Real Estate Investing

Come summer, several new policies by the FHA will change the face of federally backed home mortgages.  The FHA announced in a press release today what we’ve been expecting for several months … their eligibility rules are changing.  The changes are expected to strengthen the FHA financial reserves while continuing to make homes affordable during the housing recovery,

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement.

The proposed changes should take effect by summer and include:

• Increase MIP by 50 bps to 2.25 percent and shift premium (if legislation allows) to life of the loan rather than up-front at closing.
• New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.  This hearkens back to the old days when I first bought a house… we had to have a significant amount for a down payment rather than “$200 gets you in!”
• Decrease allowable seller concessions from 6 percent to 3 percent.  Again, this means the buyers will have to have more money to close. According to the FHA press release, the current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
• Increase enforcement on FHA lenders to include reporting lender performance and enhancing the monitoring of eligible lenders.

I believe consumers should be most concerned with the higher credit scores.  The seller paid closing costs shouldn’t be too big because if you’re working with a really good lender, these costs should not exceed 3 or 4 percent anyway (depending on your situation).  At 3 percent, that concession should just about be enough to cover closing fees if the seller agrees to pay.

If you’re concerned these changes will shut you out of owning real estate, then you need to be looking now … while you can also still qualify for the $8000 or $6500 home buyer tax credit!

I am dying here!  My oldest daughter earned a little bit of money last year working at a fast food place and now she wants back the taxes she paid.  She’s well below the income minimum of $9,350 (according to the IRS) to file but that $300 refund is very tempting to her.  Of course it may mean that we lose her as a tax deduction, but before we do we’re going to work up “dummy” tax forms using both scenarios (claiming her or she files for herself) and see where the least damage occurs. Then we’ll help her decide whether she stays on our filing or if she does her own.

On the flip side, we are able to take advantage of our home ownership tax deductions – a huge plus when you own real estate!   I usually beat the drum that a home is so much more than just an “investment” but I do like how Turbo Tax describes it as a “tax deduction.”  The biggest single deduction is the interest paid on your home loan – an especially juicy deduction when the home is fairly new because in the beginning most of your mortgage payments go toward interest.

Turbo Tax has other deductible items to remember when you figure out your real estate assets while working on your taxes, but it also outlines what you can not deduct for a personal residence,

• Dues to a homeowners association
• Insurance on your home
• Appraisal fees for your home
• The cost of improvements to your home, except in the relatively rare case where they qualify as a medical expense. (But keep those receipts. They may help you reduce your taxes when you sell your home.)

Allowable deductible medical expenses include lowering cabinets in the kitchen, building wheelchair ramps, widening entryways to be accessible, modifying hardware on doors, along with a slew of others that will help someone be able to function inside their own home.

Anytime you’re in doubt about what you can claim or deduct, consult with your accountant.  If you don’t have one, the IRS is available to help and they have many local offices set up to answer your questions or concerns.  Finding your local office is very easy when you go to the IRS web site.

Guess I’ll start pulling my receipts together.

With federal laws changing to protect home buyers, it’s become even more important for Realtors to work closely with the lenders chosen by buyers.  The good faith estimate has changed, as well as the HUD Settlement Statement.  Lenders are limited to how much they can charge in “junk fees” because nothing can be added at closing to catch up to the amount of money a seller agrees to pay on behalf of the buyer.  Amounts to be paid should all now be rolled into the loan origination fee and total charges should be within 10 percent of the amount given on the good faith estimate provided by the lender.  If the amount exceeds 10 percent, the lender must cure the problem within 30 days.

What does this mean for the buyer, seller, and Realtor?  It means that if a buyer asks for up to $5,000 in closing costs, the seller may ultimately pay only $3,500 because the lender is prevented from collecting more.  The new law keeps a lender honest!  However, if a seller is willing to pay for up to $5,000 then the buyer ultimately leaves $1,500 on the table that the seller won’t have to pay even though he/she has agreed to it.

To compensate for this, the buyer, Realtor and lender should work very closely together when negotiating a contract.  The agent needs to know just how much the lender actually requires for closing and ask for that amount. If it’s $3,000, they can state,

“Seller shall pay $3,000 on behalf of the buyer at closing.”

Then to reap the full benefit of the $5,000 the seller may have been willing to pay, you can negotiate that amount in the cost of the house.  For example, instead of paying $100,000 for the home, write the contract for $98,000.   But you can only get this specific when you have a good, open communication between all parties.  This also means that perhaps buyers should focus on using LOCAL lenders rather than someone one or six states over.  With local lenders, you know how to reach even cell phone numbers – something hard to do at 7:00 p.m. on a Friday night for long-distance lenders.

It’s better late than never to have this type of buyer protection available to the consumer.