Interesting story and tax case:  A recent U.S. Tax Court ruling clarified the IRS position that the $1.1 million limit for mortgage interest deduction applies per residence and not per taxpayer as some homeowners were hoping.

A married homeowner filing jointly can have fully deductible interest on a mortgage of up to $1,000,000 of acquisition debt and up to an additional $100,000 of home equity debt. If the married couple files separately, each party is limited to deducting the interest on half of those maximum amounts.

The court case came about when two unmarried individuals who owned a home together as joint tenants felt that they were entitled to deduct the interest on $1.1 million of debt each. IRS did not agree with their understanding and neither did the Tax Court. The Court ruled that the limits apply per residence, not per taxpayer even if a home is co-owned by unmarried taxpayers.  I guess you can’t blame them for trying!!!???

The result for the taxpayers in this case was that their deduction was cut in half resulting in much more income tax due. While this situation only affects a few taxpayers, obviously, have a conversation with your tax professional prior to “trying this at home”!!!  Not really an issue for me  ….  too bad!  ;-)

The pre-approval is an antidote to stress:

• How much you can borrow.  The amount decrease as interest rates rise.
• Looking at the “Right” homes.  Price, size, amenities, location.
• Find the best loan.  Rate, term, type.
• Uncover issues early.  Time to cure possible problems.
• Bargaining and negotiation power.  Price, terms and timing.
• Close quicker.  Verification’s have been received.

Check out a Great Investment!

If you invest in a savings account, you’ll make less than 1% and will have to pay income tax on the earnings. On the other hand, contribute something extra to your house payment on a regular basis and you’ll essentially earn at the mortgage interest rate which is probably more than you’re earning in the bank.
Making additional principal contributions on your mortgage will save interest, retire debt and build equity.  An extra $100 a month in the example shown will save thousands in interest and shorten the term of the mortgage as well.

mortgage principal reduction

Reducing your cost of housing is just one more way to improve the investment in your home.  Becoming debt-free is a good goal that is achieved with a little discipline and some good decisions. Those decisions include having an “emergency fund”/”rainy day fund” and balancing making other investments (such as stocks, bonds, mutual funds, investment real estate) so you can have a well-rounded and diversified financial portfolio.

FEBRUARY PORTLAND METRO REAL ESTATE UPDATE!!!!

With the holidays, Valentine’s Day (not to mention my birthday) behind us, we can look forward to the 2012 Real Estate Season!!!  2011 ended on a positive note and this year has definitely started off on another positive note.  Closed sales experienced an 18.3% increase if you compare this January to the same month a year ago.  These are the highest numbers for January since 2007 (remember, if you believe the statistics, March 2007 was the height of the market).  The average time on the market has also improved, decreasing from 160 to 136 days.  December 2011 saw 5.3 months of inventory (down from 11.3 months in January 2011 and 12.6 in 2010).  January 2012 came in at 7 months of inventory, but that’s a fairly typical trend that January will be one of the highest (and usually THE HIGHEST) month of the year in housing inventory.  I have been in a multiple offer situation 3 times in the last 6 weeks!  So, well-priced, good condition properties are moving!!!  That speaks volumes to me!

SELLERS:  What does this mean for sellers?  It means if you haven’t already absorbed the market data, get someone you trust to give it to you!  Some properties are harder than others to price correctly; such as those with ethereal value (views, waterfront, etc) or challenged properties (fixers, un-staged, over-stuffed).  None-the-less, you must react quickly to the marketplace.  If you get a “lot” of activity and no offers, it probably sounded good but still has issues (remember price overrides all objections).  I’m telling you that well-placed, well-marketed properties will go fairly quickly.  If your home is not selling, re-visit price, condition, location.  There are no magic potions!

BUYERS:  What does this mean for buyers?  The Fed has claimed they will keep interest rates down until 2014.  If that doesn’t change, then mortgage rates (which still fluctuate daily) should stay very low giving buyers some time to position themselves for the best buy.  However, that being said, like I mentioned in my beginning paragraph the inventory is beginning to be absorbed.  Since pricing is always about “supply and demand”, I have to question that the pricing continuum will continue to go down!

INVESTORS:  What does this mean for investors?  The rental market is very good in the Portland area, generally with vacancy rates less than 4%. You use your down-payment + other people’s money (a Mortgage) to purchase a property. Your tenants pay that mortgage (PITI=principal, interest, taxes, insurance), you realize whatever cash-flow (rents minus PITI & maintenance=cash-flow). So, whether the real estate market appreciates or not, you accrue equity due to the tenants paying down the mortgage on a monthly basis.  It can be a challenge to lay the foundation to be an investor, but “NO PAIN, NO GAIN”!!  Read my recent post on “Preparing to Be a Real Estate Investor”!

1. Don’t stop making your mortgage, rent, auto or any other payment!!  If you have a late payment, even on a silly $10 a month credit card it could mean the difference between “yes” and “no”.
2. Don’t buy or lease an auto!!  Lenders look carefully at your monthly debt obligations.  A large payment such as a car lease or purchase can greatly impact those rations and prevent you from qualifying for a home loan.
3. Don’t move assets from one bank account to another!!  These transfers show up as new deposits and complicate the application process, as you must then disclose and document the source of funds for each new account. It’s a paperwork nightmare.  Wait until after close of escrow to consolidate accounts.
4. Don’t change jobs if you can help it!!  A new job may involve a probation period, which must be satisfied before income for the new job can be considered for qualifying purposes.  If you job is part-time or temporary, please let your mortgage broker know as it affects your approval.
5. Don’t run a credit report on yourself or have anyone pull your credit!!  This will show as an inquiry on your lender’s credit report and could lower your credit score 7-10 points per credit inquiry!
6. Don’t buy new furniture or major appliances for your new home!!  If new purchases increase the amount of debt your are responsible for on a monthly basis, there is the possibility this may disqualify you from getting the loan.
7. Don’t attempt to consolidate bills before speaking with your lender!!  Moving around credit balances can destroy your credit score!  Ask your lender first before you change any balances around.
8. Don’t pack or ship information needed for the loan application!!  Important paperwork such as W-2 forms, divorce decrees and tax returns should not be sent with the movers along with your other household goods.  Duplicate copies take weeks to obtain and could stall the closing date on your transaction.

There has been a lot of hub-bub recently about the revisions to HARP.  This is a guest post that I thought answered a lot of the questions you might have!

by Ted Spradlin, Mortgage Advisor, MLO #214130

tspradlin@alpinemc.com                 www.alpinemc.com

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Yesterday’s New York Times had an article about the most recent expansion of the Treasury’s Home Affordable Refinance Program, known as HARP, which allows underwater homeowners with Fannie Mae and Freddie Mac backed loans to refinance their mortgage and take advantage of today’s low interest rates.

The revised program lifts the Loan To Value limit on fixed-rate loans which was 125% to unlimited, reduces some refinance fees, allows refinances of loans that experienced minor delinquency, and extends the eligibility date.

So far, HARP has helped 838,441 homeowners nationwide. Treasury anticipates this program will help an additional 900,000 homeowners in the coming year.

To better understand the program and who may be eligible, I created several Questions and Answers:

Q:  How does a person find out if Fannie or Freddie owns their mortgage?

A:  Go to the Fannie and Freddie loan lookup websites

Q:  If Fannie owns my loan, will it go back to Fannie?

A:  Yes, the loans go “Fannie to Fannie” and “Freddie to Freddie.”

Q:  Who benefits most from HARP?

A:  Homeowners with solid income, credit, employment, and mortgage payment history, who lost equity during this housing downturn. People who are in professions where they need to maintain their credit rating to keep their jobs will benefit the most.  For Example, police officers, financial professionals, attorneys, military officers, civil servants, etc.

Q:  What if my loan was originated in April 2010?  Can I still qualify for the HARP refinance?

A:  As of now, HARP is limited to mortgages delivered to Fannie and Freddie prior to June 1, 2009. When the expanded guidelines take effect in March 2012, you may qualify.

Q:  If I’m over 80% LTV, will I have mortgage insurance on my new loan?

A:  That depends on if you had mortgage insurance on your existing loan.  If you don’t currently have MI, you won’t have it on your new loan.  If you do have MI, you will have it on your new loan, and most likely with the same MI company as you had before.

Q:  Will my loan servicer change?

A:  Maybe, maybe not.  It all depends on where the loan and its servicing rights are sold or assigned in the secondary markets.

Q:  Can I refinance my underwater rental property?  

A:  Yes.

Q:  Can I refinance my underwater vacation home?

A:  Yes.

Q:  What is the maximum loan limit?

A:  $417,000.

Q:  What if I have a second mortgage?  

A:  Seconds may re-subordinate their position and allow you to refinance your first mortgage.

Q:  When does the unlimited LTV program take effect?

A:  The earliest this program will be online looks to be March 2012.  Remember, Fannie and Freddie’s software programmers have to re-write all the software code for the new guidelines.  Most mortgage originators use the automated underwriting engines of Fannie and Freddie rather than manually underwrite loans.

Q:  Do people really qualify for these loans?  

A:  Yes.  So far 838,441 people have refinanced with HARP so far.  HARP 1.0 and HARP 2.0 are aimed at the homeowner who bought at the peak of 2004-2007, who put 10-20% down at the time of purchase.  They have stable jobs, income, “strong to quite strong” credit, and have a desire to stay in their home.

Q:   Do you have an example of a HARP loan?

A:   Yes, here’s a loan I’m closing right now.  The loan balance is $300,000 and the home appraised at $280,000.  It’s a 108% LTV, Freddie to Freddie refinance.

Q:  Does this program help the people who lost their job and fell 180 days delinquent on their mortgages?

A:  No.  That would most likely be the HAMP modification.

Q:  What if I have a permanent HAMP modification, can I apply for HARP?  

A:  Yes, you can apply for HARP.

Q:  Do I have to pay closing costs out of pocket?

A:  No, you can roll your closing costs into the new loan; however, you are limited to the lesser of $5,000 or 4% of the loan amount.

Q:  Can I get cash out to pay off debt?

A:  No.  This program is for rate and term refinances with a maximum of $250 back at closing.

Q:  What if I’m delinquent on my property taxes?

A:   Taxes take priority over voluntary liens like mortgages and will need to be brought current.  Depending on your credit scores, debt to income and loan to value ratios, you may be able to roll your taxes into your new loan.

\”For the Love of Money\” – O\’Jays

It takes money to buy a home: “yours” or “theirs”.  If you’re not going to pay cash for a home, you need to find out exactly what you can borrow and what it will cost before you start looking at homes.  This is an important step so that you are relaxed about the $$$ part of the process, so that we are looking at the correct price point for your new home and that when you are ready to make an offer you have a letter of pre-approval to present to the seller of that property.  As you compare and interview lenders, be sure to not only look at interest rates but the Annual Percentage Rate (APR) as well!

The mortgage process is not as clear cut a path as it was a few years ago.  It is certainly more complex, takes longer and requires that you are credit worthy by a whole new set of standards of late. If you have less than stellar credit, a trusted mortgage professional can advise you how to improve your individual situation.

You are entitled to a free credit report from each of the three major credit bureaus each year.  Go to www.AnnualCreditReport.com  to get a copy of each from TransUnion, Experian and Equifax.  Read the reports to determine if they’re accurate.  Surprisingly, about 90% of all reports have errors.  You can try to correct them directly with the credit bureau, but a trusted mortgage professional can help you with this process too.  They have tools that are not available to individuals.  Some errors may not be serious but others will keep a person from qualifying.

Housing affordability is at a near record height due to the incredibly low interest rates and low home prices. Some areas are experiencing absorption of the inventories which could impact price. If you’re going to use “their” money to buy a home, the first step is to talk to a trusted mortgage professional. Call me for the name of a trusted mortgage professional.

There’s a time for spontaneity, there’s a time for flexibility and there’s definitely a time for resilience!  But, there’s always room for future planning, especially when it comes to finances and real estate.  Thinking ahead can make you $$$$!  Thinking about your retirement when you are young, can make you an early retiree.  Thinking about the type of loan you secure for real estate can make your property more salable in certain markets (such as those with higher interest rates).  Just sayin……….

I am actually referring to FHA (Federal Housing Administration)  or VA (Veteran’s Administration) loans!  FHA & VA do not lend money, rather they both guarantee the loans.  I remember in the mid-80′s when I began my illustrious career and the mere mention of an underlying FHA or VA loan made a real estate agent swoon!  WHY???  Because FHA/VA loans are assumable at the interest rate of the existing loan (current rates, at that time, topped at 13%…OUCH!).  So, if the new buyer can come up with the difference between the existing underlying FHA loan and the current sales price (and can meet the qualifying standards), they can assume at the existing interest rate.

I know, I know!  It’s been a long time since interest rates were an issue.  But, when (not if) our economy makes a change, interest rates must go up.  They’ve been artificially low for some time.  But, to have attractive financing that could be assumed would add to the future sale-ability!

Consider getting a FHA or VA loan to purchase your home. The present advantages are that these loans are priced competitively and a little easier to qualify for than conventional loans. The future advantage is that FHA and VA loans are assumable at the original note rate for qualifying buyers.

There’s more to sell than the home itself when you have an assumable loan. The mortgage payment could lower the cost of housing significantly.  A buyer may easily be willing to pay more for the home due to the attractive financing, especially if it helps their equity grow faster.

Competing with Cash
I have recently had Portland metro real estate listings that have received cash offers AND I’ve been representing buyers in multiple offer situations up against cash offers. It’s just not fair (unless you are the buyer with cash)!   29% of all sales in the US made in June and July 2011 were cash. How does a buyer who needs a mortgage compete with a cash buyer?  And, why the “uptick” in cash offers.  A sideline note:  have you looked at the stock & bond market numbers lately?  Many people are “parking” their money in real estate instead of the stock market.

Perhaps you’ve been looking for a home for months after thinking about it for years. You’ve found the home you want and meets your family’s needs. You write a contract but before it’s even presented to the seller, another offer comes in. With all the homes on the market, you’d think you wouldn’t have to deal with multiple offers but you’d be surprised how many times it does happen.  A sideline note: why does this happen???  Because this particular property is priced competitively and is in “show” condition.  There’s no secret…just location, price, condition!

If it’s a short sale or bank-owned (foreclosure), competing against a cash offer can be a bear!!  In a short-sale, the bank wants that property “off the books” and the short-sale numbers and situation have to be less expensive than the looming foreclosure.  If the bank has just repossessed a property (at some expense) and they want a sure bet on a substantive offer that lessens their losses.

There are some strategies that can (at least) compete with the advantage of an all-cash buyer.
1)  Get pre-approved and submit the letter from the lender with the offer
2)  Move fast to minimize competing with other offers
3)  Make an over sales price offer. Money talks….
4)  Use an escalation clause (you will pay “x” amount of money over any verifiable offer up to “x” amt)
5)  Submit larger than normal earnest money to show your sincerity
6)  Be as flexible as possible about closing and possession
7)  Avoid unnecessary contingencies in the contract
 Write a letter emotionalizing why you want the home

It’s a “dog-eat-dog” world out there right now.  Can anyone explain what “dog-eat-dog” means????