Delete Collection Accounts

Getting a home mortgage loan or refinancing an existing loan calls for a clean credit report. Banks simply will not give a mortgage to someone with collection accounts on their credit report. And, sometimes these collection accounts can be a big shock to the prospective home buyer. Who knew the account was even there?

In California, the statute of limitations for an unpaid collection account is four [4] years. It seems, though, that  creditors have come up with some creative ways to keep collection accounts going. Sometimes, the debt is sold to another credit company, thus re-activating it or sometimes it is simply transferred to another division of the same company with a different name. Both gambits are done with the hope of resurrecting these debts.

This can have a major impact on the consumer’s credit score, sometimes as much as 30 points. This is, of course, of major concern when applying for a home loan. All collections must be paid or the bank will not grant the mortgage. If collection agencies realize that a debtor is trying for a home loan, then they will definitely play hardball and expect to get the entire amount of the debt paid with additional fees added.

So, what to do?

Thanks to a recent court case, the 9th Circuit held that the Federal Debt Collection Practices Act requires substantial activity by the debt collector before a debt can be considered valid. Specifically, for a debt to be valid the collection agency must send a notice to the debtor within 5 days.This is true if it’s the first collection agency, one of many or a subsequent one.

Of course, people often don’t even realize they have collections because collection agencies rarely send out these “validation notices.” Now, the collection agency must inform the debtor of the total amount of the debt and to whom it is owed and this must be in writing within 5 days. Furthermore, the agency must inform the consumers they have 30 days in which to dispute the debt.

When the consumer disputes the debt or any part of it, the agency must supply a copy of the judgment or verification of the debt. Previously, knowing the consumer wanted to buy a house, the agencies would simply insist on payment until either the home buyer gave up the quest for a house or paid the loan.

Now, there is some protection for the home buyer with a collection account. If you discover a collection account on your credit report, it is only valid if you have received notice of it from the collection agency in writing and you may still dispute the account. If the collection agency refuses to back down, yes, you will have to hire an attorney, but a simple letter may do the trick.

Help For California Home Buyers

 

1st time home buyerThink you and your family don’t make enough to buy a home? Worried about your low credit score or lack of down payment? If these issues have prevented you from even beginning to look for a new home, let me assure you that help is on the way.

Most home buyers are not aware that many programs exist to help them  purchase a home. Often, the lenders selected by the buyers or their agents prefer to avoid the extra paperwork and so do  not inform their clients about these programs. Financial aid for home buyers in California comes from cities, counties and the state itself. 

The assistance comes in many forms.Some allow zero down payment. Some are outright grants of money. Some come as “silent seconds” which are only repaid when the home is sold. Some eliminate mortgage insurance. Some are directed towards buyers with low credit scores. Future home buyers in pricey California would do well to find a lender who is conversant with these programs and start the process.

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Here is a sampling of assistance available to first-time home buyers. Note that a “first-time” home buyer is one who has not owned a home in the last three years. 

  • California Housing Finance Authority [CalHFA] requires at least a 640 FICO score, well below average, and when combined with 3% CHDAP, 3% CalPLUS and $6500 Cal Extra allows for ZERO down payment. On a $300,000 property, for instance, $22,000 is available through these programs.
  • Extra Credit Teacher’s Program [ECTP] allows teachers, administrators, employees and staff of high priority schools [ranks 1-5] a deferred loan of up to $15,000 in high-cost areas and $7500 in low-cost areas. If the recipient lives in the house for three years, the loan is forgiven.
  • Southern California Home Finance Authority [SCHFA] requires at least a 640 FICO score and offers a grant, not a loan, of up to 4% of the purchase price to help with the down payment. This program applies to LA and Orange Counties only.
  • CHF Platinum, again requiring 640 FICO,  is a 3-5% down payment assistance grant with a slightly higher interest rate.
  • Mortgage Credit Certificate [MCC] is a 20% tax credit through CalHFA and amounts to average savings of $200/month through the life of the loan and helps borrowers qualify.
  • County of Orange Mortgage Assistance Program [MAP] provides up to $40,000 down payment assistance in 17 Orange County cities. The amount becomes a lien which must be paid back when the property is sold.

Most of these programs are for “low-income” individuals and families, but in Southern California that can mean up to $120,000 or higher family income. Each program is different and attempts to answer different borrower needs.

These are just SOME of the mortgage assistance programs available. Many cities in Southern California also offer some type of aid. It costs nothing to ask and may make the difference between buying and renting.

For further help either with home buying or selecting a lender, feel free to call me, Diane Butler, at 626-641-0346 or email me at drdbroker@gmail.com.

 

Tax Benefits of Real Estate Investment

Rental Property: Amazing Tax Benefits

These days we hear a lot about the tax havens and tax loopholes available to high-income taxpayers and corporations, but  most ordinary people do not understand the amazing tax benefits offered by owning rental property. In most cases, a “taxable loss” accrues from the rental which can offset ordinary income and thus the federal income tax bite. Of course, most people’s eyes glaze over at this point, so I’m going to make this as painless as possible!

Tax Savings For Middle-Income Earners

Not everyone is going to save tax money on real estate investments. Most middle-income wage-earners, though, will.  First, let’s be clear.  It takes a certain type of person to be a landlord as indicated in a previous post.  So, looking at owning property to save money on taxes is, how do you say, bass-ackwards.

First and foremost, purchase a rental property with the idea of making money. Look for a property which will give you income after all the expenses are eliminated. This is cash-flow. Assuming you have such a property, how does it happen that even cash-flow properties can save you money on your taxes?

Rental properties generally show a “taxable loss” for many years after the purchase. This is true because, as in any business, you have the income from the rents, but then you can deduct all your expenses  to come up with your net operating income. Your expenses include repairs, utilities paid, labor costs, property management or any of a vast variety of other expenses. Once you have your net operating income, then you can deduct any mortgage interest paid to arrive at the net income.

Rental Tax Saver: Depreciation

Now, here comes the good part for rental property--depreciation. You also get to deduct 1/27.5 of the building’s cost from your net income.  This figure becomes your taxable income or, in many cases, loss. This is how even a good, cash flowing property can manage to be a loss for tax purposes. It is also how an investment property can help reduce ordinary income because this “loss” is deducted from the owner’s wage income and can often substantially reduce income tax owed.

There is a hitch, naturally. If losses are over $25,000 and ordinary income is over $100,000, then the taxpayer may not be able to deduct the whole amount due to Passive Activity Loss Limitations. Still, the taxpayer does get all other ordinary deductions and may well substantially reduce the amount of tax owed. Owning real estate is one of the best tax strategies allowed by the current tax code. Anyone earning any kind of money really should consider investing in rental property, whether residential, multi-family or commercial.

Today’s real estate market offers amazing opportunities for anyone thinking about investing in real estate. Mortgage rates are incredibly low, values are lower than they have been in many years and rents have not dipped. Want to discuss rental property? Call me anytime.

My, How Mortgages Have Changed!

The horse has already bolted out the barn door, which the mortgage industry is now nailing firmly shut.   Due to the banks’ foolhardy loans during the “bubble years”, home prices and loan values are now at an all-time low, but few are able to benefit. The reason? Those who want a home loan today need pristine credit. That means a FICO score of 750 to 775.  Since the nation’s median score is 711, that means fully half the population would not qualify for a new home loan even if the 20% down payments were no problem.

Because of the new, much tighter loan qualifying guidelines, the terrific bargains out there will have to remain a tantalizing, but forbidden  treat for potential buyers. In the past before the current crisis, a FICO score of 700-725 was considered “solid”, a good risk for the bank. FICO scores range from 300 to 850.  Freddie Mac and Fannie Mae, two government agencies, are now covering about 75% of the mortgage market and, according to data just released pursuant to the Dodd-Frank financial-services legislation,  have approved borrowers with 750 to 775 for 75% of their mortgages when in 2005 that high a FICO accounted for just 5% of approvals.

Paying close attention to credit reports is now, more than ever, of prime importance for would-be home owners.  Having a score below 750 does not make getting a mortgage approval impossible, just more expensive. Besides the 20% down payment required for conventional mortgages,  a 730, for instance, would cost an extra .125 percentage points per year.  Between 700 to 725, previously an un alloyed approval, the borrower will pay an extra quarter percentage point. Below 680, it gets harder to find an approval and, of course, costs more.

Those who already own their homes and are looking to tap into today’s great loan rates will face similar obstacles. The banks will look for the higher credit scores, adequate income and what is now increasingly difficult to come by–at least 20% equity in the property. The rules for refi really are little different from those for first-time buyers. Cash-out refis also are subject to stringent approval guidelines as home values are still dropping or wildly gyrating in many areas. And, unlike the past, no one seems to have much faith in the future any more.

 

Housing Takes Another Hit

Just when we think it’s getting better, the news comes out that we are in for a double-dip in housing prices. Last year in 2010 things were starting to look up in many municipalities as sales were brisk and housing prices were even starting to inch up again. This year, though, the situation has turned from hopeful to grim. Now it appears that the price increases of last year were mainly due to the home buyers’ housing credit extended by the U.S. Congress to buoy the market. Buoy it they did, but now we’re in for a let-down. In September of 2010 as the last of the home buyer credit buyers closed on their properties, housing started to slide. Of course, it’s natural for sales of homes to slide  after Halloween and throughout the winter, especially in cold-weather states, but this year’s slide began earlier and lasted longer.

Compounding the problem was the “robo-signing” scandal which halted foreclosures for several months last fall. Regular sales and short sales continued to pile up as inventory on a stagnant market, then the banks resumed their foreclosures. Foreclosures hit at perhaps a more rapid rate as banks rushed to close out their books at the end of the year. Now, at the end of February, here in Southern California we have not only a huge inventory, but I would even characterize it as a glut of properties clogging up the market.

Another issue adding to the misery is the difficulty borrowers are having obtaining financing. After the bailout, as we all know, banks, instead of spreading the wealth around as was intended, instead simply stopped lending.  Belatedly  realizing their folly during the bubble years, banks, always ponderously slow and bureaucratic, finally reacted–by clamping down on lending! Too late, banks. It has been estimated that half the population now has bad credit due to the recession in one form another, either a short sale, foreclosure, bankruptcy, late payments on credit cards  or, at a minimum, too much debt.  Lenders now will not lend to these people

For an analysis of what the near future holds for lending, check out my Pasadena Short Sale Blog. Hint: it’s another downer.

All of these factors have played a part in the current housing glut and consequent stasis. The inevitable result will be–yet lower prices as banks, short sellers and those who must sell for one reason or another, all compete with one another for the few buyers out there.  Already this year, analysts have indicated that the scant 2.25% gain in L.A. housing last year has been wiped out. Some experts are predicting that we are in for another dip of approximately 15%. I am not in the prognostication business, but I can say that it’s not looking good.

Already from 2006-2008 many cities in five states, California, Nevada, Arizona and Florida and Michigan, according to Federal Housing Finance Agency data, have lost significant value in housing. Starting with Stockton, which lost 75% of its housing value in those two years, the dreadful list continues with Modesto at negative 73%, Vallejo negative 64%, Salinas at negative 60%. These are horrible numbers. Imagine losing 75% of the value of your home in just two years through no fault of your own!

The roll of California cities continues with Riverside-San Berdo-Ontario tied with Bakersfield  at negative 47%, Fresno at negative 45%, Sacramento area at 44%, Oxnard-Thousand Oaks at 41%, Santa-Barbara-Santa Maria-Goleta tied with Santa Rosa at negative 40%. The l ist goes on-Oakland area -38%, Santa Ana-Anaheim-Irvine -36%,LA-Long Beach-Glendale -32, San Luis Obispo-Paso Robles -29% and even Santa Cruz-Watsonville lost 29% in two years.

That just us. Of course, Vegas lost 54% of its value in those years and is still hemorrhaging. Reno-Sparks lost 41%; Phoenix-Mesa-Glendale was down 31% and is still falling. Then, like California only worse because it has a less diversified economy, is Florida which was and still is a disaster zone. Cape Coral-Fort Myers lost 60% of its value, followed by Naples-Marco Island at 54%  negative, Ft. Lauderdale -45%, West Palm Beach-Boca Raton down 45% and on and on.

That was the story three years ago. Much as we would like to say it’s getting better, really, it’s not over yet.

 

How To Pay Off Your Mortgage Faster

These days with 30% of those with mortgages under water and foreclosures coming left and right, it’s easy to forget that 50% of all American homes have paid off mortgages. That’s right–50%. Though some may quibble that means huge amounts of untapped equity that could be used elsewhere more productively, for the average homeowner paying off the mortgage means peace of mind, safety and security in an unsafe and insecure economy.

Pay Off The Mortage Faster

Paying off the mortgage is a good thing, but how can a homeowners get it done faster than the 15 or 30 years of payments outlined in their mortgage documents? Many routes to mortgage-free living exist, most almost painless.

One simple method involves refinancing the property. Despite the millions suffering from plunging home values, others still have plenty of equity. If you estimate that you have at least 20% equity in your home, refinancing is a good options. It makes sense even if your present rate is 5% or 6% as current rates are hovering closer to 4%. A good rule of thumb is–if you can save 1% in mortgage interest than it is worthwhile to refinance. And, if you can afford it, it might make greater sense to refi into a 15-year mortgage which will save you more than half the interest costs of a 30-year mortgage.

Another simple method of paying off your mortgage faster is to make bi-weekly payments. That way if your payment on, say, a $300,000 mortgage at 5% over 30 years is $1610 per month, you could break this up into two payments a month of $805. Because a year has 26 weeks, paying biweekly will have you making 13 payments and by the end of the year, you will have made an extra payment. You could also, of course, make a whole extra payment any time during the year.  Or you could divide one payment of $1610 by 12 and pay an extra $134 per payment. The savings can be substantial. In the above example, according to this nifty calculator from bankrate.com, a homeowner could shave 5 years off his 30-year loan and over $50,000 in interest charges. Not bad.

Do Banks Charge A Fee?

Some banks are offering this biweekly mortgage payments as a service with a setup fee of several hundred dollars. Citibank, for instance, charges $375 for the “convenience” of taking this money out of your checking account and then dings you again when you make the payment. Most banks, including Citibank, will allow you to make extra payments for free.  It is possible to make this payment yourself, but it pays to check with the bank first as your bank may just deduct the payment from principal and then still expect the regular payment.

High-Interest Credit Cards First

Making this extra payment can save the homeowner in this example, for instance, 5% so it does not make sense to put the money into the mortgage if you have outstanding balances on credit cards charging interest rates of 6% or above and certainly not the 29% charged by some cards. Pay off those high-interest cards first and then start working on the mortgage.

Great Short Sale News. You CAN Buy Another House.

Losing sleep over the precipitous drop in the value of your home? Wondering how you can continue to make payments on that $500,000 loan when the home now seems worth at most $300,000? Casting  jealous glances at the newcomers in your area who are getting bargain prices and bargain rates?

Guess what? Now you can short sell your home AND  buy another house at today’s prices and rates.

Over 14 million loans in the U.S. are now either underwater or in some stage of foreclosure. About half the nationwide sales to new buyers are either repossessions or short sales.  It seems to most underwater homeowners that there ought to be some way to connect the two–now there is. You can short sale your home and buy a similar property for half the price.

Lenders are  now coming out with new programs, many insured by FHA, which make it possible for homeowners to short sale their homes and simultaneously buy another property at today’s prices and today’s rates. Many homeowners have allowed their homes to go into foreclosure or waited helplessly for the loan modifications that never came simply because they couldn’t figure out where they were going to live if they left their homes. Some decided to stick out the school year. Others couldn’t bear to leave the neighborhood. Now they don’t have to.

Here are a few of the guidelines that will allow homeowners to short sale their current home and simultaneously purchase another home. First, they must be current on their mortgages. So, owners who have “let the property go” or who were not financially able would not qualify. Finally, here is some reward for those who have steadfastly made their payments in the face of dropping values.

Second, they must be able to qualify for the new mortgage.That means a FICO of at least 640 and income sufficient to pay for the new mortgage.That’s not as hard as it may seem. If a homeowner can pay the $500,000 mortgage at 6% or 7%, no matter with what great difficulty, think how easy it will be to pay the $300,000 with a 5% mortgage for an identical property.

Third, the buyer must have money sufficient to pay the minimum 3.5% FHA down payment and the accompanying  closing costs. The short seller will get no proceeds from the sale of his property. That’s a given. So, where will the money come from for the new property? If  it’s an FHA loan, the minimum down payment is 3.5% and that total amount can be a gift. Also, the short seller is eligible for the federal tax credit which goes up to $6500 for move-up buyers. That may be applied to the down payment or closing costs, but this is not yet determined.

Finally, some programs require that the new loan cannot be more than the previous loan. So, in this case the new loan cannot be more than the $500,000 which the  buyer was paying on the previous home. With the drop in prices today, in most markets, this will be an easy criterion to satisfy.

Impetus to do short sales just got much bigger. If you’ve been dithering about what to do and how to house the family after a short sale, these new loans could certainly aid in the decision-making process and give you peace of mind. Short selling your home and buying another one at today’s much lower values may, in fact, result in a significant improvement in your housing standards…