Tim 's Blog

Escrow - Dotting I's and Crossing T's www.TimMouton.com

Tim Mouton (Keller Williams - Stuidio City, CA) — Tue, 13 Feb 2007 03:02:38 -0600

Another Interesting Article that You May Want To Read!

Getting Through Escrow Unscathed
by Broderick Perkinshttp://realtytimes.com/rtcpages/20051107_escrow.htm

The key to getting through escrow includes making time for the arduous task of reading reams of documents to make sure the dotted "Is" and crossed "Ts" are indeed dotted and crossed and to be certain you aren't signing anything you don't want to sign.

If there are any loan, sales contract, property transfer or related documents you don't understand -- or you just don't want to bother with the task -- you should seek the help of your real estate agent or other professional familiar with the escrow process and its documents to assist you go over every word.

You should not sign escrow papers until you understand what responsibilities they trigger for you and, bottom line, what the transaction truly costs.

"In this fast-paced real estate market, the escrow process is an integral part of the real estate transaction equation for consumers and real estate professionals. Because buying a home will likely be the largest financial transaction most people will make in their lives, escrow can feel intimidating. Being prepared and informed goes a long way toward making home ownership dreams come true," advises the California Escrow Association (CEA).

However, as important as the documents are, there are peripheral matters that also need your rapt attention.

Here's why.

Escrow is a process that provides for a fair and equitable transfer of real estate property from one person to another.

The process assures that the lender releases the home purchase funds at or about the same time the deed is recorded to reflect new ownership. To facilitate that goal, escrow provides the means for depositing, with a neutral third party, funds, documents and instructions necessary to complete the transfer.

Because the real estate transaction involves large sums of money and reams of documentation, escrow is not always a predestined, step-by-step process, but can become a confusing end game of details, nit picking and overlapping procedures.

Requiring special preparation, attention to detail, and desire from both sides to close the deal, escrow is perhaps the most complicated part of what's likely the most emotionally trying and intricate transaction you'll ever complete.

In addition to a host of other escrow information, the CEA offers these Top Five Tips To A Smooth Closing to help see you through close of escrow -- with your sanity intact.

Work with a certified escrow professional who works for an escrow, title company legal firm or other entity which typically is licensed by the state to conduct the escrow proceedings. Shop around for the best rate, but also choose a professional based on referrals from family, friends, co-workers or others you trust who have also recently closed escrow with satisfaction.
Do your part. Come clean, be honest, avoid potential problems. If you are a buyer with uncertain credit, let your mortgage broker or lender know ahead of time. They are qualified to assist you in getting your credit rating into shape. Sellers should let escrow officers know in advance about potential hurdles, such as any known judgments or liens or other encumbrances against the property.
Be available while escrow is open. Don't unwittingly cause delays. To ensure a smooth escrow close, much cooperation and communication is necessary. Give transaction parties as many was as possible to contact you -- home and work phones, cell phones, email, pagers, etc. Always be responsive and timely regarding requests of the professionals assisting you. Don't go on vacation while in escrow, and if possible avoid taking on time-consuming tasks other than those associated with your normal job or day work. Don't otherwise get tied up and out of reach for long periods during escrow. Other parties involved in the transaction my need to reach you quickly.
Get the property insured. The changing face of home owners insurance means some properties require special coverage, not always available from your friendly neighborhood insurance agent. Other properties may have had claims filed that makes a new policy difficult if not impossible to obtain. Older homes, homes in disaster prone areas, and homes with unpermitted work, as well as those with repeated water or moisture-related claims could cause problems and delay escrow. You should have home owners insurance coverage secured when you open escrow and it should be ready to take affect the day you close.
Take a good look around the property you are buying. Complete all walk-through inspections such as home inspections, swimming pool/spa inspections, roof inspection, and those for termites, dry rot, and other wood-destroying fungi, prior to the escrow close. Hire professionals to do the work. Unless you are a general contractor, architect, or other expert familiar with a home's structure and its systems, let a pro give it the final once over.

As usual, Please give me a call or email me: 1-818-762-5987 or TimMouton@kw.com www.TimMouton.com or from a risk insurance point of view tmouton@shoptermquotes.com or www.ShopTermQuotes.com

Easy Explanation of Foreclosures and Short Sales

Tim Mouton (Keller Williams - Stuidio City, CA) — Tue, 13 Feb 2007 02:53:32 -0600

I found this article to be of particular interest in a very astute presentation of what foreclosures and Short Sales are all about, I hope you enjoy it. Please contact me at TimMouton@kw.com or www.TimMouton.com or for a financial and insurance prospective to your real estate transaction tmouton@shoptermquotes.com or www.ShopTermQuotes.com

FORECLOSURE/SHORT SALE BROCHURE

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

There are two types of foreclosure in California: Trustee's Sale, and Judicial Foreclosure.

Formerly, JUDICIAL FORECLOSURE was rare but now is increasing in use as property values have dropped. Judicial foreclosure has many disadvantages to the lender. It is not an expedited process (as is the Trustee's Sale), but involves court proceedings, orders, appraisals, and an auction. It takes much longer and costs much more than a Trustee's Sale.

The real difficulty with Judicial Foreclosure is that it allows the Borrower a 1 year "right of redemption" in which he is allowed to buy the property back from the successful bidder. This makes purchases of such property more uncertain and tends to lower the bidding.

The advantage to the lender of Judicial Foreclosure is that a deficiency judgement against the Borrower is allowed. [See exception below for personal residence.] The auction proceeds are used to reduce the debt (including penalties, attorneys' fees, and costs); judgement is entered against the Borrower for the balance.

Whether the deficiency judgment is collectable is another problem for the lender.

A TRUSTEE'S SALE is the easy method of foreclosure. It's fast and inexpensive. However, NO DEFICIENCY JUDGEMENT IS ALLOWED.

In a Deed of Trust the borrower (Trustor) gives the Trustee (typically a title company) the right to sell the property if the Buyer defaults.

The first step is a Notice of Default. It states the amount in default. 90 days is given to cure the default by catching up on all late payments, penalties, and costs.

After the 90 days expires, the lender files a 21 day Notice of Trustee's Sale, at which time an auction is held, usually at Court, with limited publicity resulting in a greatly depressed price. After it is over, the former owner must be evicted if he refuses to leave.

The Borrower can still catch up on all late payments until 5 business days prior to the sale. Within the last 5 days, the only way to stop a sale is by payment in full of the entire balance.

Most lenders prefer NOT to foreclose. Banks are in the money business, not the real estate business. They try to avoid foreclosure, because it is bad for their books if their ratios of REO (real estate owned) and bad debts climb.

EXCEPTION Personal Residence = No Liability

By State law there is never personal liability for a purchase mortgage for a personal residence. The owner can "walk away" from the property with immunity from personal liability regardless of the method of foreclosure.

Deed in Lieu of Foreclosure

This is a short-cut, when the owner accepts the inevitable and gives the property back to the Bank. However, many lenders now refuse to take a Deed in Lieu of Foreclosure. They get "cleaner" title if they foreclose, effectively wiping out all other claims to the property.

Bankruptcy

Many borrowers stall until the last minute and then file bankruptcy to stop the sale. If there is no equity in the property the lender eventually will make a "Motion for Relief from the Automatic Stay" to allow the foreclosure to proceed. This takes time and costs the lender more money.

Foreclosure after Sale

"I sold the property. The loan is still in my name. The buyer was supposed to make all the payments. Now the Bank is foreclosing and sending me notices."

As discussed above, if the lender uses the Trustee's Sale, it waives any right to seek a deficiency judgment against anyone.

Therefore, a seller who is still on the mortgage for his former property has little (if any) real risk of liability for a deficiency.

The next concern is, "But will it affect my credit?"

If the former owner can prove that the loan was current when he sold the property, although it may show on a credit report, a letter to the credit agency explaining that the foreclosure was after a sale, usually works.

"I'M BEING FORECLOSED. What can I do?" See a lawyer! Talk to the lender. Try to get an extension, lower interest, or reduced payment.

"SHORT SALE"

Most lenders are in the money business and would rather not own real estate. If the value of the property has decreased, some lenders cooperate and allow a sale of the property, instead of forcing a foreclosure.

If the debt is greater than the property's value, in order to sell it and turn the lender's interest into cash, the lender must agree to accept less than full payment as satisfaction of the debt.

Many lenders realize that some money soon is better than less money (since foreclosure auctions usually bring low prices) later, especially if the debt continues to increase during the pendency of the foreclosure.

TAX CONSEQUENCES

Most people are shocked that they can lose their property and still owe taxes on the profit. We often hear people say that they prefer to be foreclosed since they will not owe any tax, but if they sell (and have no net sales proceeds) they will owe substantial tax. WRONG!

The tax results of a foreclosure, deed in lieu of foreclosure, or short sale depend on the nature of the loan: whether it is recourse or non-recourse. Recourse means that the borrower has personal liability for the loan, in addition to the risk of losing his real property.

Tax Consequences: NON-RECOURSE LOANS

Non-recourse loans include typical California purchase loans used to buy an owner occupied residence of up to 4 units.

State Law protects borrowers from personal liability on a purchase mortgage for a home which they occupy at purchase. (If the borrower later converts the home to rental, he is still protected.) The State has put the risk on the lender; the most a lender can do is take back the house. This law applies to properties of up to 4 units, and applies only to loans used to purchase the property.

Purchase loans include bank loans and seller carrybacks.

Some cases allow the same protections for refinances IF there is no cash paid out to the borrower, or if any cash paid out is used for property repairs or improvements.

If the loan falls within this statutory protection, it is a non-recourse loan. Other loans may be non-recourse by their terms.

[Special rules may apply to VA and FHA loans.]

The tax consequences of foreclosure, deed in lieu of foreclosure, or short sale on a non-recourse loan are simple: the property is taxed as if it were sold for the total outstanding amount of the loan (or sales price, if higher). Taxability of the gain and deductibility of the loss depend on the nature of the property.

Tax Analysis Examples:

1) Bob owes $100,000 on a property he bought for $130,000, now worth $80,000. If Bob is foreclosed, gives the property to the lender, or the lender accepts a short sale payoff, Bob is taxed as if he had sold the property for $100,000.

Bob's loss of $30,000 is not deductible if it is his residence, but is deductible if the property is a rental.

TAX TIP: If you expect a loss on your own home, move out, rent the property, and then the loss may be deductible since the property is a rental!

2) Sam owes $100,000 on a property he bought for $95,000, now worth $80,000. If he is foreclosed, gives the property to the lender, or the lender accepts a short sale payoff, Sam is taxed as if he had sold the property for $100,000.

Sam's profit of $5,000 is subject to the rules for sale of residences [2 year rollover & Over-55 Rule apply], or rental property, depending on Sam's use of the property.

3) Ted owes $100,000 on a property he bought for $95,000. At the foreclosure auction, it sells for $110,000. Ted is taxed as if he had sold the property for $110,000.

[These examples are over-simplifications: the tax basis (for determining gain or loss) is not the cost of property. Rather, initial cost is reduced by depreciation and profit rolled over from prior sales, increased by capital expenditures, and affected by other tax rules. Also, in a Deed in Lieu of Foreclosure, the deemed sales price includes an additional factor: past due interest, but an offsetting interest deduction is allowed.]

Tax Consequences: RECOURSE LOANS

A recourse loan is a loan where the borrower is personally liable if the property is sold for less than the amount owed to the lender.

There are two issues with a recourse loan: personal liability and taxation.

Liability: Recourse Loan

To obtain a personal judgment against the borrower, the lender must proceed with a Judicial Foreclosure. Even if the loan was recourse, if the lender proceeds with a Trustee's Sale, the borrower is relieved from personal liability for any remaining deficiency (which the lender cannot collect under a Trustee's Sale).

Taxable Profit: Recourse Loan

There are two elements of profit: `true profit,' and relief from debt income. `True profit' is computed as if the property were sold for its value; relief from debt income is taxable if the debt exceeds the property's value.

A foreclosure, Deed in Lieu, or a short sale (involving recourse debt) are taxed identically.

If the debt is $200,000 and the property's value is $180,000, the owner's `true profit' is taxed as if he had sold the property for $180,000; relief from debt income is taxable on the $20,000 debt in excess of the property's value.

If the owner's "cost basis" is less than the value, he has a taxable `true profit.'

["Cost basis" is determined by examining the property's initial cost, plus capital improvements, less any deferred profit from prior tax deferred sales (from the 2 year rollover of a primary residence or §1031 for investment property). If the property cost $250,000 and profit of $100,000 was rolled over from prior sales into this home, its cost basis is $150,000.]

`True profit' is taxed as if from a regular sale of the property and may qualify for a tax deferred sale of a primary residence (§1034) (if he plans on buying a new home within 2 years), and for the Over-55 Rule.

The other kind of taxable income is `relief from debt income,' based on the difference between what is owed and the value of the property, $20,000 ($200,000 debt, less $180,000 value).

The 2 year rollover (§1034) and the Over-55 Rules do NOT apply to relief from debt profit.

Relief from debt income is taxable only to the extent that the debt relief results in solvency. If the owner has a negative net wealth before and after the sale, nothing is taxable. Alternatively, if he has negative net worth before, and $3,000 net worth after, up to $3,000 is taxable.

If the owner is in bankruptcy, no relief from debt income is taxable.

These rules are complicated and point out that in any circumstance in which unexpected tax results are possible, a thorough examination by an experienced tax professional must be sought BEFORE IT IS TOO LATE.

BOSTON HARBOR SCAM

"PAY US A FEE. SIGN OVER TO US YOUR FORECLOSURE PROPERTY. YOU AVOID TAXES AND PROTECT YOUR CREDIT!"

WRONG! The old rule, "If it sounds too good to be true, it probably is" really works. Companies such as Boston Harbor make many promises but the truth is far short.

As outlined above, the tax results of a foreclosure, deed in lieu of foreclosure, or short sale depend on the nature of the loan: whether it is recourse or non-recourse.

NON-RECOURSE LOANS

Bob bought his first house for $150,000, with a $120,000 mortgage from Bank. The value drops to $100,000. What should Bob do? He can:

Give Bank a Deed in Lieu of Foreclosure;
Let Bank foreclose;
Make a short sale, if Bank approves; or
Pay a fee to Boston Harbor, deed them the property, and "forget all his problems."

Bob has exactly the same results under each one of these plans, except for the last option where he pays unnecessary fees.

Regardless of what he does, Bob is taxed as if he sold the property for the total debt: $120,000.

Advertisements by Boston Harbor and others talk about relief from debt income, and state that Bob has a big problem which they can solve. WRONG! Relief from debt income does NOT apply to Bob's loan: it is a non-recourse loan.

No matter what Bob does, the property is taxed as if it were sold for the total outstanding amount of the loan (or sales price, if higher). If Bob's tax basis is above that amount, he has a loss (non-deductible if it is his residence); if his basis is less than the balance owed, he has a profit [Bob can use the 2 year rollover rule & the Over-55 Rule].

In a non-recourse loan, there is no relief from debt income.

There is absolutely no benefit from using Boston Harbor if you have a non-recourse loan.

RECOURSE LOANS

If the debt is $200,000 and the property's value is $180,000:

1 - `True profit' is taxed as if he had sold the property for $180,000. The result depends on the owner's cost basis and use of the property.

2 - `Relief from debt income' is taxable on the $20,000 debt in excess of the property's value.

The 2 year rollover (§1034) and the Over-55 Rules do NOT apply to relief from debt profit.

As described above, relief from debt income is taxable only to the extent that it results in solvency. However, if the owner is in bankruptcy, no relief from debt income is taxable.

These rules apply even if the property is deeded to Boston Harbor, or to your brother-in-law.

The IRS and State Attorney General are investigating Boston Harbor and other similar companies.

In February, 1995, the State of California filed a lawsuit against Boston Harbor seeking an injunction and monetary damages

This information was provided by: Copyright 1996, Marc S. Weissman
Weiss & Weissman, San Francisco, California.

Stated Income Loans = Liar's Loan???

Tim Mouton (Keller Williams - Stuidio City, CA) — Sat, 03 Feb 2007 04:37:30 -0600

Stated income loans are also called "liars loans", because in some cases, the rules virtually invite the borrower to lie. The case below is a great illustration.

"My husband makes $7,000 a month but has a credit score of 503. I make $1250 and have a score of 690. The loan officer offered a mortgage in my name alone but I must sign a statement saying that I bring in $7000 a month. I don't make that money but my husband does and we need the loan. Should I sign it? The loan officer told me to sign it only if I was comfortable...It is called a stated income loan."

Stated Income Loans Compared to Full Documentation Loans

A stated income loan qualifies a borrower using the income the borrower states on the application form - as opposed to the income the borrower can document. With a stated income loan, the lender agrees not to attempt to verify the income the borrower states on the application.
Stated income loans are designed for the many prospective home buyers who have the income to afford a mortgage and have acceptable credit, but don't meet traditional underwriting standards - called full documentation or "full-doc".
Full documentation generally requires that applicants show that the income they claim was actually earned in each of the two prior years. This is usually done by presenting W-2s or tax returns for two years.
Self-employed borrowers usually have the most trouble meeting this requirement, and stated income loans were originally designed to deal with them. But many applicants with incomes from salaries also can't meet full-doc requirements. For example, the income they claim might incorporate their latest increase in salary, which is not yet reflected in documents covering past income.

Stated Income Borrowers May Have to Execute IRS Form 4506

Some lenders require that the stated income borrower execute a Form 4506, which authorizes the lender to request IRS verification of the bottom line of the borrower's tax returns for the previous two years. Lenders who require a 4506 don't ordinarily check the returns, but the possibility that they might is viewed as an inducement to report income truthfully.
If the borrower defaults very quickly, the lender might check the returns for possible evidence of fraud. Many mortgage brokers steer borrowers away from lenders who require the 4506.
In many cases, a check of tax returns would not reveal a falsehood. This includes the case of the woman who wrote the letter cited above, who filed a joint return with her husband. This is probably why many lenders do not bother with a 4506.

Lenders Verify the Source of Stated Income

While lenders don't check income on a stated income loan, they do check the source of the income. Ordinarily, they require that a self-employed borrower be self-employed in the same business for two years, and that a salaried employee be employed in the same line of work for two years.
The income stated by the applicant is not verified, but it must be roughly consistent with incomes earned in the type of business or line of work in which the applicant is involved. Where the range of incomes is very large and the applicant comes in at the top of the range, the underwriter might ask the applicant to strengthen the application by showing significant financial assets.

Stated Income Lies

Stated income lies are less about the true amount of income the borrower has available than about the source of the income. Few loan officers or mortgage brokers will encourage borrowers to exaggerate the amount of their income, because that is the surest path to a default where everybody loses. But embroidering on the source of the income is viewed as OK, so long as the borrower really has the income and is not uncomfortable embroidering. Their general attitude is, "so long as the borrower really has the income, what does it matter where it comes from?"
The inducement to lie on a SIL is that the price of the mortgage, while higher than the price on an identical loan with full documentation, is lower than the price with no documentation. For example, the rate could be .4% higher on a stated income loan than on a full-doc loan, but .2% lower than on a no-doc loan. (I took these adjustments off one lender's price sheet, another lender might price differently.)
The woman who wrote the letter above can easily rationalize the lie that the income of her husband's is actually hers. Indeed, she lives in a community property state where husband and wife share legal right to each other's incomes. But the loan officer did not try to persuade her to sign, and I didn't either. She must be the custodian of her own conscience.

http://www.shoptermquotes.com
http://www.TimMouton.com
I would love to hear from you:
TimMouton@kw.com

STATED INCOME LOANS - A LIAR'S LOAN???

Tim Mouton (Keller Williams - Stuidio City, CA) — Sat, 03 Feb 2007 04:34:14 -0600

Stated Income Loans Compared to Full Documentation Loans
http://www.TimMouton.com
A stated income loan qualifies a borrower using the income the borrower states on the application form - as opposed to the income the borrower can document. With a stated income loan, the lender agrees not to attempt to verify the income the borrower states on the application.
Stated income loans are designed for the many prospective home buyers who have the income to afford a mortgage and have acceptable credit, but don't meet traditional underwriting standards - called full documentation or "full-doc".
Full documentation generally requires that applicants show that the income they claim was actually earned in each of the two prior years. This is usually done by presenting W-2s or tax returns for two years.
Self-employed borrowers usually have the most trouble meeting this requirement, and stated income loans were originally designed to deal with them. But many applicants with incomes from salaries also can't meet full-doc requirements. For example, the income they claim might incorporate their latest increase in salary, which is not yet reflected in documents covering past income.

Stated Income Borrowers May Have to Execute IRS Form 4506

Some lenders require that the stated income borrower execute a Form 4506, which authorizes the lender to request IRS verification of the bottom line of the borrower's tax returns for the previous two years. Lenders who require a 4506 don't ordinarily check the returns, but the possibility that they might is viewed as an inducement to report income truthfully.
If the borrower defaults very quickly, the lender might check the returns for possible evidence of fraud. Many mortgage brokers steer borrowers away from lenders who require the 4506.
In many cases, a check of tax returns would not reveal a falsehood. This includes the case of the woman who wrote the letter cited above, who filed a joint return with her husband. This is probably why many lenders do not bother with a 4506.

Lenders Verify the Source of Stated Income

While lenders don't check income on a stated income loan, they do check the source of the income. Ordinarily, they require that a self-employed borrower be self-employed in the same business for two years, and that a salaried employee be employed in the same line of work for two years.
The income stated by the applicant is not verified, but it must be roughly consistent with incomes earned in the type of business or line of work in which the applicant is involved. Where the range of incomes is very large and the applicant comes in at the top of the range, the underwriter might ask the applicant to strengthen the application by showing significant financial assets.

Stated Income Lies
For Insurance: http://www.shoptermquotes.com
Stated income lies are less about the true amount of income the borrower has available than about the source of the income. Few loan officers or mortgage brokers will encourage borrowers to exaggerate the amount of their income, because that is the surest path to a default where everybody loses. But embroidering on the source of the income is viewed as OK, so long as the borrower really has the income and is not uncomfortable embroidering. Their general attitude is, "so long as the borrower really has the income, what does it matter where it comes from?"
The inducement to lie on a SIL is that the price of the mortgage, while higher than the price on an identical loan with full documentation, is lower than the price with no documentation. For example, the rate could be .4% higher on a stated income loan than on a full-doc loan, but .2% lower than on a no-doc loan. (I took these adjustments off one lender's price sheet, another lender might price differently.)
The woman who wrote the letter above can easily rationalize the lie that the income of her husband's is actually hers. Indeed, she lives in a community property state where husband and wife share legal right to each other's incomes. But the loan officer did not try to persuade her to sign, and I didn't either. She must be the custodian of her own conscience.

Please visit http://www.shoptermquotes.com
http://www.TimMouton.com
I would love to hear from you!
TimMouton@kw.com