Ask Realty Times - March 4, 2005
by Peter G. Miller
Question: I'd like to sell my property for $250,000. The buyer would get a $200,000 mortgage (80 percent of the purchase price) and I would take back a $50,000 second trust. Can the buyer avoid private mortgage insurance (MI)? Answer: Yes. Because the first loan is equal to 80 percent of the purchase price, no MI coverage would be required. However, you need to ask if you are well served by taking back a $50,000 loan. Here's why: The transaction you propose represents 100 percent financing. Who has the greatest risk if the buyer walks away from the property? Not the purchaser -- he has no cash in the house. Not the first loan holder -- if the property is foreclosed, the first mortgage must be paid in full before any money is made available to repay the second loan. In effect, you have all the risk -- and no mortgage insurance. For your protection it would be best to insist on a good down payment, to carefully review the borrower's credit information and past tax returns, and to have all loan documents prepared and recorded by your lawyer. If this seems "tough" or "unfair," remember you're the lender and any commercial lender would insist on the same standards. Question: If a borrower dates an IRS form 4506 at closing, does a lender have the ability to pull the tax returns two or three years later in the event of default? Answer: IRS Form 4506, Request for Copy of Tax Return, is commonly provided at closing. It allows a third party, such as a lender, to obtain copies of the borrower's past tax return for as many as four separate years. The reason lenders want a Form 4506 is to review a tax return in the event a loan package is audited, something that might happen if the loan is sold. For this reason it's possible that the lender already has past tax returns in the loan file. Instructions for the form state that "form 4506 must be signed and dated by the taxpayer listed on line 1a or 2a. If you completed line 5 requesting the return be sent to a third party, the IRS must receive Form 4506 within 60 days of the date signed by the taxpayer or it will be rejected." The catch is this: Borrowers sometimes sign a Form 4506 -- but fail to complete the date. The result is that the form can be dated in the future. In the event of default, one reason lenders would want to look at past returns is to determine if the loan application was somehow improper. Please speak with an attorney for details. Question: Please help! How do I begin researching affordable homes? The homes here are out of reach for me and the property taxes are high. Where are the affordable homes? Where can I get financing? Answer: You need a local real estate broker. The broker can review your needs and finances, help find areas within your price range, and suggest local lenders who can assist with your financing. For a list of brokers in your community, try the market condition reports provided by local brokers to Realty Times. Question: I have been with my boyfriend for a longtime. We have been living together in this house for eight years but the house is in his name only. How do I go about getting my name put on this house? Answer: If you were married your name could be added to the deed with "good" consideration -- title in exchange for love and affection. However, because you are not married adding someone to the title is not so easy. For instance, if the property is now financed, adding a name to the title may allow a lender to invoke a "due-on-sale" clause and call the loan. Why? Because by changing the title the property has effectively been "sold." Does the mortgage now have a current interest rate? If not, perhaps this is the time to refinance -- and also clarify ownership. Both you and your boyfriend will want to have an attorney prepare proper documents. Also, you should each have proper wills and living wills. Question: I am considering the purchase of a home in a very nice area of town, with one exception -- the development is near power lines, and the lot that I have (unwittingly) reserved is, along with several others, extremely close to the lines. I am concerned for my own safety and worried about re-selling the property. Can power lines be an impediment to a sale? Answer: There are people with concerns regarding electromagnetic fields from power lines and therefore they would prefer to buy elsewhere. However, others are not bothered by such facilities. As the New England Journal of Medicine said in an editorial published July 3, 1997, "electromagnetic fields have no reproducible biologic effects at all, except at strengths that are far beyond those ever found in people's homes." "Eighteen years of research," said the editorial, "have produced considerable paranoia, but little insight and no prevention. It is time to stop wasting our research resources." Try this: Contact the local power company or health department and ask them to bring a "gausmeter" to the site to check electromagnetic field levels. Question: There is a company that offers loans on homes that I want to buy. They offer to finance 65% of the appraisal value plus 15% for repairs. The rate is 13.75% over five months plus 4 points with a $50,000 minimum. Can I do better? Answer: Let's say that you borrow $50,000 at 13.75 percent interest plus 4 points. The loan term is five months. Let's agree that no monthly payments are due and that the balance owed at the end of the five-month term is $50,000 in principal plus $2,865 in interest and $2,000 (4% x $50,000) for points, a total of $54,865. The effective annual rate would be 23.35 percent. Plus you have to put down 35%. Now ask this: What happens if you cannot refinance or sell the property in five months? Is 15 percent of the property's acquisition price enough to fund all repairs or will you require additional cash? As an alternative, consider investment financing which parallels the FHA 203(k) program. Under 203(k), the loan term can be as long as 30 years, little down is required and the amount financed can equal 110 percent of the property's improved value. As to the FHA program itself, it's restricted to owner/occupants buying one-to-four units and unavailable to non-occupant investors. Alas.
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