January 22, 2018 By

Q&A: Get your credit score ready for the home-buying process

Dear Liz: What score do you need to be approved for a mortgage? Is 520 even close? If not, how do I get that score higher quickly?

Answer: A score of 520 on the usual 300-to-850 FICO scale is pretty bad. Theoretically, you might be able to get a mortgage if you can make a large down payment, but you’ll have more options — and pay a lot less in interest — if you can get your scores higher.

That, however, takes time. You need a consistent pattern of responsible credit behavior to start offsetting your mistakes of the past. If you don’t already have and use credit cards, consider applying for a secured credit card, which requires a cash security deposit, typically of $200 or more. You’ll get a credit limit equal to your deposit. Using the card lightly but regularly, and paying in full every month, can help your scores.

A credit builder loan, offered by credit unions and the online company Self Lender, is another way to improve your credit while building your savings at the same time. The money you borrow is put into a savings account or certificate of deposit that you can claim once you’ve made 12 monthly payments. Making your payments on time helps improve your credit history and scores.

Taking a year to build your credit also would give you more time to save for your down payment and for closing costs. Rushing into homeownership is rarely a good idea, so take the time you need to get your financial life in order first.

Filed Under: Credit & Debt, Credit Scoring, Q&A, Real Estate Tagged With: , , ,
November 27, 2017 By

Q&A: How to sort out the taxes when you sell your house

Dear Liz: I am trying to understand the capital gains tax exemption as it applies to the sale of a house. If I have no mortgage and I sell my house before I have lived in it for two of the previous five years that are now required for the exemption, is it based on the total selling price of the house or on the amount over what I paid for it? And what is the tax rate based on?

Answer: The home sale exemption can shelter from taxes up to $250,000 per owner ($500,000 for a couple) of capital gains from a home sale. If you don’t live in the home for at least two of the previous five years, you typically can’t use the exemption unless the sale was because of a change in employment, health problems that require you to move or an unforeseen circumstance that forced the sale.

The rules on these exceptions can get pretty tricky, so you’d need to discuss your situation with a tax pro. If you qualify, the amount of the exemption usually would be proportionate to the percentage of the two years that you actually lived in the home. If you sold after one year, for example, you might exempt up to $125,000 per owner.

Whether you have a mortgage does not affect the capital gains calculation. What matters is the difference between the price you get when you sell the house and the price you paid when you bought it.

From the sale price, you get to subtract any selling costs such as real estate commissions. From the purchase price, you can add in certain costs, such as home improvement expenses. What results after these adjustments is your capital gain for tax purposes.

If you have capital gains in excess of the exemption, you would pay long-term capital gains rates on that profit. Long-term capital gains are typically taxed at a 15% federal rate, although the highest-income taxpayers (those in the 39.6% bracket) may pay 20% and the lowest-income taxpayers (those in the 10% and 15% brackets, including taxable capital gains) pay a 0% rate.

States typically have additional taxes.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , , ,
November 19, 2017 By

Q&A: More reasons why adding an adult child to a deed is a bad idea

Dear Liz: I’m an estate planning attorney and I agree with your warning to the couple who wanted to add their daughter to their house deed to avoid probate.

The daughter’s share of the home would lose the step-up in tax basis she would get if she inherited instead, plus there are several other issues. What if the daughter gets sued or has creditor problems? The house could be at risk.

The parents also may not have thought through what might happen if the daughter marries, divorces or dies before they do. A living trust would cost some money to set up but would avoid these problems.

Answer: A revocable transfer-on-death deed is another option for avoiding probate, but a living trust is a more all-encompassing solution that also can help the daughter or another trusted person take over in case of incapacity.

In any case, they should consult an estate planning attorney, who has a far better understanding of what can go wrong after a death and how to prevent those worst-case scenarios.

Filed Under: Estate planning, Inheritance, Q&A, Real Estate Tagged With: , ,
September 11, 2017 By

Q&A: Reverse mortgages have gotten safer and cheaper but aren’t for everyone

Dear Liz: I have been making interest-only payments on a home equity line of credit but starting in January the payments will increase to include principle. I would like to do a cash-out refinance of my first mortgage (I owe about $190,000) to pay off the HELOC (on which I owe $140,000).

My home is worth about $600,000, but my debt-to-income ratio is very high, and I’ve been told I won’t be approved.

I have never been late on my mortgage or credit cards, on which I owe about $30,000. I am working very hard on paying off my debt but my income is low, $25,000 a year.
I am 72, a widow and find it hard to land a good paying job like I used to have. I have to settle for what I can get.

My son and his family live with me and pay $900 rent and half of utilities but those payments are not reflected on my taxes.

The advice I am getting so far is to get a reverse mortgage for about a year, to not take any money from it and instead pay down my credit, then after a year try to refinance again. What are your thoughts on reverse mortgages?

Answer: Reverse mortgages have gotten safer and less expensive but they aren’t a good short-term solution for anyone. All mortgages have costs, and it makes little sense to pay to set up a reverse mortgage if you plan to get rid of it a few months later.

Reverse mortgages, for those who don’t know, allow borrowers 62 or over to tap their home equity to get a lump sum, a series of monthly checks or a line of credit. Borrowers don’t have to make payments on these loans, but any debt incurred on a reverse mortgage grows over time and must be paid off when the borrower sells, moves out or dies.

The most common reverse mortgage is the Home Equity Conversion Mortgage, which is insured by the federal government. The HECM loan typically includes upfront and annual mortgage insurance premiums, third party charges, origination fees, interest and servicing fees.

The amount you can borrow is based on your age, prevailing interest rates and the value of your home (the maximum home value considered is $636,150). You’ll find a calculator at www.reversemortgage.org/About/Reverse-Mortgage-Calculator that can help you estimate what you can borrow and the costs.

Normally, people can’t access more than 60% of the borrowed amount in the first year. That’s to prevent them from running through all their equity in a short time. The exception is when the money’s being used to pay off existing loans. You probably would be able to borrow just enough to pay off your current mortgages, but the upfront mortgage insurance premium you would owe would be high: 2.5%, rather than the usual 0.5%.

Another complication is the fact that you have family living with you. You’d need to think through what would happen if you died, had to sell or moved into a nursing home, because that could leave your son and his family homeless if they weren’t able to pay off the mortgage.

A final concern is the fact that you’ve been living beyond your means for quite a while, as shown by the amount of debt you have. Eliminating mortgage payments could help you pay off your remaining debt, but that’s only if you keep your expenses in line with your current income — not what you were able to spend when you had a good job. There’s also no telling how much longer you’ll be able to continue working, which would mean getting by on even less.

Consider meeting with both a nonprofit credit counselor and a bankruptcy attorney to understand your options. You can get referrals from the National Foundation for Credit Counseling (www.nfcc.org) and the National Assn. of Consumer Bankruptcy Attorneys (www.nacba.org), respectively.

Filed Under: Q&A, Real Estate Tagged With: , , ,
July 31, 2017 By

Q&A: How cosigning a mortgage loan can bring big risks

Dear Liz: I’ve been self-employed for just over a year. Because of disbursements from a recent divorce, I have enough money to make a 40% down payment on a modest house. My income will easily cover the resulting mortgage payments, health insurance and other expenses, but I’ve been turned down for a loan several times without a cosigner. A family member has offered many times to do this, as the person doesn’t have the means or interest in buying a house anytime soon for various reasons. Reluctantly I am considering it.

This person has a good job but will not be contributing any money toward my down payment or mortgage payments. I plan on setting up a separate shared bank account that will cover at least a year to 18 months of expenses for the home in case something happens to me, so my relative isn’t burdened in any way. I also plan on listing this person as a beneficiary on the mortgage so they could choose to sell the house or live in it.

What would be the tax liability if this happens? What if we become roommates and they pay me rent? Would it be a good idea to refinance in a year or so to remove the cosigner? Would a revocable living trust be a better way to handle this situation?

Answer: The best way to handle this situation is to find a good real estate attorney who can explain your options. Your relative should do the same.

Cosigning a loan would have a lot of upside to you and mostly downside to your relative. Cosigners are equally responsible for the home loan, but they aren’t typically owners of the property.

If you want your relative to inherit the house should you die, you can include her as the property’s beneficiary in estate planning documents or a transfer on death deed, if your state has that document for real estate. (Mortgages aren’t assets, so they don’t have beneficiaries.) If your relative inherits the house, she typically wouldn’t owe taxes unless yours is one of the six states that still has an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey or Pennsylvania). In these states, closer relatives typically pay a lower rate than more distant relatives or those who aren’t related.

You also could leave a sum of money to pay the home’s expenses for a certain period. That probably would be a better idea than a shared bank account, unless your relative insists on access to such a thing as a condition of the loan. In general, you should minimize financial entanglements with people if you’re not married to them or legally or morally responsible for them.

You probably should try to refinance this loan at your earliest opportunity, rather than leaving her on the loan or inviting her to be your tenant. Even in areas where landlord-tenant law favors the landlord, such a relationship can be tricky. In other areas, you could find yourself saddled with a relative who would be extremely difficult to evict.

Filed Under: Q&A, Real Estate Tagged With: , ,
July 24, 2017 By

Q&A: The road to homeownership should be paved with skepticism

Dear Liz: My husband is 46 and I am 43. We have been living in Las Vegas for six years. We are aware that we missed out on buying a home a few years ago. Are we chasing a dream or do you think that we might have another chance to buy a house in the next few years? I am also very concerned about another recession. Some websites forecast one in 2018.

Answer: Some websites forecast the end of the world in 2016. And 2015. And 2014. And so on.

Recessions, by contrast, are pretty much inevitable but they’re not really predictable. You shouldn’t try to time your real estate purchases hoping to avoid, or take advantage, of the lower prices they might bring.

In general, you need to be a lot more skeptical about what you read and what you’re told if you want to be a homeowner and not get fleeced.

Everyone involved in real estate transactions — as well as in most other financial transactions — may have an incentive to mislead you or at least not tell you the whole truth. That’s why it’s so important to do your own research and make your own decisions.

Here’s just one example. A lender will tell you how large a mortgage it will give you, but that doesn’t necessarily mean you can really handle that loan. You may have other goals, such as retirement, that you won’t be able to achieve if you take on a too-large payment.

The best time to buy a home is when you want to be a homeowner, you’re financially ready to do so and you can afford to stay put for several years, because it can take a few years’ worth of appreciation to offset the costs of buying and selling a home (not to mention moving costs).

You also should make sure you have a healthy emergency fund — three months’ worth of expenses is a good start — to handle the inevitable unexpected expenses that arise when you own a home.

Filed Under: Q&A, Real Estate Tagged With: ,
July 3, 2017 By

Q&A: Capital gains

Dear Liz: If and when we sell our house, the capital gain is likely to exceed the $500,000 exemption limit. I am carrying over a loss of about $100,000 from stock sales. Can I use this loss to offset the capital gain from the house?

Answer: Yes. Capital losses can be used to offset capital gains, including those from a home sale.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , ,
June 12, 2017 By

Q&A: Why a reverse mortgage might be a good idea for some older homeowners

Dear Liz: I recently retired to a small house I bought 30 years ago. I refinanced four times to get the rate down from 11% to 3.5%. This provided me with a low monthly mortgage (just under $450), but my current 30-year loan won’t be paid off until I’m 92. I’ll be 67 in two months, and just received an inheritance of $400,000 following the death of my parents. My only income is $2,000 a month from Social Security and a monthly pension check of $1,100, although I do have an IRA that should be worth roughly $170,000 by July.

I’m thinking about paying off the $90,000 remaining on my mortgage, which would allow it to be passed on to my sister, nephew (or whomever) without any complicated bank or loan issues. It also would free up that mortgage payment for other household expenses. The house needs some work, such as a new carport, double-pane windows, proper insulation, deck repair and maybe termite work, all of which will probably eat up the better part of $100,000. Is it worth keeping the loan just to maintain the tax deduction or does it makes financial sense to pay it off?

Answer: Keeping a mortgage just for the tax deduction doesn’t usually make much sense. Here’s why: If you’re in the 25% federal tax bracket, you’re getting back only about 25 cents for each dollar in interest you pay. Most homeowners get even less back, and many don’t get any tax advantage from their mortgages at all.

It can make sense, though, to keep a mortgage to preserve liquidity. Younger people, especially, should be wary of tying up most of their net worth in a home if that equity would be hard to tap in an emergency. Home equity lines of credit offer one way to access that equity, although lenders can freeze or reduce those lines on a whim.

Because you’re over 62, you could consider paying off the loan and then setting up a reverse mortgage line of credit.

An FHA-insured reverse mortgage line of credit can’t be shut down once it’s established, as long as you abide by the loan rules (such as paying your property taxes and insurance, and keeping the home in good condition). In fact, the amount you can borrow can increase over time with a reverse mortgage credit line. You don’t have to make monthly principal and interest payments on the money you borrow with a reverse mortgage.

Any amount you borrow will grow over time, typically at variable interest rates, and will have to be repaid when you die, sell or permanently move out of the home. That would complicate leaving the house to your heirs, but if the amount you owe is greater than the home’s worth, your heirs aren’t on the hook for the difference with an FHA-insured reverse mortgage, also known as a Home Equity Conversion Mortgage.

In any case, preserving an inheritance probably shouldn’t be your top priority. You should focus instead on preserving your quality of life and your financial flexibility.

Reverse mortgages have gotten safer and less expensive in recent years, but you would need to exercise discipline not to waste the money you borrow on frivolous purchases. You want that equity to be available for you when you need it, such as for nursing home or other long-term care expenses.

You would be required to get counseling before applying for a reverse mortgage, but you also should talk to an independent, fee-only financial planner to make sure this approach makes sense.

Filed Under: Q&A, Real Estate Tagged With: ,
May 8, 2017 By

Q&A: Capital gains taxes explained

Dear Liz: Do I understand correctly that I must live in a house for two years before selling it to avoid paying capital gains tax, regardless of how much I may profit from the sale?

Answer: You do not. You must live in a home for two of the previous five years to exempt up to $250,000 of home sale profits. (Married couples can exempt up to $500,000.) After that, you’ll pay capital gains taxes on any remaining profit.

Even if you didn’t last the full two years, you may be able to claim a partial exemption if you meet certain criteria, such as having a change in employment, a health condition or other “unforeseen circumstance” that required you to move out.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , ,
April 24, 2017 By

Q&A: How a short sale can short-circuit your credit score

Dear Liz: In 2010 I was laid off from my construction management position. I was unable to find work for 28 months. The bank tried to foreclose but I was able to arrange a short sale of my home in March 2012. Shortly after that, my unemployment benefits ran out and I was unable to pay my obligations (two credit cards totaling around $9,500).

I did get a good job in June and in July worked out payment plans to get the back debt caught up. I have since paid this debt off (November 2016) and pay any credit card balances in full every month. I also pay my car loan on time using automatic debits.

My credit scores remain stuck in the 675 to 690 range and none of the steps that I take seem to help. I know that after seven years the negative information regarding the mortgage and the credit card past dues will drop off. Since I did the short sale and not a foreclosure, though, why are my credit scores treating me as if I did a foreclosure or chose bankruptcy?

Answer: A bankruptcy theoretically slices more points off credit scores than either a foreclosure or a short sale. The hit you take from a short sale, though, depends in part on how your lender reported the transaction to the credit bureaus.

If the lender reported a deficiency balance — which is essentially the balance of your mortgage that wasn’t repaid after the sale — the impact will be similar to a foreclosure. If the lender opts not to report the balance, the credit score impact will be somewhat less. After the foreclosure crisis started, some lenders opted not to report those balances as an incentive for homeowners to arrange short sales rather than let their homes go into foreclosure.

You’re already doing most of what you need to do to repair your credit, including having different types of credit (credit cards are revolving accounts while car loans are installment accounts) and paying those debts on time.

One tweak you can try is reducing your credit utilization on those cards. If you regularly charge 30% or more of your credit limits, try reducing your charges to 10% of those limits or less. It’s good that you pay in full, but the balance that’s used in most credit scoring formulas is the one the credit card issuer decides to report. It’s often, but not always, the amount that shows as your balance due on the statement closing day. Reducing the amount of credit you use may boost your scores a few more points. Other than that, you simply have to wait for time to pass and for your responsible credit use to undo the damage of the past.

Filed Under: Credit Scoring, Q&A, Real Estate Tagged With: , ,