Lynn's Blog

How the FHA Mortgage Works For You

Lynn Caldwell, ABR, ASP, ePRO (Sine & Monaghan GMAC) — Wed, 07 Jan 2009 14:57:03 -0600

FHA Mortgage, How it Works

The FHA does not lend the money; it simply insures that the total mortgage will be paid to the lender if the buyer defaults. It is always the decision of the private lender (a bank, credit union, or savings and loan) to decide whether or not they will lend the money. The FHA mortgage program tends to be more forgiving than conventional mortgages in terms of past credit history. A bankruptcy discharged as little as two years ago may not hinder a homebuyer from qualifying for the FHA program.

Typically, FHA mortgages do not require more than a 3.5% percent down payment. Unlike traditional loans, this money may also be a gift to the homebuyer and does not need to be secured as the homebuyer's own money. Often, there are "points" associated with FHA mortgages that are usually worth about 1 percent of the total mortgage value. These points are paid to lenders to help lower the interest rate of the mortgage. Borrowers will also have to pay PMI (private mortgage insurance) on the mortgage. PMI is used to ensure that the total amount of the mortgage will be paid to the lender if the buyer defaults. Usually, a PMI will not be put into effect until 20 percent of the mortgage has been paid.

FHA mortgages have no mortgage value cap. In other words, you can take out a FHA mortgage for $150,000 - $300,000 without any restrictions, other than credit applicability. Closing costs on FHA (or conventional loans 3.5 % percent of the total mortgage amount and are the responsibility of the buyer. However, FHA closing costs can be financed into the total amount of the mortgage and paid off accordingly.

Qualifying For a FHA Mortgage

To be approved for a FHA mortgage, you must have a satisfactory credit history, which shows your commitment to paying off debts in a timely manner. Also, you must be able to prove that the total monthly mortgage payment will be less than 29 percent of your monthly income. The number arrived at after multiplying your total monthly income by 29 percent is referred to as PITI, or principle, interest, property taxes, and insurance. The PITI amount is the highest amount that your monthly mortgage payments may be. Furthermore, long-term debt, such as car loans and credit card balances, in addition to the monthly PITI amount cannot be more than 41 percent of your total monthly income. While these qualifications may seem a little stringent, they are actually more lenient than traditional mortgage qualifications. The decreased down payment makes this type of mortgage even more desirable for many people.

Short Sales vs. Foreclosure

Lynn Caldwell, ABR, ASP, ePRO (Sine & Monaghan GMAC) — Wed, 07 Jan 2009 14:44:24 -0600

Short Sales vs. Foreclosure

Many Sellers have come to me asking my questions about short sales. Here are a few things you need to know to help educate you on this process in case you or someone you know is starting to fall into financial hardship.

What is a Short Sale?

A Short Sale is a real estate transaction in which the debt owing on a property exceeds its actual market value.

What is a Foreclosure?

A Foreclosure occurs when a homeowner fails to make timely mortgage payments and the lender exercises the right to force a "Sherriff's Sale" to satisfy the debt.

When Should I consider a Short Sale?

Evaluate your current financial situation to determine if you can afford your monthly mortgage payment. Once you realize you no longer can afford it, contact your mortgage lender immediately. Don't wait until it's too late and the foreclosure process has already begun.

Why would my Lender agree to a Short Sale?

Lenders do not want to foreclose on anyone if possible. It's a lose, lose situation for both parties. A short sale often has a better return on investment to the lender and allows the lender to collect and cash-out earlier than they would in a foreclosure situation. Foreclosures are also much more expensive to the lender long term.

What is Loss Mitigation?

It is the department within your lender and the process that they use to help you avoid foreclosure,

How does a Short Sale affect my Credit Score opposed to Foreclosure?

A foreclosure can stay on your credit report for up to 10 years and can lower your credit score by 100 points or more. Your credit score is used by credit card companies, auto lenders, insurance companies and many others to determine the rates you will be required to pay. A short sale may not damage your credit score if the lender accepts the offer and does not report negative credit behavior. Typically, any payments missed leading up to a short sale remain on a credit report for 7 years. So be sure to keep your payments up during the process.

Will I receive a 1099 from the lender after the sale?

The Mortgage Forgiveness Act of 2007, passed by President Bush forgives the loss and eliminates the 1099 tax penalty on short sales. The IRS Publication 908 also addresses this issue. In some cases, where the seller is insolvent (incapable of meeting one's current debts), the 1099 penalty can be avoided all together. Contact your accountant for more information

What if my house does not sell during the Short Sale Process?

Another alternative to foreclosures is called Deed in-lieu. Deed in-lieu of foreclosure is to voluntarily give the property back to the lender to prevent the lender from bringing foreclosure proceedings. Although this is more damaging to your credit than a short sale, it is still better than a foreclosure.

If you feel that you may be falling into financial hardship just remember two things. You are not alone and there is help. Please call me so that we can get your home listed and sold before it is too late for you.

Capital Gains and Real Estate

Lynn Caldwell, ABR, ASP, ePRO (Sine & Monaghan GMAC) — Wed, 07 Jan 2009 14:40:12 -0600

Capital Gains and Real Estate

When you sell a stock, you owe taxes on your gain-the difference between what you paid for the stock and what you sold it for. The same is true with selling a home

(or a second home), but there are some special considerations.

How to Calculate Gain

In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate this:

1. Take the purchase price of the home: This is the sale price, not the amount of money you actually contributed at closing.

2. Add adjustments:

Ø Cost of the purchase-including transfer fees, attorney fees, inspections, but not points you paid on your mortgage.

Ø Cost of sale-including inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.

Ø Cost of improvements-including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.

3. The total of this is the adjusted cost basis of your home.

4. Subtract this adjusted cost basis from the amount you sell your home for. This is your capital gain.

A Special Real Estate Exemption for Capital Gains:

Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria

Ø You have lived in the home as your principal residence for two out of the last five years.

Ø You have not sold or exchanged another home during the two years preceding the sale.

Also note that as of 2003, you also may qualify for this exemption if you meet what the IRS calls "unforeseen circumstances," such as job loss, divorce, or family medical emergency.