Can You Afford to Buy a House?
Friday, October 31, 2003
Credit Score Can Limit Traditional Investor Financing
by M. Anthony Carr
Question: I recently acquired a rental home in addition to my primary residence. I am now in the middle of acquiring another rental. I noticed my Experian score dropped 13 points when the real estate debt showed up on my credit report. Even though the rental generates income, my score takes a hit. How do the lenders view this? Do they consider a healthy bureau report (no negative info) with a point drop due to real estate acquisition as a positive or negative?
Answer: Your credit score is a fluid number. It's not like a grade given to you at graduation that follows you the rest of your life. Today, your score could be 750. Next year it could edge up to 760 and later turn down to 695. There are variables that determine your score on any given day depending on what's happening in your credit life at the moment.
Experian's Web site explains: "Scores used by individual lenders may use such elements as income, occupation and type of residence in determining their own custom credit score." As your debt level increases and decreases, you will experience fluctuations in your score, as well. However, debt level is only one of the factors that determine your score.
As an investor, trying to acquire property after property will eventually beat up on your score if you're not careful. This is why you'll see a lot of investor courses out there talking about zero down, owner financing.
The reason an owner may be interested in financing the sale of a property is two fold: a) he or she will benefit from all the equity that has built up on the house over the years; and b) now that equity is turned into a note and they are receiving a guaranteed interest return.
Just to digress a moment, let's look at a sample of such a scenario. If an investor purchased a property for $50,000 and 15 years later it sells for $150,000, that's a 200 percent gain on the value of the property. The property has already created a lot of cash flow over the years through rental payments, but now he sells and holds the loan for $150,000 (if it's zero-down financing). With a no-downpayment option, the investor is obviously going to charge a higher interest rate than what the traditional money market demands -- say 2 percentage points more.
A $150,000 mortgage at 8 percent today will result in a mortgage payment of $1,100.65. If the investor had originally financed the property 15 years earlier at 6 percent, his payment on $50,000 would have been $299.78 -- a spread of $801.87 per month if he holds onto the old note -- that's more than $9,000 per year in income from the property.
The investor holding the note now has a couple options -- hold onto the note for a passive cash flow over the next several years or sell it at a discount and take his cash and run.
This is obviously not traditional financing. When an investor goes through traditional channels to obtain financing for purchases, those banks and lenders are going to report the investor's debt load to the credit reporting agencies. As your debt load increases, it will affect your credit score -- even if the properties being held are creating a cash flow. You may have a cash flow, but the reality still remains that the house maintains a mortgage from Bank A or B. Those mortgage amounts will affect your credit score.
When you use owner financing, as described above, most likely a private owner is not going to report to anyone, except maybe the courthouse, that you have a loan from them. It's a personal deal between the investor and the note holder who is probably an investor just like the purchaser. Technically, an investor could hold millions of dollars in mortgages on investor properties from personal note holders and it never show up on his credit report. It just depends on whether the notes are recorded with the agencies. At settlement, the attorneys or escrow agents will report any income from the transaction to the IRS.
Most investors are at least going to record the note at the courthouse to protect their interests and give them the legal hold on the property needed to foreclose if the new owner defaults.
As far as your cash flow is concerned, this will be looked on as income, but the loan officer may also write in a vacancy factor. Most likely, you will experience periods of vacancy and the loan officer will compensate for that against the cash flow.
Published: October 31, 2003
Tuesday, October 28, 2003
How to Stay on Top of Mortgage Payments During a Short-Term Financial Crisis
by Michele Dawson
With a job loss, divorce, illness, or death or illness of a spouse, you may have a difficult time making your mortgage payment. But don't despair - there are steps you can take to stay on top of your bills and avoid losing your home during this transition period.
One of the most important things you can do is take immediate action, according to the U.S. Department of Housing and Urban Development. First, examine how much money is coming in and how much you owe for your various bills. Eliminate unnecessary spending.
Then, take the following steps:
Contact your lender as soon as possible. Don't let embarrassment stop you from notifying your lender about your financial situation. HUD says most lenders want to help borrowers keep their homes. Foreclosure is expensive for all parties involved. Lenders have workout options to help you keep your home. But lenders are most accommodating when you are just one or two payments behind. The farther behind you get, the fewer options exist. Most lenders will help you explore your options.
Don't ignore mail from your lender. If you haven't contacted your lender and you start receiving letters when you're behind in making your payments, you need to respond when they contact you. If they don't hear from you, they will take legal action.
Talk to a housing counselor. If you don't want to contact your lender right away, call a HUD-approved housing counselor. He or she will help you assess your financial situation, review your options, and - most importantly - help you negotiate with your lender. Counselors are familiar with the work-out arrangements for various lenders.
Prioritize your debts. Under new budget constraints, you'll need to focus on food, utilities, and shelter. If you don't pay your debts, chances are your credit will be negatively impacted. Any money you have after paying for food and utilities should go toward your mortgage payment. In addition to contacting a housing counselor, you may want to contact a non-profit consumer credit counseling agency. A credit counselor can often reduce your monthly bills by negotiating lowered payments or long-term payment plans with your creditors. Most of these agencies provide their services free of charge. Be leery of an agency that requires a large fee or donation.
Keep your credit as clean as possible. Resist the urge to pay with plastic - you don't want to fall behind on additional debts and ultimately mar your credit report. This is especially important if you're trying to find a new job. Many employers check candidates' credit reports. It will also affect you if and when you buy or rent again.
Explore loan workout solutions. If at all possible, stay on top of your mortgage payments. If you are unable to do so, contact your lender to help you find a program.
Once you have contacted your lender and if it appears your financial situation is only temporary, you may be offered one of the following options:
Reinstatement. This means your lender may accept the total amount owned on your mortgage by a specified date.
Forbearance. This is often used in tandem with reinstatement. Your lender may allow you to arrange for a reduction or suspension of payments for a specified period if there is another option in the works in which your loan will be paid off. This is a good option if you know you will have a chunk of money coming to you - perhaps a hiring bonus if you will be starting a new job, investment distribution or sale, or insurance settlement or reimbursement.
Repayment plan. You may be able to renegotiate your payment plan, paying your regular payment plus an amount to bring you up to date on your past due payments.
Just remember, the worst thing you can do is ignore the situation and hope it will go away. The only way it will get better until you get back on your feet financially is through the services of a housing counselor, a lender workout program, or credit counseling - if not all three.
Published: April 23, 2002
For Tax Purposes, What is the Best Time To Buy My House?
For Tax Purposes, What Is The Best Time To Buy My House?
by Sandy Gadow
Knowing when to close your real estate purchase can work to your advantage at tax time. You may want to consider postponing your December closing until January of next year, if it will benefit you on your tax return. You would make this determination in several ways.
First, you need to review your tax liabilities for the current tax year with your tax accountant or tax preparer and see if taking additional deductions in the current or future year would be most beneficial to you. Next, you will need to understand which items in your closing will be tax-deductible and which items will added to the value of the property. Keep in mind that if you close on December 31 rather than on January 2 (or the first business day after the New Year), you will be permitted to take the allowable deductions for your home purchase in the year purchased, even if your closing occurs on the last day of the year. If you want to increase your deductions for the coming year, then you may want to choose to close in January. The normal allowable home purchase deductions will be the points, interest, and property taxes which you pay.
If you will be obtaining a mortgage on the property and will be paying points, this expense will be an allowable tax deduction. A "point" is the fee which represents 1% of your loan amount and may be charged by your lender or mortgage broker. The number of points you pay may vary from lender to lender. Points are referred to as a "nonrecurring closing cost," and are fully deductible in the year paid. You should be aware that points on a refinance loan are not deductible in the year paid, but rather must be amortized and deducted over the life of the loan. There are certain other exceptions, such as the loan must be secured by your main home, but generally, the points will be allowed as a deduction in the year paid.
Prepaid and prorated interest is also deductible in the year paid and refers to the interest you are charged from the date of your closing to the beginning of the period covered by your first mortgage payment. As a reminder, keep in mind that mortgage interest and principal payments are paid in arrears. For example, if your closing takes place on December 10th, your first monthly payment would begin to accrue on January 1st and would be payable the beginning of February. You probably would be required to prepay the interest form December 10th through the end of December. If your closing occurs later in the month, you would pay less at the closing than if you had closed the first of the month. The amount of prorated interest you will be required to pay may be something for you to consider when choosing a closing date. Your lender will send you a 1099 form at the end of the year which will list the interest paid for the year. Be certain that it includes the prorated interest which you paid at closing.
Any prorated property taxes will also be an allowable expense item. The property taxes on the new property which you are purchasing will be prorated at closing and your portion will be allowed to be deducted as an expense for income tax purposes. Your escrow officer will calculate the tax prorations by dividing the taxes between you and the seller, based on the due date for the property taxes in your state. If the seller has paid the property taxes beyond the date of closing, the seller will be credited for this expense. If the taxes have not yet been paid, the amount owed will be charged to you and added to your closing costs. Your lender may require that the taxes be paid in full at closing, or they may be certain that they collect enough to cover the taxes until the next pay period. Any delinquent taxes which were due and which you may have agreed to pay, would not be a deductible expense. You would need to treat any delinquent taxes which you pay as part of the cost of your home. Keep in mind that some special government fees, such as water or sewer assessments, may not be deductible. Check with your accountant or refer to the IRS Publication #530 for which law applies to your circumstances.
You will want to assess your tax liability for the current and future year, to determine if it is in your best interest to close in 2000 or 2001. Keep in mind that once you purchase your property, you may want to choose to itemize your deductions on your tax return, if you have been taking the standard deduction previously. If your itemized deductions, which includes your mortgage interest and property taxes, do not exceed the standard deductions, you may be better off taking the standard deduction. Each individual has unique tax circumstances and your tax accountant or preparer will know what is best for you.
If you do decide to close on the last week of the month, be aware that this week is typically the busiest time for title and escrow companies. Be sure to schedule your closing well in advance of your closing day and notify your attorney, lender, seller, escrow officer and any other participants in the closing of the closing date which you choose. If you would like to investigate further which items will be tax deductible and which items will be added to the cost of your home, you may refer to IRS Publication #530, “What You Can and Cannot Deduct” located on the internet at http://www.irs.gov/prod/forms_pubs/pubs/p53001.htm or you can download the brochure at: http://ftp.fedworld.gov/pub/irs-pdf/p530.pdf.
Published: December 1, 2000
Tuesday, October 14, 2003
Can You Afford to Buy a House?
By Sara Herring
While the thought of paying a mortgage is more enticing than paying rent, it's important to understand all the costs involved in buying and owning a home as you determine whether you can afford to join the ranks of homeowners.
Potential buyers sometimes forget to factor in the down payment and homeowners insurance, as well as the costs associated with closing the transaction, moving, purchasing major appliances, and home, landscape and pool maintenance, not to mention furnishings and design accessories once you move in.
To determine whether you can afford to buy a home, you should do the following:
1. Determine the property value of homes that interest you. The property value (what the home is worth) is determined by comparing the prices of homes recently sold of similar size in the same neighborhood. Your real estate agent will be able to provide this information to you.
2. Review different mortgage loan types and compare their required down payment amounts to the money you have available. Down payments, based on a percentage of the value of the property and determined by the type of mortgage you select, typically range from three to 20 percent of the property value. Don't forget to factor in private mortgage insurance, a policy that allows mortgage lenders to recover part of their financial losses if a borrower fails to fully re-pay a loan. Mortgage insurance makes it possible to buy a home with as little as zero down. Usually, the lower the down payment, the higher the PMI, which typically will cost somewhere between $40 and $125 a month.
3. Get an estimate of your closing costs, including points (the dollar amount paid to a lender for obtaining a lower interest rate on a loan - one point is one percent of the loan amount), taxes, recording, inspections, prepaid loan interest, title insurance (a policy that insures a home buyer against errors in the title search, and financing costs from your mortgage broker. These will generally add up to between 2 and 7 percent of the property value. You'll receive an estimate of these costs from your mortgage broker after you apply for a mortgage.
4. Add the down payment requirements and the closing costs together to determine the amount of money you'll need right off the bat. But you're not done yet.
5. Think about the actual move. Will you hire a moving company or rent a truck? Either way will cost you. The more stuff you have, the more it will cost.
6. Property taxes. Many lenders will require an impound account in which monthly payments for property tax and hazard insurance are paid together with the monthly mortgage payment. You can figure your average annual tax rate will be about 1.5 percent of the purchase price of your home. This should be included in your Good Faith Estimate from your mortgage company.
Once you crunch the numbers and find you come up a bit short, investigate ways to reduce or creatively fund your down payment - it can come from a variety of sources. Check with your mortgage broker to find out what's available.
In your final analysis of whether you can afford to buy a home, you'll want to weigh the costs with the financial benefits - a consistent mortgage payment (unlike rent, which can increase), the tax benefits (you can deduct, in most cases, mortgage interest, closing costs, and property taxes), and the all-important appreciation factor -- the rate of increase in a home's value. And of course, you'll want to weigh perhaps the biggest benefit of all - having a place to call your own.
BRITTON MORTGAGE COMPANY
Sara Herring
8359 Beacon Boulevard, Suite 416
Fort Myers, Florida 33907
(239)229-9943 cell
