DEAR BENNY: My husband and I inherited a home from my husband’s uncle who passed away a few weeks ago. Will the lender expect us to refinance the home or can we just assume it even if it is a conventional loan? –Karen
DEAR KAREN: Unless the existing loan was from a private person, it is most likely covered under the Garn-St. Germain Depository Institutions Act of 1982. This federal law puts restrictions on the ability of a lender to exercise the "due on sale" clause that exists in most mortgages (also called deeds of trust). One of these restrictions reads as follows: "With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon … (5) a transfer to a relative resulting from the death of a borrower. …"
Accordingly, you should advise the lender of the death, and just continue paying under the terms and conditions of the old mortgage.
However, do you know what the interest rate is on that property? Rates are currently very low, and if you can get a better rate — and assuming that you and your husband can qualify for a new loan — you should consider refinancing.
DEAR BENNY: I plan to sell a portion of my ranch where I live and use the proceeds to buy a house in the city as my primary residence. I will be keeping the house and some of the land on the ranch for occasional weekend and eventual retirement purposes. Will I be able to avoid the capital gains tax on the land sale? Does that tax apply only to the sale of a house?
Also, I paid cash for the land and will be able to pay cash for the new house. In today’s environment, since I have the means, is it a good idea to avoid a mortgage and forfeit the tax benefits? –G.
DEAR G.: Your first question is easy. If you sell any real property, you have to pay the applicable capital gains tax. You should talk with your financial advisor, since you are probably eligible for the up to $250,000 exclusion of gain (up to $500,000 if you are married and file a joint tax return.)
Your second question is very difficult to answer, since much depends on your own financial situation. While I do not scoff at the benefits of deducting the mortgage interest you pay, the fact remains that too many people overrate those benefits. For example, if you are in the 25 percent bracket, that means that for every dollar of interest you pay to your lender, you can deduct only 25 cents. That means that the remaining 75 cents is not doing you any good.
I personally believe that most people who can qualify for a mortgage should get one. I have too many clients who are "house rich and cash poor." They have paid off their mortgage, but they are unable to pay the real estate tax or the insurance for the house. They wanted to pay off their loan, so they tapped into their savings, but now they don’t have enough money to live on. …CONTINUED
This is just my personal opinion. Readers should review their own situation and make their own decision.
DEAR BENNY: I have owned my 20 properties for more than two decades. I have $700,000 in the bank and recently tried to buy another piece of property for investment. I was told that I could not buy this house because I had more than 10 properties — Fannie Mae and FHA would not allow it. The only way I could buy the house is for cash. That requirement is restricting my growth. My credit score is over 750. Do you have any suggestions? –S.T.
DEAR S.T.: I congratulate you on your success in real estate. Your situation is not uncommon, especially in today’s uncertain market. Lenders are nervous and are concentrating on making loans for principal residences.
However, I can’t believe that you cannot find a lender. You don’t need Fannie Mae or Freddie Mac assistance. Your local bank may be more than willing to make you a loan, although the terms and conditions will be stricter than if you were just buying a home for your own personal use.
You may have to put down 25 or 30 percent, and the interest rate will be higher. You may also have to pledge some of your assets as a personal guarantee. And if your banker is unwilling to give you a loan commitment, suggest strongly that you will have to move your savings to another bank. That usually works.
DEAR BENNY: You recently wrote that HUD or FHA imposed a $6,000 limit on "closing costs." The $6,000 limit is on lender "origination fees" — not total closing costs. As a reverse mortgage loan officer, your article will cause me grief as I try very hard to consult with seniors (being a senior myself) regarding the features and benefits of the program. –Roger
DEAR ROGER: Thank you for writing and for clarifying this for me. I appreciate the fact that you honestly counsel seniors about the pros and cons of a reverse mortgage, and as you suggest, even though there are limits on "lender origination fees" there are no limits on closing costs.
Accordingly, readers who are interested in exploring a reverse mortgage must make sure that they ask prospective lenders about all costs associated with that kind of mortgage and demand that the lender put this information down in writing. This will enable you to shop and compare.
Do not just rely on one mortgage lender; there are many such reverse mortgage lenders in the country, and you will find different charges and costs. Do the numbers before committing yourself — if indeed you really want such a mortgage.
Keep in mind that a reverse mortgage should be considered as a last resort.
DEAR BENNY: I own stock in a co-op apartment building and live in my apartment there. A while back the then-president made a remark at a stockholders meeting that struck me as off the wall. He said that no one would be able to sell their unit for a price under that of the last highest price sale. There is nothing in the bylaws stating this and I’m of the opinion that even if there were a bylaw referencing sale-price control by the board, it would be unenforceable not to mention illegal.
States have different laws, I realize. But do you have any background data on the ability of the board to control sales price in a co-op or condo? –Roger
DEAR ROGER: Most cooperative housing programs that I am aware of require that prospective owners must be approved by either a membership committee or the board of directors, or in some cases the entire cooperative membership. This is quite different from condominiums, which rarely provide such a veto right for prospective owners. …CONTINUED
But the right to veto a potential owner must be limited. Generally a potential owner can be turned down for only two reasons: (1) financial issues or (2) unwillingness to abide and adhere to the cooperative rules and regulations.
So, your board president may just have been "blowing a little smoke." However, in fairness, I can understand that if a contract comes in to buy a co-op unit at such a ridiculously low price that it would dramatically impact the property values of all other owners, and may be justification to reject that contract — and the potential purchaser — from becoming a member of the cooperative. However, the price, in my opinion, would have to be really low — and not just "under the last sale price."
DEAR BENNY: My father co-signed on my mortgage approximately 12 years ago. We are both listed on the title/loan papers, although I have been the only one actually paying the mortgage all this time. If one of us died would the property automatically go to the other party or do we need to make further arrangements for that to happen and stay out of the probate process? Any help that you could give me would be greatly appreciated. –Kimberly
DEAR KIMBERLY: The answer depends on how title is held. This answer must be general in nature, because different states have different procedures. If you were married, you and your spouse would generally hold title as tenants by the entireties; on the death of one, the survivor would own the entire house.
But clearly you are not married to your father. Thus, you can hold title as joint tenants with rights of survivorship — which means that on the death of one joint owner, the survivor owns the entire property, and probate regarding the house is not necessary. However, if you and your dad hold title as tenants in common, on the death of one owner, his/her share of the property will have to go through probate. On the death of one tenant in common, his/her share is distributed according to the last will and testament, or if there is no such will, then according to the laws of intestacy in your state. But probate is required for this type of title.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@sandbox.inman.com.
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