new research shows it is possible for servicers to find those at greatest risk of strategic default, both to prevent losses and to prevent borrowers from making a decision that will damage their credit future.”
Experts said that the persisting mortgage sector weakness is driving more strategic defaults. Studies from the University of Chicago Booth School of Business showed that in September 2010, 35% of mortgage defaults were strategic, increasing from 26% in March 2009.
Meanwhile, CoreLogic's March 2011 study showed that the number of residential mortgages with negative equity totaled 11.1 million in 4Q10, or 23.1% of all residential mortgages in the U.S., rising from 22.5% in 3Q10.
The FICO Labs team built strategic default analytics that test the ability to rank-order both current and delinquent borrowers in terms of their likelihood of strategically defaulting on their mortgage. These custom models separated borrowers into high versus low strategic default risk bands. Among current borrowers (i.e., those not delinquent on any loans):
The riskiest borrowers are 110 times more likely to strategically default versus the least risky borrowers. The riskiest 20% of borrowers comprised 67% of those who later committed a strategic default. In short, FICO said that a servicer could reach two-thirds of those who would commit strategic default by focusing on just 20% of its borrowers.
“The ability to spot likely strategic defaulters before delinquency enables servicers to intervene early,” Jennings said. “Strategic defaults are bad for lenders and investors, they’re bad for the homeowners who elect to default, and they’re bad for neighborhoods and cities. Preventing them is in the interests of everyone involved.”
By Structured Finance News Staff
Thursday, April 21, 2011
Mortgage rule could hurt borrowers: FHA's Ryan
By Corbett B. Daly
http://www.reuters.com/article/2011/04/13/us-usa-housing-mortgages-idUSTRE73C7NC20110413
WASHINGTON Wed Apr 13, 2011 5:46pm EDT
WASHINGTON (Reuters) - A proposed rule requiring a minimum 20 percent down payment on mortgages that lenders could then sell to investors without keeping some of the risk on their books might prevent some potential borrowers from getting a loan, a top U.S. housing official said.
While the rule "is designed to create a class of loans that have a lower likelihood of default, in its proposed definition it has the potential to exclude a number of buyers," Acting Federal Housing Administration Commissioner Bob Ryan said in prepared testimony.
Ryan is to deliver his remarks Thursday to a House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. They were posted on the panel's website on Wednesday.
The Federal Deposit Insurance Corp and the Federal Reserve a few weeks ago endorsed the "qualified residential mortgage" proposal that is intended to restore lending discipline and define the safest form of mortgages that can be completely resold to other investors.
Loans backed by mortgage finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration are exempt from the rule. Together they back almost nine in 10 new mortgages.
Last year's rewrite of the rules of Wall Street requires firms that package loans into securities -- a practice known as securitization -- to keep at least 5 percent of the credit risk on their books.
The provision is meant to force securitizers to have "skin in the game," so they don't churn out poorly underwritten loans and then pass along the risk to investors, as happened during the 2007-2009 financial crisis.
Mortgages that meet strict underwriting standards, known as qualified residential mortgages or QRMs, are exempt from the risk requirement.
"Given the exigencies of strong underwriting for healthy, sustainable mortgages, we must be mindful of the trade-off presented by the current definition of QRM between improvement in loan quality and affordability and accessibility for prospective homebuyers," said Ryan.
He said down payment requirements alone are not the best predictors of whether loans will perform. The combination of credit scores and down payments is a better predictor of loan performance, he said.
The agencies are currently accepting comments on the proposed rule. A final rule is expected later this year.
http://www.reuters.com/article/2011/04/13/us-usa-housing-mortgages-idUSTRE73C7NC20110413
WASHINGTON Wed Apr 13, 2011 5:46pm EDT
WASHINGTON (Reuters) - A proposed rule requiring a minimum 20 percent down payment on mortgages that lenders could then sell to investors without keeping some of the risk on their books might prevent some potential borrowers from getting a loan, a top U.S. housing official said.
While the rule "is designed to create a class of loans that have a lower likelihood of default, in its proposed definition it has the potential to exclude a number of buyers," Acting Federal Housing Administration Commissioner Bob Ryan said in prepared testimony.
Ryan is to deliver his remarks Thursday to a House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises. They were posted on the panel's website on Wednesday.
The Federal Deposit Insurance Corp and the Federal Reserve a few weeks ago endorsed the "qualified residential mortgage" proposal that is intended to restore lending discipline and define the safest form of mortgages that can be completely resold to other investors.
Loans backed by mortgage finance giants Fannie Mae and Freddie Mac and the Federal Housing Administration are exempt from the rule. Together they back almost nine in 10 new mortgages.
Last year's rewrite of the rules of Wall Street requires firms that package loans into securities -- a practice known as securitization -- to keep at least 5 percent of the credit risk on their books.
The provision is meant to force securitizers to have "skin in the game," so they don't churn out poorly underwritten loans and then pass along the risk to investors, as happened during the 2007-2009 financial crisis.
Mortgages that meet strict underwriting standards, known as qualified residential mortgages or QRMs, are exempt from the risk requirement.
"Given the exigencies of strong underwriting for healthy, sustainable mortgages, we must be mindful of the trade-off presented by the current definition of QRM between improvement in loan quality and affordability and accessibility for prospective homebuyers," said Ryan.
He said down payment requirements alone are not the best predictors of whether loans will perform. The combination of credit scores and down payments is a better predictor of loan performance, he said.
The agencies are currently accepting comments on the proposed rule. A final rule is expected later this year.
Fed unveils proposal on mortgage standards
Good article by Dave Clarke of Reuters but I am going to add my comentary about a few points, directed more at the Federal Reserve, not Dave Clarke. These people at the Fed are truly clueless.
"Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan". Really? Do they think we want to make loans "knowing" the borrowers can't make the payment? Those loans are long gone and so are the lenders that made irresponsible loans.
"lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan." Anyone who has applied for a mortgage in the past year has NO DOUBT they have been thoroughly checked out, including their DNA.
"is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis." If it gets any tighter, be prepared to pay cash for your dream home. Not really, but it seems that way.
Enjoy!
http://www.reuters.com/article/2011/04/19/us-financial-regulation-mortgage-idUSTRE73I49F20110419
WASHINGTON Tue Apr 19, 2011 11:27am EDT
WASHINGTON (Reuters) - Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.
The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.
The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.
The law does provide protections from this type of liability if a loan meets the specific standards that are part of a "qualified mortgage."
In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.
Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.
Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower's employment status and debt obligations.
The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.
Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.
"This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio," the Fed said in a statement.
The Fed is seeking comments on the proposal through July 22.
The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.
"Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan". Really? Do they think we want to make loans "knowing" the borrowers can't make the payment? Those loans are long gone and so are the lenders that made irresponsible loans.
"lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan." Anyone who has applied for a mortgage in the past year has NO DOUBT they have been thoroughly checked out, including their DNA.
"is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis." If it gets any tighter, be prepared to pay cash for your dream home. Not really, but it seems that way.
Enjoy!
http://www.reuters.com/article/2011/04/19/us-financial-regulation-mortgage-idUSTRE73I49F20110419
WASHINGTON Tue Apr 19, 2011 11:27am EDT
WASHINGTON (Reuters) - Lenders would be required to make sure prospective borrowers have the ability to repay their mortgages before giving them a loan, under a proposal released by the Federal Reserve on Tuesday.
The rule, which is required by the Dodd-Frank financial reform law, is intended to tighten lending standards and combat home lending abuses that contributed to the 2007-2009 financial crisis.
The rule would establish minimum underwriting standards for most mortgages and lenders could be sued by the borrower if they do not take the proper steps to check a borrowers ability to repay the loan.
The law does provide protections from this type of liability if a loan meets the specific standards that are part of a "qualified mortgage."
In its proposal, the Fed is seeking comment on two possible ways of defining a qualified mortgage.
Under the first scenario the loan could not include interest-only payments, a balloon payment and regular payments could not result in the principle of the loan increasing.
Under the alternative, the loan would have to meet all the standards laid out under the first option and meet additional requirements such as having the lender verify a borrower's employment status and debt obligations.
The proposal lays out a general standard for complying with the rule, including verifying a borrowers income, their employment and the amount of debt they have.
Mortgage originators who serve rural and underserved areas would be allowed to give out loans with balloon payments.
"This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors may originate balloon loans to hedge against interest rate risk for loans held in portfolio," the Fed said in a statement.
The Fed is seeking comments on the proposal through July 22.
The final rule will be implemented by the Consumer Financial Protection Bureau, which opens its doors on July 21.
Tuesday, March 29, 2011
Credit and Credit Scores
Here's a great article written by one of my co-workers, John Marcus. John is a 28 year veteran of the mortgage industry and a Sr. Loan Officer with First Bank Mortgage.
Credit and Credit Scores
What is a Credit Score? It is a three digit number between 400 and 900 where the higher the number is, the better your score or “grade”. Virtually all lenders now use scores to make lending decisions.
Unfortunately, your credit score will be different depending on what type of lender you seek. For example, if you go a car dealer, a credit card company, or a mortgage lender, each may receive a different score for you when they “pull” your credit.
To make it simple, just know that the score we mortgage lenders pull will be about 20 points lower than the score you get from most other sources (including the Credit Bureaus!).Many consumers think their credit score has dropped when we qualify them but, in fact, this issue is the only difference.
If you’re sure your credit is good or great and you just want to make it better, a few simple concepts are all you need to know:
•Paying Off Debts will raise your score (the most obvious of all)
•Obtaining or Keeping at least two Credit Cards is critical.
•Keeping the balance(s) on credit cards very low will raise your score
•Keeping credit cards active is important. (Use them at least once every 6 months)
•Do not use Finance Companies. If their name ends with “Finance” avoid them.
•Avoid Department Store Credit Cards if possible.
•Follow up with anyone that claims you owe them money. Keep records. Knowing you are right is not good enough, you need to be able to prove it.
Let’s devote the rest of this article to those whose credit is not good and want to improve to be able to buy a home:
Simply put: “paying off old “bad” debts will not raise your credit score, it will just keep it from going down in the future. Good management of current “good” debts will raise your credit score.”
Let’s start with some terminology:
•Credit Bureaus—these are the companies that store your credit history. There are three: Equifax, Transunion, and Experian
•try to recover the debt.
•Judgment—the lender has gone to court and the court rules against you. The court then reports to the Credit Bureaus.
•Garnishment—the local court has ordered your employer to withhold money from your paycheck to recover the debt.
•Lien—the court issues an order than ties up any real property you have from being sold transferred or borrowed against.
•Chapter 13 Bankruptcy—the court tells all creditors to stop contacting you, interest charges stop, and you pay the balance owed in regular installments over a period of time (years)
•Chapter 7 Bankruptcy—the court wipes out all previous debt except for federal debt (student loans, etc) and you start fresh.
•Chapter 11 Bankruptcy—a business bankruptcy
•Public Records—all the above court-related delinquent credit that is written on a separate section of your credit report and are generally more serious.
•Past Due Account—for our purposes here an account that is behind but that can be brought current.
•Collection Account—an account that has been placed on your credit report by collection agency and is permanently bad until it is paid.
•Charge Off—An account where the lender reporting to the credit bureaus has stopped trying to collect.
•Over 30—at least 31 days past the due date without proper payment
•Over 60—at least 61 days past the due date without proper payment
•Over 90—at least 91 days past the due date without proper payment
•Voluntary Repossession—a vehicle it returned to the lender and the person obligated on the loan signs paperwork
•Involuntary Repossession—a vehicle is taken by the lender and no paperwork is signed
•VA loan—a loan program available to active duty military or prior military requires zero down payment
•FHA loan—a loan program that is available to all consumers in most situations and requires only 3.5% down payment.
•Conventional loan—loan programs other than FHA and VA that requires minimum 5% down.
•Debt Ratio—a percentage of your proposed total debt versus your gross income. Reflects your ability to make the mortgage payment
So, let’s get to main question—what credit score does one need to get a mortgage loan?
•VA is minimum 620
•FHA is minimum 640
•Conventional is minimum 680, unless you put 20% down, then minimum 620.
These requirements are the same for most lenders across the industry. Some lenders require even higher scores. Be prepared for a very difficult, if not impossible, loan process if you are promised a loan and your score is below those stated above.
Having a credit score high enough allows you to proceed to the next step. It does not mean your loan will be approved. For example, In the case of a prior bankruptcy or foreclosure, you must not only have a credit score as stated above, but also must meet other requirements such as mandatory waiting periods. Also, your debt ratio is critical.
How can I raise my credit score and how long will it take?
Clearing up old, derogatory credit issues will not raise your credit score, it will just keep it from going down in the future. Good management of current, good debt is how you raise your score.
More specifically, you need at least one to two major credit cards. If you have other regular loans
Good debts are those accounts where on time payments going forward will report positive payment history to the credit bureaus. Examples are credit cards, car loans, mortgages, etc. If you get more than 30 days behind on a good debt, your score will decrease, however, the lender will usually allow you to catch up and as you pay on time again month after month, your score will increase. In most cases, your score will increase some just for bringing it current. If you get far enough behind, though, the lender will eventually change your status to a bad debt.
Bad debts are Collection Accounts, Charge-Offs, Judgments, Liens, or Foreclosures
When the lender on a good debt that has become delinquent reaches the point where they no longer want to keep your account, they will usually “sell” the debt to a collection agency resulting in a “collection account”. Once a debt becomes bad, the lender will generally not allow you to “catch up” and resume normal status. They will then insist you deal with the collection agency only. At this point the debt is derogatory permanently and will have a bad effect on your credit score. If it is paid soon after, it should stop having a negative impact. If it remains unpaid, the negative impact will fade slowly over time.
Largely unseen these days are “charge-offs”. This is where the lender just gives up trying to collect the debt. Collection agencies have become so prevalent that if the lender no longer wants to pursue collection they can just sell it to a collection agency, so there is no reason for the lender to give up completely.
Collection accounts or Charge-offs can also result from accounts that were never good credit references to begin with such as medical bills. They don’t appear on the credit report unless they are delinquent. This will usually result in only one derogatory reference.
Judgments and Liens are entered in a different place on the credit report called “public records”. They generally “hit” your score a little harder. Because they involve a creditor/taxing authority and the county record-keeping department, clearing them involves twice as much work. Unlike collection Accounts and Charge-offs, loan approval almost always requires resolving/paying these items. .
Regardless of whether a bad debt has been paid, once the date of last activity fades into the past (1 to 2 years) the debt does not affect your score nearly as much. Get ready for this—paying a collection account that is several years old will lower your credit score temporarily because the date of last activity has now become current and it is a bad debt! At least once it’s done, you should never have to deal with it again. So, you may actually want to defer paying old items until you’ve accomplished getting your home, then deal with them
After 7 years (10 for public records), debts are supposed be deemed old and drop off your report.
The problem is old bad debts left unresolved can come back to bite you. One collection agency may tire of trying to collect or realize the date of last activity is nearing seven years and “sell” the debt to another collection agency. They, in turn, create a new entry on your credit report and attempt to make an “old” debt appear “new”. It a trick, but it is very difficult to fight. For this reason, paying old bad debts is usually better than trying wait until seven years.
State laws exist that declare debts older than a certain age “uncollectable” so lenders are supposed to stop pursuing them. Once again, the problem is fighting the collection agencies is extremely difficult, if not impossible.
Now that we’ve covered how to clean up the issues from the past, let’s talk about creating new, good credit. The fastest, easiest way is called a “secured” credit card. You give the lender the requested small amount of money, say, three hundred dollars. They put it in a savings account with a freeze on it and issue you a Mastercard of Visa for the same amount. If you default, they keep your money. Because there is no risk the lenders will usually give this card to anyone. It’s the perfect way to rebuild credit.
Installment accounts such as car loans, etc, will build your credit, but more slowly.
Stay away from finance companies, if possible. If the name of the institution has the word finance at the end, they are a finance company, have higher interest rates and can actually make your credit score lower that dealing with banks. Department stores, likewise, will not help your credit sore as much as Mastercard, Visa, Discover, etc.
Also, American Express, has two types of cards—one that requires you to pay in full every month and one that allows you to run a balance like most cards. The first one will not improve your credit score, the second will.
Another way we’ve seen credit improve is by having a relative or spouse add you to their card as an authorized user. This makes the entire history of that card apply to your credit.
Now that we’ve examined credit at it relates to obtaining a mortgage, let do a quick review.
•Credit scores between from 620 and up are generally needed to get a mortgage loan, depending on the loan program.
•“Cleaning up” derogatory credit is important to keep your score from being lowered going forward. (With the possible exception of small, older accounts)
•Creating new, positive credit is the key to raising your credit score.
•Learn the terms listed above to be educated and protect your credit score in the future.
Credit and Credit Scores
What is a Credit Score? It is a three digit number between 400 and 900 where the higher the number is, the better your score or “grade”. Virtually all lenders now use scores to make lending decisions.
Unfortunately, your credit score will be different depending on what type of lender you seek. For example, if you go a car dealer, a credit card company, or a mortgage lender, each may receive a different score for you when they “pull” your credit.
To make it simple, just know that the score we mortgage lenders pull will be about 20 points lower than the score you get from most other sources (including the Credit Bureaus!).Many consumers think their credit score has dropped when we qualify them but, in fact, this issue is the only difference.
If you’re sure your credit is good or great and you just want to make it better, a few simple concepts are all you need to know:
•Paying Off Debts will raise your score (the most obvious of all)
•Obtaining or Keeping at least two Credit Cards is critical.
•Keeping the balance(s) on credit cards very low will raise your score
•Keeping credit cards active is important. (Use them at least once every 6 months)
•Do not use Finance Companies. If their name ends with “Finance” avoid them.
•Avoid Department Store Credit Cards if possible.
•Follow up with anyone that claims you owe them money. Keep records. Knowing you are right is not good enough, you need to be able to prove it.
Let’s devote the rest of this article to those whose credit is not good and want to improve to be able to buy a home:
Simply put: “paying off old “bad” debts will not raise your credit score, it will just keep it from going down in the future. Good management of current “good” debts will raise your credit score.”
Let’s start with some terminology:
•Credit Bureaus—these are the companies that store your credit history. There are three: Equifax, Transunion, and Experian
•try to recover the debt.
•Judgment—the lender has gone to court and the court rules against you. The court then reports to the Credit Bureaus.
•Garnishment—the local court has ordered your employer to withhold money from your paycheck to recover the debt.
•Lien—the court issues an order than ties up any real property you have from being sold transferred or borrowed against.
•Chapter 13 Bankruptcy—the court tells all creditors to stop contacting you, interest charges stop, and you pay the balance owed in regular installments over a period of time (years)
•Chapter 7 Bankruptcy—the court wipes out all previous debt except for federal debt (student loans, etc) and you start fresh.
•Chapter 11 Bankruptcy—a business bankruptcy
•Public Records—all the above court-related delinquent credit that is written on a separate section of your credit report and are generally more serious.
•Past Due Account—for our purposes here an account that is behind but that can be brought current.
•Collection Account—an account that has been placed on your credit report by collection agency and is permanently bad until it is paid.
•Charge Off—An account where the lender reporting to the credit bureaus has stopped trying to collect.
•Over 30—at least 31 days past the due date without proper payment
•Over 60—at least 61 days past the due date without proper payment
•Over 90—at least 91 days past the due date without proper payment
•Voluntary Repossession—a vehicle it returned to the lender and the person obligated on the loan signs paperwork
•Involuntary Repossession—a vehicle is taken by the lender and no paperwork is signed
•VA loan—a loan program available to active duty military or prior military requires zero down payment
•FHA loan—a loan program that is available to all consumers in most situations and requires only 3.5% down payment.
•Conventional loan—loan programs other than FHA and VA that requires minimum 5% down.
•Debt Ratio—a percentage of your proposed total debt versus your gross income. Reflects your ability to make the mortgage payment
So, let’s get to main question—what credit score does one need to get a mortgage loan?
•VA is minimum 620
•FHA is minimum 640
•Conventional is minimum 680, unless you put 20% down, then minimum 620.
These requirements are the same for most lenders across the industry. Some lenders require even higher scores. Be prepared for a very difficult, if not impossible, loan process if you are promised a loan and your score is below those stated above.
Having a credit score high enough allows you to proceed to the next step. It does not mean your loan will be approved. For example, In the case of a prior bankruptcy or foreclosure, you must not only have a credit score as stated above, but also must meet other requirements such as mandatory waiting periods. Also, your debt ratio is critical.
How can I raise my credit score and how long will it take?
Clearing up old, derogatory credit issues will not raise your credit score, it will just keep it from going down in the future. Good management of current, good debt is how you raise your score.
More specifically, you need at least one to two major credit cards. If you have other regular loans
Good debts are those accounts where on time payments going forward will report positive payment history to the credit bureaus. Examples are credit cards, car loans, mortgages, etc. If you get more than 30 days behind on a good debt, your score will decrease, however, the lender will usually allow you to catch up and as you pay on time again month after month, your score will increase. In most cases, your score will increase some just for bringing it current. If you get far enough behind, though, the lender will eventually change your status to a bad debt.
Bad debts are Collection Accounts, Charge-Offs, Judgments, Liens, or Foreclosures
When the lender on a good debt that has become delinquent reaches the point where they no longer want to keep your account, they will usually “sell” the debt to a collection agency resulting in a “collection account”. Once a debt becomes bad, the lender will generally not allow you to “catch up” and resume normal status. They will then insist you deal with the collection agency only. At this point the debt is derogatory permanently and will have a bad effect on your credit score. If it is paid soon after, it should stop having a negative impact. If it remains unpaid, the negative impact will fade slowly over time.
Largely unseen these days are “charge-offs”. This is where the lender just gives up trying to collect the debt. Collection agencies have become so prevalent that if the lender no longer wants to pursue collection they can just sell it to a collection agency, so there is no reason for the lender to give up completely.
Collection accounts or Charge-offs can also result from accounts that were never good credit references to begin with such as medical bills. They don’t appear on the credit report unless they are delinquent. This will usually result in only one derogatory reference.
Judgments and Liens are entered in a different place on the credit report called “public records”. They generally “hit” your score a little harder. Because they involve a creditor/taxing authority and the county record-keeping department, clearing them involves twice as much work. Unlike collection Accounts and Charge-offs, loan approval almost always requires resolving/paying these items. .
Regardless of whether a bad debt has been paid, once the date of last activity fades into the past (1 to 2 years) the debt does not affect your score nearly as much. Get ready for this—paying a collection account that is several years old will lower your credit score temporarily because the date of last activity has now become current and it is a bad debt! At least once it’s done, you should never have to deal with it again. So, you may actually want to defer paying old items until you’ve accomplished getting your home, then deal with them
After 7 years (10 for public records), debts are supposed be deemed old and drop off your report.
The problem is old bad debts left unresolved can come back to bite you. One collection agency may tire of trying to collect or realize the date of last activity is nearing seven years and “sell” the debt to another collection agency. They, in turn, create a new entry on your credit report and attempt to make an “old” debt appear “new”. It a trick, but it is very difficult to fight. For this reason, paying old bad debts is usually better than trying wait until seven years.
State laws exist that declare debts older than a certain age “uncollectable” so lenders are supposed to stop pursuing them. Once again, the problem is fighting the collection agencies is extremely difficult, if not impossible.
Now that we’ve covered how to clean up the issues from the past, let’s talk about creating new, good credit. The fastest, easiest way is called a “secured” credit card. You give the lender the requested small amount of money, say, three hundred dollars. They put it in a savings account with a freeze on it and issue you a Mastercard of Visa for the same amount. If you default, they keep your money. Because there is no risk the lenders will usually give this card to anyone. It’s the perfect way to rebuild credit.
Installment accounts such as car loans, etc, will build your credit, but more slowly.
Stay away from finance companies, if possible. If the name of the institution has the word finance at the end, they are a finance company, have higher interest rates and can actually make your credit score lower that dealing with banks. Department stores, likewise, will not help your credit sore as much as Mastercard, Visa, Discover, etc.
Also, American Express, has two types of cards—one that requires you to pay in full every month and one that allows you to run a balance like most cards. The first one will not improve your credit score, the second will.
Another way we’ve seen credit improve is by having a relative or spouse add you to their card as an authorized user. This makes the entire history of that card apply to your credit.
Now that we’ve examined credit at it relates to obtaining a mortgage, let do a quick review.
•Credit scores between from 620 and up are generally needed to get a mortgage loan, depending on the loan program.
•“Cleaning up” derogatory credit is important to keep your score from being lowered going forward. (With the possible exception of small, older accounts)
•Creating new, positive credit is the key to raising your credit score.
•Learn the terms listed above to be educated and protect your credit score in the future.
Saturday, March 26, 2011
New Mortgage Regulations Could Bruise Housing Market
New regulations limiting mortgage brokers' compensation go into effect on April 1, and they might prove to be appropriate for an April Fools' Day. Though aimed at unscrupulous mortgage brokers, it seems the regulations will instead hit the nation's struggling housing market.
The Federal Reserve Board says that its regulatory goal is to "protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices." The basic idea is to prevent loan officers from steering borrowers into riskier types of loans or a higher-than-average interest rate to make a higher commission."
http://www.dailyfinance.com/story/real-estate/new-mortgage-regulations-could-hurt-housing/19888351/
The Federal Reserve Board says that its regulatory goal is to "protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices." The basic idea is to prevent loan officers from steering borrowers into riskier types of loans or a higher-than-average interest rate to make a higher commission."
http://www.dailyfinance.com/story/real-estate/new-mortgage-regulations-could-hurt-housing/19888351/
Tuesday, March 22, 2011
Taxes & Your Home: Deducting Private Mortgage Insurance (PMI)
Sticking with the theme, here's an article by Miranda Marquit.
One of the tax deductions that many homeowners have been happy to take since 2007 has been the deduction for the premiums paid for Private Mortgage Insurance (PMI). The tax deduction was slated to expire at the end of 2010, but the tax package passed by Congress last December extended it through 2011. That means that you still have this year to claim PMI payments as a deduction on Schedule A of your Form 1040. (Yes, you have to itemize to take this deduction.)
What is PMI?
Private Mortgage Insurance is designed to protect lenders in the event that you default. You pay mortgage insurance premiums in order to help the lender recoup losses if you stop making payments. Most lenders require borrowers to purchase PMI if you don’t make a 20% down payment on the home.
PMI payments change each year, accounting for a percentage of the outstanding balance. The annual premium is usually 0.5% to 0.75% of the remaining balance. So, if you have a remaining balance of $150,000 on your home, your annual premium would be between $750 and $1,125 a year. That amount is usually divided by 12 and added to your monthly mortgage payment. When you reach the point where you have 20% equity in your home, you no longer have to keep making PMI payments.
Taking the PMI Tax Deduction
If you have been paying premiums, they are deductible on Schedule A when you itemize instead of taking the standard deduction. In order for your home to qualify, though, it has to have been bought after January 1, 2007. The PMI deduction only applies to mortgages made in the year 2007 and after. The mortgage also must be secured by your home.
If you are paying PMI on a mortgage not used for your home purchase, it must have been taken to “substantially improve” your home – so some home equity loans are eligible. The PMI deduction can also be used on one second home in addition to your primary residence.
Realize, though, that there are income limits to taking the PMI deduction. There are no dollar limits on the deductible amount, but if your adjusted gross income reaches a certain level, you cannot take the deduction. For every $1,000 of your adjusted gross income above $100,000, you have to reduce your deduction by 10%. Once your adjusted gross income reaches $109,000, you are no longer eligible for the deduction. This is another deduction aimed at helping middle class homeowners.
So, if you paid PMI in 2010, you can deduct it on your tax return this year, if you itemize. Additionally, what you pay in tax year 2011 can be deducted on next year’s tax return. However, after the end of 2011, you will no longer be able to deduct your PMI payments – unless the deduction is extended again. Be sure to consult with a tax professional before taking any credit or deduction on your tax return. You want to make sure that you are eligible for any tax breaks that you take.
Here's a direct link to the story.
http://blog.lendingtree.com/blog/2011/03/22/pmi-deductio/
One of the tax deductions that many homeowners have been happy to take since 2007 has been the deduction for the premiums paid for Private Mortgage Insurance (PMI). The tax deduction was slated to expire at the end of 2010, but the tax package passed by Congress last December extended it through 2011. That means that you still have this year to claim PMI payments as a deduction on Schedule A of your Form 1040. (Yes, you have to itemize to take this deduction.)
What is PMI?
Private Mortgage Insurance is designed to protect lenders in the event that you default. You pay mortgage insurance premiums in order to help the lender recoup losses if you stop making payments. Most lenders require borrowers to purchase PMI if you don’t make a 20% down payment on the home.
PMI payments change each year, accounting for a percentage of the outstanding balance. The annual premium is usually 0.5% to 0.75% of the remaining balance. So, if you have a remaining balance of $150,000 on your home, your annual premium would be between $750 and $1,125 a year. That amount is usually divided by 12 and added to your monthly mortgage payment. When you reach the point where you have 20% equity in your home, you no longer have to keep making PMI payments.
Taking the PMI Tax Deduction
If you have been paying premiums, they are deductible on Schedule A when you itemize instead of taking the standard deduction. In order for your home to qualify, though, it has to have been bought after January 1, 2007. The PMI deduction only applies to mortgages made in the year 2007 and after. The mortgage also must be secured by your home.
If you are paying PMI on a mortgage not used for your home purchase, it must have been taken to “substantially improve” your home – so some home equity loans are eligible. The PMI deduction can also be used on one second home in addition to your primary residence.
Realize, though, that there are income limits to taking the PMI deduction. There are no dollar limits on the deductible amount, but if your adjusted gross income reaches a certain level, you cannot take the deduction. For every $1,000 of your adjusted gross income above $100,000, you have to reduce your deduction by 10%. Once your adjusted gross income reaches $109,000, you are no longer eligible for the deduction. This is another deduction aimed at helping middle class homeowners.
So, if you paid PMI in 2010, you can deduct it on your tax return this year, if you itemize. Additionally, what you pay in tax year 2011 can be deducted on next year’s tax return. However, after the end of 2011, you will no longer be able to deduct your PMI payments – unless the deduction is extended again. Be sure to consult with a tax professional before taking any credit or deduction on your tax return. You want to make sure that you are eligible for any tax breaks that you take.
Here's a direct link to the story.
http://blog.lendingtree.com/blog/2011/03/22/pmi-deductio/
Will your home or mortgage hurt you at tax time?
http://blog.hsh.com/index.php/2011/03/will-your-home-or-mortgage-hurt-you-at-tax-time/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+hsh+%28blog.hsh.com%29&utm_content=Twitter
Most of us know that a portion of the interest paid on a mortgage is tax deductable — it’s one of this country’s shining examples of pro-homeownership policies.
But can or should every homeowner deduct their mortgage interest at tax time?
What if you sold your home last year, how does that sale affect your 2010 taxes?
How does a loan modification, foreclosure or refinance impact your upcoming tax bill?
HSH.com has put together an article that answers 10 common questions as they relate to homeowners during tax season. Time is running out to file your taxes, so be sure you’re aware of how your home and mortgage factor into what you owe by April 18.
Let’s take a look at some common 2010 tax questions and answers:
1. How much of my mortgage payment is tax deductible?
On a Schedule A, you can deduct the following:
•Interest on debt used to buy, build or improve your primary or second home (called acquisition debt), as long as mortgages totaled $1 million or less ($500,000 if single or married filing separately).
•Mortgage insurance (or funding fees for government loans) for loans taken after 2006 as long as your adjusted gross income does not exceed $109,000 for a married couple (half that for singles and those married filing separately).
•Property taxes on first and second homes. Starting in 2010, however, you must itemize your deductions to get this tax break.
2. I sold my home this year. Will I owe capital gains tax?
As long as the property was your principal residence for at least two of the last five years, you can exclude $250,000 of your profit ($500,000 for married couples) from your taxable income. If you profited less than the $250,000/$500,000 threshold, no extra form is required. You can do this as often as every two years.
For those with profits that cannot be excluded, you’ll report your gain on a Schedule D, Capital Gains and Losses. There are special rules for vacation homes. You may be able to exclude some or all of your gain.
3. I bought or refinanced a home this year. Are my closing costs tax deductible?
You can claim a deduction for real estate taxes you paid as part of your mortgage closing costs. The same goes for prepaid interest. It will be included on the 1098 form your lender sends you. What about points? The IRS has a flowchart that you can use to see when points are and are not deductible. In general, you must have paid points to build, buy or improve your primary residence in order to deduct the entire amount in the year they were paid. Otherwise they may still be deducted but on a prorated basis.
4. Does a mortgage modification affect my taxes?
If you modify your mortgage, one consequence might be that you pay so much less interest that you will save more by choosing the standard deduction rather than itemizing. Don’t just assume that itemizing is always best because you did it in the past.
5. Does a mortgage foreclosure affect my taxes?
The Mortgage Forgiveness Debt Relief Act of 2007 generally allows you to exclude income from the discharge of debt on your primary residence. However, this law does not cover investment properties and vacation homes, nor does it apply to forgiven home equity loans. You could end up paying income tax on this canceled debt. In addition, states’ rules for the treatment of forgiven mortgage debt vary, so check with a tax professional.
Be sure to read all “10 critical questions for homeowners at tax time.” (This article was written by HSH.com’s Gina Pogol.)
Most of us know that a portion of the interest paid on a mortgage is tax deductable — it’s one of this country’s shining examples of pro-homeownership policies.
But can or should every homeowner deduct their mortgage interest at tax time?
What if you sold your home last year, how does that sale affect your 2010 taxes?
How does a loan modification, foreclosure or refinance impact your upcoming tax bill?
HSH.com has put together an article that answers 10 common questions as they relate to homeowners during tax season. Time is running out to file your taxes, so be sure you’re aware of how your home and mortgage factor into what you owe by April 18.
Let’s take a look at some common 2010 tax questions and answers:
1. How much of my mortgage payment is tax deductible?
On a Schedule A, you can deduct the following:
•Interest on debt used to buy, build or improve your primary or second home (called acquisition debt), as long as mortgages totaled $1 million or less ($500,000 if single or married filing separately).
•Mortgage insurance (or funding fees for government loans) for loans taken after 2006 as long as your adjusted gross income does not exceed $109,000 for a married couple (half that for singles and those married filing separately).
•Property taxes on first and second homes. Starting in 2010, however, you must itemize your deductions to get this tax break.
2. I sold my home this year. Will I owe capital gains tax?
As long as the property was your principal residence for at least two of the last five years, you can exclude $250,000 of your profit ($500,000 for married couples) from your taxable income. If you profited less than the $250,000/$500,000 threshold, no extra form is required. You can do this as often as every two years.
For those with profits that cannot be excluded, you’ll report your gain on a Schedule D, Capital Gains and Losses. There are special rules for vacation homes. You may be able to exclude some or all of your gain.
3. I bought or refinanced a home this year. Are my closing costs tax deductible?
You can claim a deduction for real estate taxes you paid as part of your mortgage closing costs. The same goes for prepaid interest. It will be included on the 1098 form your lender sends you. What about points? The IRS has a flowchart that you can use to see when points are and are not deductible. In general, you must have paid points to build, buy or improve your primary residence in order to deduct the entire amount in the year they were paid. Otherwise they may still be deducted but on a prorated basis.
4. Does a mortgage modification affect my taxes?
If you modify your mortgage, one consequence might be that you pay so much less interest that you will save more by choosing the standard deduction rather than itemizing. Don’t just assume that itemizing is always best because you did it in the past.
5. Does a mortgage foreclosure affect my taxes?
The Mortgage Forgiveness Debt Relief Act of 2007 generally allows you to exclude income from the discharge of debt on your primary residence. However, this law does not cover investment properties and vacation homes, nor does it apply to forgiven home equity loans. You could end up paying income tax on this canceled debt. In addition, states’ rules for the treatment of forgiven mortgage debt vary, so check with a tax professional.
Be sure to read all “10 critical questions for homeowners at tax time.” (This article was written by HSH.com’s Gina Pogol.)
Sunday, March 20, 2011
"Point Banks" will not be allowed with new Fed Rule.
A mortgage industry proposal to create "point banks" that loan officers can tap to grant price concessions to borrowers will not be allowed by Federal Reserve Board staff. The days of the loan officer paying for a closing cost item at the closing tabel to save a deal are over.
The Fed's loan officer compensation rule does not allow loan officers to lower their commission to cover a concession – which led to an industry proposal to take 10 basis points from every loan transaction, put that cash in a "point bank" or use overages to offer borrowers a better deal.
The Federal Reserve staff concluded that overages are tied to the terms and conditions of the loans, which would violate its new compensation rule, which goes into effect April 1.
Taking 10 bps from every loan transaction amounts to spending the loan officer's previously earned compensation. That would violate the rule because the LO is bearing the cost of the price concession, according to Fed senior attorney Paul Mondor. "We have yet to hear a variation on the theme of point banks that we think really can succeed under this rule," Mondor said during Thursday's Fed webinar on LO comp.
This interpretation also makes it difficult for managers to penalize LOs for mistakes and errors. The Fed has ruled that mortgage companies cannot dock a loan officer's compensation if they incorrectly calculate closing costs and exceed the tolerances of the RESPA good faith estimate.
If RESPA "forces you" to lower the closing costs to the consumer – that's a pricing concession to the consumer, Mondor said. "A loan officer or originator cannot be made to bear that cost," he added.
The Fed's loan officer compensation rule does not allow loan officers to lower their commission to cover a concession – which led to an industry proposal to take 10 basis points from every loan transaction, put that cash in a "point bank" or use overages to offer borrowers a better deal.
The Federal Reserve staff concluded that overages are tied to the terms and conditions of the loans, which would violate its new compensation rule, which goes into effect April 1.
Taking 10 bps from every loan transaction amounts to spending the loan officer's previously earned compensation. That would violate the rule because the LO is bearing the cost of the price concession, according to Fed senior attorney Paul Mondor. "We have yet to hear a variation on the theme of point banks that we think really can succeed under this rule," Mondor said during Thursday's Fed webinar on LO comp.
This interpretation also makes it difficult for managers to penalize LOs for mistakes and errors. The Fed has ruled that mortgage companies cannot dock a loan officer's compensation if they incorrectly calculate closing costs and exceed the tolerances of the RESPA good faith estimate.
If RESPA "forces you" to lower the closing costs to the consumer – that's a pricing concession to the consumer, Mondor said. "A loan officer or originator cannot be made to bear that cost," he added.
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