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8 Places to Go When Your Mortgage Lender Says No

house

By: Dona DeZube
Published: February 4, 2014

New mortgage rules draw some pretty clear lines about who should — and shouldn’t — get a mortgage. If you fall outside the lines and your lender says no, you have eight other options.

New mortgage rules are pretty clear about what you have to do to convince a lender you’re a qualified mortgage borrower. Meant to measure your ability to repay, the new rules created a list of eight things lenders had to check to make sure you could repay your mortgage.

Those protections help ensure we’re not going to see a repeat of the mortgage crisis any time soon. The new rules are also designed to reward banks for staying away from risky products like interest-only loans. But if you can’t meet any of the eight standards you’re going to find it harder to get a new mortgage or refinance your existing mortgage.

The NATIONAL ASSOCIATION OF REALTORS® predicts the changes will slice about 5% to 7% of borrowers out of the market.

Where do you turn if you’re in that 5% to 7% or you like your balloon loan and want to refinance into another balloon loan?

The fine print in the new rules created some exemptions that you can use to try again if you don’t meet one or two of the eight qualified mortgage checks, or if you want to go with a loan product that the rules discourage lenders from making.

1. Your State Housing Finance Authority

State Housing Finance Authorities specialize in helping first-time and low-to-moderate income homebuyers and homeowners. They’ll often give you a below-market interest rate or the option of putting down as little as 3%.

In exchange, you’ll likely have to agree to complete a financial education course and prove every penny of your income.

Historically, HFAs have had much lower rates of late payments and foreclosures than for-profit lenders, so they’re exempt from the rules.

2. An Itty-Bitty Bank

Banks and credit unions that have less than $2 billion in assets and make 500 or fewer first mortgages don’t have to follow the same rules as larger lenders.

That’s because they didn’t make the risky loans that led to high foreclosure rates during the mortgage crisis. Plus, they tend to hold on to the loans they make (rather than selling them to investors). That makes it easier for the bank to work with customers who run into financial trouble.

Small lenders can charge higher fees and interest rates than big banks, which they need to do if you have a tiny loan amount, because some fees, like a title search, cost the same no matter how big or small your loan is.

If, for example, you had a $20,000 mortgage, the fee cap would limit you to $1,000 in fees, which probably isn’t enough to cover a title search and appraisal. Although the bank would still earn interest on your loan, it would have to pay the fees for you — and no bank wants to do that.

Some small lenders can still make balloon loans, where you owe one big payment at the end of your loan. A balloon loan has a lower monthly payment than a regular mortgage loan where each month you pay back some of the money you borrowed instead of just interest.

The catch is that the small lender has to hold on to your loan for at least three years and can’t sell it into the secondary market.

So you’ve got to persuade the bank that your mortgage is a good investment. Small bankers can be very conservative lenders, which is another reason they didn’t end up with a lot of foreclosures on their hands during the real estate crisis.

Right now, any lender who meets the size rule can use the small lender exemption. Starting Jan. 10, 2016, only small lenders in rural underserved areas will get to use the exemption, so don’t delay trying this avenue unless you live in a sparsely populated place.

3. A Government-Guaranteed Loan

The new rules set a clear line for how much of your income, max, you should be using for debt: 43%. If you’re above that limit because you have too much debt or not enough income, there’s a work-around.

You can go over the 43% limit if your loan is guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration, the VA, or the U.S. Department of Agriculture’s rural housing loan program.

4. Community Development Nonprofits

Nonprofit lenders who work with low- and moderate-income borrowers don’t have to follow the new mortgage rules. As long as they don’t make more than 200 loans a year, they can create special loan programs to help the people in their community.

Community Development Financial Institutions set up shop in areas undergoing revitalization. They target a particular community for assistance, including homebuyer incentives. CDFI lenders also don’t have to follow the new mortgage rules.

5. Homeownership Preservation and Foreclosure Prevention Programs

If you’re underwater on your mortgage, meaning you owe more than your home is worth, you can still get a loan from a foreclosure prevention program or a homeownership stabilization organization. Because these groups have a history of knowing how to help troubled homeowners, they don’t have to follow the new mortgage rules.

6. A Safer Loan

If you’re in a dangerous, unfair loan right now and you want to refinance into a safer loan, your lender doesn’t have to follow the eight standards when it gives you a better loan. There’s an exemption from the ability to repay standards when a lender is moving a borrower out of:

  • An adjustable-rate mortgage that’s about to adjust to a much higher payment.
  • An interest-only loan.
  • A loan with negative amortization (meaning the amount you owe can go up even if you make all your payments).

Your new standard loan:

  • Has to have a fixed rate for the first five years.
  • Must lower your monthly payment.
  • Can’t have fees of more than 3% of the amount you’re borrowing.

7. A Work-Around

If you’re rich enough that your bank has assigned you a personal wealth manager, that’s the person to talk to when it’s time to refinance. Your bank will want to keep you as a customer and will find a work-around to fund your loan.

For example, if you’re using more than 43% of your income for debt but you can show you have millions in assets, your personal banker will make the case that you’re quite able to repay your mortgage even though you don’t meet the debt-to-income rule.

8. Another Kind of Loan

The new mortgage rules don’t apply to all loans. It specifically doesn’t include:

  • Open-ended loans.
  • Timeshare loans.
  • Reverse mortgages.
  • Temporary loans, including bridge and construction, and the construction phase of construction-to-permanent loans.
  • Loans from the bank of Mom and Dad.

If one of those types of loans will work instead of a mortgage, you won’t have to meet the new mortgage rules.

“Visit HouseLogic.com for more articles like this. Reprinted from HouseLogic.com with permission of the NATIONAL ASSOCIATION OF REALTORS®.”

What You Should Know About Your Home and Your 2013 Taxes

taxes

By: Dona DeZube
Published: December 12, 2013

It’s the last year for three sweet home tax benefits, but the first for a way simpler home office deduction.

These days few things start a fight on Capitol Hill faster than taxes. Despite the fact that three important tax benefits used by millions of American homeowners are days from expiring, Congress is unlikely to do anything to re-up them any time soon.

So if you’re eligible, tax year 2013 is possibly the last time to claim the private mortgage insurance (PMI) deduction, the energy tax credit, and debt forgiveness benefit, all of which all expire on Dec. 31, 2013.

At least there’s one piece of good news for homeowners: If you have a home office, there’s a new, simpler option for calculating the home office deduction for which you may qualify on your 2013 taxes.

Meanwhile, here’s what you need to know about those expiring benefits as you ready your taxes:

PMI Deduction

This tax rule lets you deduct the cost of private mortgage insurance, which is what you pay your lender each month if you put down less than 20% on a home. PMI protects the lender if you default on the home loan. Your deduction could amount to a couple hundred dollars depending on your tax bracket and other factors.

Find out if you qualify for and how to take the PMI deduction.

Energy-Efficiency Upgrades

This sweet little tax credit lets you offset what you owe the IRS dollar-for-dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades, from insulation to water heaters. On the downside, the credit is capped at $500 (less in some cases). But on the bright side, the right improvement could lower your utility bills indefinitely.

Related: Take back your energy bills with these high-ROI energy-efficiency practices.

Debt Forgiveness

When you go through a short sale, foreclosure, or deed-in-lieu, your lender typically lets you off the hook for some or all of what you owe on your mortgage.

That forgiven mortgage debt is income, on which you’d typically have to pay income tax.

Suppose you’re in financial distress and your lender agrees to let you short-sell your home, say for $50,000 less than you owe on the mortgage, and forgive you for the balance. Without the protection of the Mortgage Debt Forgiveness Act, you’ll owe income tax on that $50,000.

It’s likely if you had the money to pay income tax on $50,000, you’d have used it to pay your mortgage in the first place.

New Simplified Option for the Home Office Deduction

This may be the last year for the benefits above, but a new one kicks in for the 2013 tax year. If you work from home, you may qualify to use a new, simplified option for claiming the home office deduction when you file your 2013 taxes.

How much simpler is it? It lets you claim $5 per sq. ft. for up to 300 sq. ft. instead of having to compute the actual expenses of your home office using a 43-line form. To calculate the square footage of your office, just multiply the length of two walls. For example, an 8-by-10-foot room is 80 sq. ft. And at $5 per, that’s $400.

Although using the simplified option is obviously easier, the basic requirements for claiming the home office deduction haven’t changed. Your home office still must be used for business purposes:

  • Exclusively, and
  • On a regular basis.

Related: Which Home Office Set-Ups Qualify for a Deduction?

Why Might the Tax Benefits Not Be Renewed?

Although the expiring tax benefits were renewed retroactively in past years, that may not happen in 2014 because many in Congress would like to see comprehensive tax reform rather than scattershot renewals of individual provisions. This could delay a decision on the homeownership tax benefits until the big picture budget and tax issues are resolved.

So if you can, enjoy them now!

“Visit HouseLogic.com for more articles like this. Reprinted from HouseLogic.com with permission of the NATIONAL ASSOCIATION OF REALTORS®.”

Your Top Home Ownership Tax Questions Answered

home taxes

By: Natasha Padgitt
Published: December 31, 2012

Which tax benefits do home owners miss? Will you get audited if you take the home office deduction? Find out the answers to these questions and more before Tax Day.

There are a lot of home ownership tax benefits — if you don’t forget to take them. To make sure you get your due, HouseLogic asked tax expert Abe Schneier, a senior technical manager with the American Institute of CPAs, for tax-filing tips.

HouseLogic: What’s the most common home-related tax deduction or credit claimed by home owners?

“Visit HouseLogic.com for more articles like this. Reprinted from HouseLogic.com with permission of the NATIONAL ASSOCIATION OF REALTORS®.”

Abe Schneier: The mortgage interest deduction, [which the NATIONAL ASSOCIATION OF REALTORS® estimates amounts to about $3,000 in tax savings for the average itemizing home owner] and [the deduction for] real property taxes.

HL: Which tax provision do home owners often overlook?

AS: You can deduct mortgage insurance premiums [or PMI] if you were required to get PMI as a condition of receiving financing on your home. Some people will overlook that, although it’s typically disclosed on the 1099 that you receive from the bank, along with all the deductible information you need.

HL note: The PMI deduction has been extended through 2013 and is retroactive for 2012.

[Another area of tax-filing confusion is] whether you’ve correctly treated any points you paid if you refinanced. In a new home purchase, the points can be deducted [in the tax year you paid them]. But typically in a refinancing, you have to amortize and deduct any points you paid over the life of the mortgage, and people tend to forget that after a couple of years.

HL: What’s the No. 1 mistake home owners make when filing their taxes?

AS: Because you receive a statement from the bank with details [such as] how much mortgage interest you paid over the year, and how much the bank pays on your behalf in real estate taxes, the number of mistakes has dropped.

But if you’re in a state where you pay the real estate taxes on your own — the bank doesn’t handle it for you — [people] make mistakes because sometimes real estate tax bills include other items besides pure real estate taxes. It could be trash collection fees; it could be snow removal fees that the state or county is assessing on the real estate tax bill. Since the items are included in the same bill, home owners sometimes deduct [those fees] regardless of whether the items are actually taxes.

HL: What’s the single most important piece of advice for people filing their taxes as a first-time home owner?

AS: You have to take a look at your closing statement from when you bought the house. It’s commonly called the HUD-1 form and you receive it at the closing. Occasionally, there are fees such as prepaid taxes or interest at closing that can be deductible.

HL: What tax advice do you have for someone who’s owned their home for 10 or 20 years?

AS: If you’ve been a longtime home owner and you’ve been through refinancings, you have to be careful about how much interest you’ve deducted, especially if you have a home equity loan or equity line. A lot of people who’ve refinanced have sizable equity lines. The maximum outstanding home equity debt on which interest is deductible is $100,000; the maximum loan amount on which interest is deductible is $1 million.

HL: What home improvement-related records should home owners keep?

AS: Absolutely keep your receipts for couple of reasons:

1. You want to make sure — if there are any warranties attached to the work that was done — that you maintain those records and you have something to go back to the person who did the work in case something doesn’t function properly.

2. If you’ve added value to the home — you’ve added a deck, you’ve added a room, you’ve added something new to house — you’ll need to know what the gain is on that capital improvement when you sell the house.

HL note: Tax rules let you add capital improvement expenses to the cost basis of your home, and a higher cost basis lowers the total profit or capital gain you’re required to pay taxes on. Of course, most home owners are exempted from taxes on the first $500,000 in profit for joint filers ($250,000 for single filers). So it doesn’t apply to too many people.

HL: How do I tell the difference between a capital improvement and a repair?

AS: Typically a repair is [done] to allow an item, like a home furnace or air conditioner, to continue. But if you were to replace the heating unit, that’s not a repair.

HL: Does taking any home-related tax benefits, such as the home office deduction, make a taxpayer more likely to be audited?

AS: Only if numbers look out of the ordinary — for instance, if one year you were writing off $20,000 in mortgage interest debt and the next year you’re writing off $100,000 in mortgage interest. Taking the home office deduction in and of itself doesn’t usually generate an audit. However, if you claim nominal income and significantly higher expenses in an effort to create artificial losses, the IRS will see that there’s something else going on there.

HL: Once filing season is over, when should home owners start thinking about next year’s taxes?

AS: Well, hopefully, when you visit your CPA to give information about or pick up [this year’s] tax return, your CPA has spoken with you about your plans for [next year]:

  • If any major improvements are scheduled
  • If you’re planning on moving
  • How to organize any expenditures for fixing up the home before sale

If you’re planning to do any of those things, talk with your CPA so that you’re prepared with documentation and so that the [tax pro] can help minimize your tax situation.

“Visit HouseLogic.com for more articles like this. Reprinted from HouseLogic.com with permission of the NATIONAL ASSOCIATION OF REALTORS®.”

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