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A Basic Guide To Real Estate, Mortgages & Taxes

Peter G. Miller — Wed, 11 Nov 2009 04:33:00 +0000

Let’s be honest: April 15th is a day of reckoning, the moment when we find out what we really owe for taxes. In households nationwide wallets are drained and many who were rich on the 14th are greatly impoverished by the 16th.

But for those with real estate the load is made lighter by tax rules which encourage the ownership of homes and investment property. Such rules are not only good for homeowners, they’re also good for the country: About 20 percent of all economic activity nationwide is related to real estate, so policies which encourage real estate activity help everyone.

It seems that almost every year changes to the tax code require the production of new forms and a re-education process. That said, the real estate basics remain in place and they’re good news for buyers, sellers, borrowers and owners.

Mortgage interest is generally deductible.

The IRS says there are three categories of deductible home mortgage interest:

Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2005 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2005 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

Substantial profits can be sheltered when a prime residence is sold.

When a prime residence is sold, up to $500,000 in profits can be sheltered from federal taxes if married, $250,000 if single, providing the home has been used as a prime residence for two of the past five years. Generally this deduction cannot be used more than once every two years, according to the IRS.

There are also provisions which may be helpful to individuals who must sell a prime residence in less than two years. Under the 2004 safe harbor rules, individuals may be able to get some capital gains relief under certain circumstances, such as being forced to move because a job has been relocated at least 50 miles or a home that must be sold because of multiple births resulting from the same pregnancy.

Also, individuals in the Armed Forces and the Foreign Service may be entitled to special consideration under the Military Family Tax Relief Act of 2003 (MFTRA). For instance, you may have longer to take a capital gains deduction or to amend a tax return. There are other provisions under MFTRA that also may be helpful, so check with a tax professional for specifics.

Lastly, please see the information below regarding the new tax credit of up to $6,500 which is available to certain owners who obtain a contract to buy their current residence before April 30, 2010 and close before June 30, 2010.

Points may be deducible by both buyers and sellers.

Picture a situation where a home is sold for $500,000 and the owner — to help close the sale — offers to pay 1 point for the buyer. If the property was financed with a $350,000 mortgage, a point would be worth $3,500. According to the IRS, “the seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller.”

Interestingly, in this situation the buyer can also deduct the points when the home is sold.

“The buyer,” says the IRS, “reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them.”

In effect, the seller gets to write-off the $3,500 cost by reducing any profit from the sale. The buyer essentially lowers the purchase price of the property when the home is sold at some point in the future — thus increasing the size of any profit. However, since up to $500,000 in sale profits may be untaxed, most buyers will effectively never pay a tax on the seller’s contribution for points.

If a prime residence is refinanced then the deal with points is different: The expense of a point must deducted over the life of the loan. If the home is sold before the loan term ends, then any cost not deducted for points can be used to reduce owner’s profit from the sale.

Home offices may be deductible.

If a portion of your home is used regularly and exclusively as your principal place of business or for the convenience of your employer it may be possible to write off a portion of such costs as mortgage interest, property taxes and utilities. There are a number of tests which must be met to take this deduction, see IRS Publication 587, Business Use of Your Home for details.

In some cases there may be tax advantages associated with not deducting your home office in the year or two before you move. Speak with a tax professional for specifics.

Mortgage insurance premiums may be deductible.

Mortgage insurance premiums should be deductible. The catch? Not all mortgage insurance premiums are deductible by all borrowers. In general, the rules look like this:

The deduction applies to loans made after January 1st, 2007.
The deduction applies to both private mortgage insurance (MI) as well as mortgage insurance through the Federal Housing Administration (FHA), the Veterans Department (VA) and the Rural Housing Administration.
The deduction applies to acquisition indebtedness, meaning debt used to acquire a home.
If you refinance remaining “acquisition indebtedness” then you can write off mortgage insurance on the new debt.
You can take the deduction if you’re married, file jointly and have a gross adjusted income of $100,000 or less. If you’re single or married and filing separately the income limit is $50,000.
The deduction phases out once income limits are passed. For married couples, the deduction is reduced by 10 percent for each $1,000 in income over $100,000. This means there is no deduction for incomes above $110,000. For singles and those married and filing separately, the deduction is reduced by 10 percent for each $500 in additional income — this means there is no deduction above $55,000.
The mortgage premium write-off begins January 1, 2007 and is scheduled to end December 31st, 2010. However, the program is likely to be extended.
Speak with a tax professional for specifics.

Natural Disasters

The Katrina Emergency Tax Relief Act of 2005 provides extensive tax benefits and assistance to those who were victims of hurricanes Katrina, Rita and Wilma. For details, go to the IRS Katrina relief page or call 1-866-562-5227.

If you have been in a natural disaster — a flood, hurricane, tornado, etc., contact your local congressional office to see if special tax help is available. Links to congressional offices can be found by pressing here.

Mortgage Forgiveness Act

Traditionally if you do not pay off a mortgage in full when a home is sold or foreclosed any money not repaid is regarded as “imputed” income — income which is taxable. However, with the passage of the Mortgage Forgiveness Debt Relief Act of 2007, if you can negotiate a partial pay-off with a lender, the amount forgiven will not be taxed by the federal government.

This legislation makes sense because people who have lost their homes, been foreclosed or gone bankrupt have no money to pay. However, the maximum write-off is limited to forgiveness worth no more than $2 million (not a problem for most folks) and — more importantly — the rule applies only to a principal residence.

Some questions to ask: When does this law end? Are home equity loans covered? What about state rules?

The $8,000 Tax Credit For First Time Buyers Extended Until April 30, 2010

Under the FHA reform package passed by the Congress during the summer of 2008, first-time home buyers could be entitled to a tax credit equal to 10 percent of the purchase price of the residence. This credit is limited to $7,500 for married couples and single taxpayers but can be no more than $3,750 for married individuals filing separately.

Since most homes are valued at more than $75,000 the credit will likely be used up with the purchase of a home or condo. The property must be occupied after April 9, 2008 but before July 1, 2009 to qualify. Also, a “first-time” buyer is defined as someone who has not held title to real estate for at least three years. The credit phases out for married couples earning above $150,000 a year and for singles earning more than $75,000.

The catch.

The $7,500 is a credit against taxes due to Uncle Sam. If you owe $10,000 to the IRS you can deduct up to $7,500. But, when you sell the property the $7,500 must be repaid over 15 years — that’s just $500 a year at some point in the future.

Okay, it’s really a $7,500 loan — without interest and when you really need it.

2009 First-Time Homebuyer Credit (Part 1)

In 2009 the deal changed. Under the American Recovery and Reinvestment Act of 2009 the credit amount was raised to $8,000 and NO repayment is required if a first-time homebuyer purchases a residence before December 1, 2009. There is still an income phase out and buyers must own their homes for at least three years.

2009 First-Time Homebuyer Credit (Part 2)

In November 2009 the deadline for the first-time homebuyer credit was extended under the Worker, Homeownership, and Business Assistance Act of 2009 from December 1, 2009 to include contracts made before April 30, 2010 and closed before June 30th.

Also, the income cap to get the full credit was raised from $75,000 if single or $150,000 if married to $125,000 for singles and $225,000 for joint filers. Above the $125,000/$225,000 levels the credit phases out to nothing at $145,000 for singles and $245,000 for couples.

New Credit for Existing Home Sellers

The November 2009 legislation also created a new tax credit for existing home sellers. In basic terms, if you have owned your home for five consecutive years out of the last eight you can get a tax credit for 10 percent of the purchase price but not more than $6,500. The contract to sell your replacement residence must be signed before April 30, 2010 and the deal must be closed before June 30, 2010. The sale price of the property cannot exceed $800,000.

For specifics regarding the November 2009 changes, speak with a tax professional and get a copy of IRS Form 5405. Also, see the IRS first-time homebuyer site for details regarding the new legislation.

Tax Credit For Military Personnel, Foreign Service Personnel and the Intelligence Community

The National Association of Home Builders points out that “the law provides qualified service members who served on official extended duty outside of the United States for 90 days or more at any time between Jan. 1, 2009, to April 30, 2010, another year to buy a home and claim the credit. They have until April 30, 2011, to sign a sales contract, and until June 30, 2011, to settle and close on the home. Both the $8,000 first-time and $6,500 repeat home buyer tax credits are included in the rule.”

“Qualified service members” are defined as a member of the uniformed services of the United States military, a member of the Foreign Service of the United States, or an employee of the intelligence community, according to the association.

For additional information, please speak with a tax professional and see: http://www.federalhousingtaxcredit.com/service_mem.php

Investment real estate can generate substantial write-offs.

If you own rental property you must seek a fair market rental for your property. You may generally deduct mortgage interest, property taxes, repair costs, management by an outside party, depreciation, advertising, insurance, utilities, legal services and other expenses.

It’s possible with rental properties to have both a positive cashflow and a loss for tax purposes. However, the ability to use real estate losses to reduce overall taxes may be phased out as income rises above $100,000.

If a rental involves relatives special rules and restrictions may apply. Check with a tax pro for details.

A 1031 exchange may allow investors to defer all capital gains taxes.

With a 1031 transaction, investment property is exchanged for “like” real estate. The basic requirements are that within 45 days after the “relinquished” property has been sold, a “replacement” property must be identified. The identified replacement property must then be acquired within 180 days after the sale of the relinquished property.

What’s important about a 1031 exchange is that the capital gains tax on the relinquished property is deferred — but it does not disappear. What really happens is that the basis for the new property (the “replacement property”) is reduced by the adjusted value of the “relinquished property” (the old property).

A 1031 exchange is complex and requires the services of a “qualified intermediary.” Among other tasks, a qualified intermediary holds the money from the sale of the relinquished property and applies it to the purchase of the replacement real estate. This must be done because under the rules for 1031 exchanges, the seller of a relinquished property cannot touch money from the sale — it must be held by the qualified intermediary.

Accounting for a 1031 exchange is also complex. Good sources of information include IRS Form 8824, IRS Publication 544, the website www.1031.us and tax professionals.

Death of a Spouse

The capital gains write-off for the sale of a home is $500,000 if married and $250,000 if single. But what happens if a spouse dies?

For years the rule has been that if the couple’s home was not sold by December 31 of the year when the spouse passed then the surviving spouse would be treated as a single home seller. In other words, the maximum write-off would go from $500,000 to $250,000.

There is a certain logic to this approach — and also a certain cruelty. If a spouse dies on November 30th the surviving spouse would have about four weeks to sell the home. This hardly seems right but now the rule has been changed.

Under new legislation passed by Congress, after December 31, 2007 surviving spouses will now have two years from the date of passing to sell the property and still qualify for the $500,000 write-off.

Gifts

For 2009 you can give someone as much as $13,000 per year, tax free. This is up from $12,000 in 2008. For gift information from the IRS, press here.

Sources and Publications

You can be certain that the information presented here is not a substitute for professional advice. As always with taxes, nothing is ever simple or easy. Speak with a qualified tax professional for specific advice — an enrolled agent, a CPA or an attorney who specializes in tax issues.

Also, the IRS itself has excellent information at its website, www.irs.gov, by phone at 1-800-829-1040 and with specialized publications such as those below:

A Basic Guide To Real Estate, Mortgages & Taxes is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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2009 Real Estate, Mortgages & Taxes

Peter G. Miller — Wed, 11 Mar 2009 06:18:25 +0000

Mortgage interest is generally deductible.

The IRS says there are three categories of deductible home mortgage interest:

Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2005 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2005 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

Substantial profits can be sheltered when a prime residence is sold.

There are also provisions which may be helpful to individuals who must sell a prime residence in less than two years. Under the 2004
safe harbor rules, individuals may be able to get some capital gains relief under certain circumstances, such as being forced to move because a job has been relocated at least 50 miles or a home that must be sold because of multiple births resulting from the same pregnancy.

Points may be deducible by both buyers and sellers.

Interestingly, in this situation the buyer can also deduct the points when the home is sold.

“The buyer,” says the IRS, “reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them.”

Home offices may be deductible.

In some cases there may be tax advantages associated with not deducting your home office in the year or two before you move. Speak with a tax professional for specifics.

Mortgage insurance premiums may be deductible.

Mortgage insurance premiums should be deductible. The catch? Not all premiums are deductible by all borrowers. In general, the rules look like this:

The deduction applies to loans made after January 1st, 2007.
The deduction applies to both private mortgage insurance (MI) as well as mortgage insurance through the Federal Housing Administration (FHA), the Veterans Department (VA) and the Rural Housing Administration.
The deduction applies to acquisition indebtedness, meaning debt used to acquire a home.
If you refinance remaining “acquisition indebtedness” then you can write off mortgage insurance on the new debt.
You can take the deduction if you’re married, file jointly and have a gross adjusted income of $100,000 or less. If you’re single or married and filing separately the income limit is $50,000.
The deduction phases out once income limits are passed. For married couples, the deduction is reduced by 10 percent for each $1,000 in income over $100,000. This means there is no deduction for incomes above $110,000. For singles and those married and filing separately, the deduction is reduced by 10 percent for each $500 in additional income — this means there is no deduction above $55,000.
The mortgage premium write-off begins January 1, 2007 and is scheduled to end December 31st, 2010. However, the program is likely to be extended.
Speak with a tax professional for specifics.

Natural Disasters

Mortgage Forgiveness Act

Traditionally if you do not pay a mortgage in full any money not paid is regarded as “imputed” income — income which is taxable. However, with the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a bill sponsored by Rep. Charles Rangel (D-NY), if you can negotiate a partial pay-off with a lender, the amount forgiven will not be taxed by the federal government.

Some questions to ask: When does this law end? Are home equity loans covered? What about state rules?

$8,000 Tax Credit For First Time Buyers

Under the FHA reform package passed by the Congress during the summer of 2008, first-time home buyers may be entitled to a tax credit equal to 10 percent of the purchase price of the residence. This credit is limited to $7,500 for married couples and single taxpayers but can be no more than $3,750 for married individuals filing separately.

The catch.

Okay, it’s really a $7,500 loan — without interest and when you really need it.

For specifics, speak with a tax professional before you go house hunting.

Investment real estate can generate substantial write-offs.

If a rental involves relatives special rules and restrictions may apply. Check with a tax pro for details.

A 1031 exchange may allow investors to defer all capital gains taxes.

Accounting for a 1031 exchange is also complex. Essentially there is a need to figure out the sale value of the relinquished property, add back depreciation and account for financing. Ed Horan, a well-known exchange authority and the author of How To Do a Like Kind Exchange of Real Estate, has posted a free 13-page exchanging guide with an accounting worksheet that’s well worth reviewing before meeting with a tax pro.

Death of a Spouse

The capital gains write-off for the sale of a home is $500,000 if married and $250,000 if single. But what happens if a spouse dies?

For years the rule has been that if the couple’s home was not sold by December 31, 2007 then the surviving spouse would be treated as a single home seller. In other words, the maximum write-off would go from $500,000 to $250,000.

Under new legislation passed by Congress, after December 31, 2007 surviving spouses will now have two years from the date of passing to sell the property and still qualify for the $500,000 write-off.

Gifts

For 2009 you can give someone as much as $13,000 per year, tax free. This is up from $12,000 in 2008. For gift information from the IRS, press here.

Sources and Publications

Also, the IRS itself has excellent information at its website, www.irs.gov, by phone at 1-800-829-1040 and with specialized publications such as those below:

2009 Real Estate, Mortgages & Taxes is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Who Won’t Be Helped Under The Obama Foreclosure Prevention Plan

Peter G. Miller — Thu, 19 Feb 2009 11:50:58 +0000

The Obama Administration has come out with a new plan to both prevent foreclosures and to help those who are now struggling with home payments.

If you read the documents the Administration has posted to date, you can see that the plan offers real benefits to millions of borrowers and provides for federal cash to back-up federal policies.

Given the total failure of foreclosure prevention efforts under the Bush Administration, Obama at least gets credit for trying something bold, innovative and different — and something which helps actual people rather than just friends and contributors in the financial community.

That said, the Obama plan will not help everyone.

For instance:

___If your housing costs are not reduced to 38 percent of your gross monthly income you can’t qualify for help.

___ If the value of your mortgage is 25 percent greater than the value of your home you don’t qualify for help. This means that a lot of people who bought with little or nothing down during the past few years are are now in financial trouble are out.

___ If the combination of your housing costs and consumer debts are more than 55 percent of your gross monthly income you can’t get help.

___ If you have an investment property or a second home the Obama program cannot help you.

___ If the investor who owns your loan will not make sufficient concessions — despite financial benefits offered to lenders under the program — then you will not be helped.

___ If you lose your job and cannot make your payments with savings or other income, the Obama plan (and no plan) will help you.

___ The program is designed for conventional borrowers; that is, it won’t help those with jumbo mortgages.

The limitations are a big deal if your finances are so bad that you can’t get assistance under the plan because then the odds are overwhelming that you will be foreclosed.

Alternatively, the limitation makes sense because no federal program can bailout everyone. The Obama plan essentially says that some homeowners have so much debt and so little equity that further help is fruitless.

Want to know what the Obama Plan really says? Here are the basic links you need to the new Homeowner Affordability and Stability Plan.

Who Won’t Be Helped Under The Obama Foreclosure Prevention Plan is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“Canine Redlining” And Other Issues Impacting Homeowners Insurance

Peter G. Miller — Sat, 13 Sep 2008 00:22:43 +0000

A few years ago, when two of the nation’s most powerful groups — dog owners and insurance companies — collided in the state of Washington, it was the insurance industry which won that round, defeating legislation that would have prevented it from establishing higher rates for homeowners with big dogs and dangerous breeds.

Welcome to the new era of homeowner insurance, a time when insurance companies are trying to limit claims, increase exclusions and raise premiums — all with some reason.

According to the Insurance Information Institute premiums are increasing: Average policy costs for homeowners rose 4.8 percent in 2005 and such price hikes are unlikely to be finished — just look at hurricanes Gustav and Ike as well as declining investment revenues.

There isn’t much homeowners can do about declining stock values, but there are ways to get the best possible rates and coverage at the least cost.

Get Enough Coverage

You want sufficient coverage to replace the property in the event of disaster, but how much is enough can be tricky. For instance, new building codes may require different systems and standards than those in place when the property was constructed.

Alternatively, you don’t want too much coverage. For example, it’s usually held that land is not insurable because it cannot be damaged — if a house burns down the property is still there. The bottom line is that you want enough coverage so that improvements on the property can be replaced at today’s prices and with today’s technologies.

Beware of Inflation

Inflation reduces the spending power of cash. Many insurance policies have an “inflation guard” feature so that coverage automatically increases each year with the rate of inflation. However, given that local home prices often rise more than the rate of inflation, it’s wise to check policy coverage at least annually.

Don’t Push The Limits

It’s a common practice for drivers not to make small claims for auto insurance when they have a minor ding or dent. The same theory may well apply to insurance: even small claims require paperwork and payments. Think of insurance as disaster relief and avoid small claims.

Use Care In The Animal Kingdom

Several years ago while at the pound with the children looking for a dog we spotted an especially large, robust creature which, said the cage notice, “eats livestock.” Insurance companies, fairly or unfairly, are backing away from coverage which involves certain species and breeds. You can pretty much figure that any animal which is poisonous, endangered, illegal to import (think of certain parrots), huge, dangerous or capable of downing a heifer will raise coverage questions.

Prepare For Disaster Repairs

It routinely happens that after a hurricane, earthquake or other local disaster repair costs rise substantially above going rates. One solution is something called “extended replacement cost coverage” which will increase allowable repair payments by as much as 20 percent.

Personal Stuff

Homeowners insurance not only provides protection in the case of fire and theft, but also the loss of personal goods. Coverage often equals 50 percent or more of the policy’s face value, but there are cautions when it comes to personal goods. In one case, a home dated back to the 1700s — and so did the furnishings. The tables, chairs, art and other items were worth substantially more than the home, a serious insurance issue since such items cannot be replaced.

Is the policy’s personal property coverage sufficient? If you have art, jewelry, historic items, expensive furnishings, etc. then check with your insurance broker to obtain full and complete coverage. Ask about “cash value” coverage and “replacement cost” policies as well as special coverage for high-priced items — so-called “floaters” or “endorsements.”

How do you appraise items with sentimental value? What’s invaluable to you may not have much cash value for insurance purposes.

How do you know what’s covered? It’s a good idea to make a video record of each room in the house, collections, silverware, art, and other valued items. Place the video in a safety deposit box. In the event of a claim you then have a visual record and inventory.

What About Tenants?

In the same way that you need property insurance for your home you also need it for rental properties. As a condition of the lease many landlords require tenants to obtain renter’s coverage. If there’s a problem at the property, the tenant then has insurance protection — and less reason to make a claim against the property owner.

In a similar manner, ask insurance brokers about coverage if you have a boarder. Can you get liability coverage? Are you protected if the rent stops because of a disaster?

Living Expenses

If you do have a fire or other disaster you still have to live somewhere. Does your policy pay for living expenses after a catastrophe? If yes, how much?

Liability Coverage

If someone trips and falls in your front yard — or claims they did — you may well face a court suit. The good news is that homeowners coverage provides liability protection. Specifics regarding coverage and legal fees can vary, however, and you may want additional coverage.

Surprising Goodies

Have a home office? Protection may be included in your policy — but it may be limited in which case an additional endorsement can be desirable. Have a child in college? See if your policy covers lost or stolen property for college students living in dorms. Do clients and customers visit your home-based business? If yes, check about coverage.

Premium Payments

When homes are financed lenders often take on the duty of collecting monthly insurance costs, holding them in “escrow” or trust accounts, and then paying your policy as bills come due. This is fine, but it makes sense to check annual mortgage account statements to assure that such payments have been made — otherwise you may not have coverage.

As always, it pays to sit down with your insurance broker to specifically find out what’s covered, what isn’t, what can be covered better and where costs can be reduced.

(Pictured: Nemo, a golden retriever, 100 pounds of friendly dog.)

————————
Published originally by Realty Times on March 18, 2003 and posted with permission.

“Canine Redlining” And Other Issues Impacting Homeowners Insurance is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The Illusion of Mortgage Protection

Peter G. Miller — Mon, 01 Sep 2008 15:02:47 +0000

With a growing number of foreclosures nationwide, it’s good to know that the federal government has consumer protections in place to defend the public interest. What’s not so good is what those “protections” actually say.

Speaking in Chicago, Federal Reserve Board Chairman Ben Bernanke said “the Home Ownership Equity Protection Act (HOEPA) gives the Board the power to prohibit acts and practices in mortgage lending deemed ‘unfair’ or ‘deceptive.’”

But is HOEPA — which applies to all lenders and not just federally-regulated banks — a powerful consumer protection tool? Can borrowers rest easy knowing that HOEPA will be used to defend their interests against unscrupulous lenders?

Judge for yourself.

In basic terms, what HOEPA says is this:

If a lender issues a first lien which is at least 8 percent points higher than comparable federal securities, then the lender must issue special disclosures to the borrower. Also, if the loan requires the payment of points and fees equal to at least 8 percent of the mortgage amount then special disclosures are also necessary.

Say that 10-year Treasury bills yield 5.25 percent. Under HOEPA special disclosures would be required if your $150,000 first loan had an interest rate at or above 13.25 percent or if fees and points totaled $12,000 or more. (For a second lien, no HOEPA disclosures are required unless the loan is a full 10 percentage points above Treasury securities.)

According to the Federal Trade Commission, under HOEPA “the lender must give you a written notice stating that the loan need not be completed, even though you’ve signed the loan application and received the required disclosures. You have three business days to decide whether to sign the loan agreement after you receive the special Section 32 disclosures.”

And what happens if the lender does not provide required disclosures or closes the loan in less than three days? Then borrowers have the right to sue and may be able to collect damages, legal fees and get the loan rescinded.

HOEPA sure sounds like a powerful friend of downtrodden borrowers, at least until you hear about the rest of the law. As the FTC explains, “the rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit.”

In other words, a huge percentage of all mortgage loans — including mortgages to purchase a home — are simply not covered by HOEPA disclosure requirements. It’s like having a having a law which says that cars must have seat belts — except that the law does not apply to cars which have steering wheels, tires or brakes.

You might think under HOEPA that high-cost loans are prohibited. That’s not the case. What HOEPA says is that high-cost mortgages are just dandy as long as the lender makes required disclosures, not exactly a tough standard. As Carolyn Warren, a former loan officer, explains “never once did a client complain about signing this notification that their loan was so expensive it was an exception to HOEPA.”

Warren, author of Mortgage Rip-Offs and Money Savers, says “we would just call up our borrower and say, ‘Hi, I have a form I’m going to fax over that I need your signature on. The Feds have so many forms mortgage companies are required to have on file! Sure doesn’t help our trees, does it? Ha-ha. So much for a paperless society! Ha-ha. We’re not allowed to finance your loan until three days after you sign and date the form, so will you please get this back to me right away?’

“And they would say, ‘Oh certainly. No problem.’”

While HOEPA’s disclosure requirements relating to high cost loans are severely curtailed, the law does include broader provisions to address unfair, deceptive and abusive lending practices in general.

The problem, say consumer advocates, is that federal regulators have not used HOEPA to rein in abusive lenders.

Through HOEPA, says Martin Eakes, CEO of the Center for Responsible Lending, the Federal Reserve Board can address lending abuses on ALL loans through regulation, not just high-cost financing. But to date, he says, “the Board has not used this authority.”

For its part, the Center for Responsible Lending would like to have HOEPA revised. It proposes several changes, saying the law should:

Prohibit the financing of fees and charges for high cost loans. This would force borrowers to bring more cash to closing, cash most do not have thereby eliminating most high-cost loans.
Require independent mortgage counseling for high-cost borrowers. The idea is to require counseling because, says the Center, as many as 30 to 50 percent of all subprime borrowers might actually qualify for lower-cost loans if they had better information.
Change the definition of a “high cost” loan from 8 percent points to 5 percentage points. The 5 percentage points would include both loan fees and “points”.

“When HOEPA was passed in 1994 it reflected the mortgage marketplace and the political landscape of the time,” says Jim Sacaccio, chairman and CEO at
RealtyTrac.com, the leading foreclosure resource. “Today we have loan products which were unknown when HOEPA was developed, a far-bigger percentage of all mortgages are now subprime loans and we also have a large and growing number of foreclosures. Lenders, investors and borrowers would all be better off with HOEPA legislation which makes the mortgage marketplace less risky for everyone.”

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Published originally by RealtyTrac.com during May 2007 and posted with permission.

The Illusion of Mortgage Protection is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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What Are The FHA Loan Limits?

Peter G. Miller — Fri, 29 Aug 2008 01:11:16 +0000

The amount available under the FHA loan insurance program varies according to where you live. There are different loan limits for standard areas, high cost areas and areas outside the lower 48 states.

For specifics, press here.

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How Much Flood Insurance Can I Get?

Peter G. Miller — Thu, 28 Aug 2008 17:04:17 +0000

The maximum amount of federal flood insurance at this writing is $250,000 for a single-family home structure and $100,000 for contents.

A business structure can be insured for up to $500,000 under the federal program, plus $500,000 for contents.

Renters can insure contents under the federal program for up to $100,000.

For program details, speak with local brokers and also check out FloodSmart.gov.

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What Is The Passive Loss Exception?

Peter G. Miller — Thu, 28 Aug 2008 12:20:08 +0000

It may be possible to write off up to $25,000 in passive real estate losses from your general income under certain conditions.

The ability to write-off passive real estate losses is limited. Generally, if your adjusted gross income is more than $100,000 per year, you typically lose the ability to write off $1 in passive losses for every $2 in regular income. In effect, your ability to claim current write-offs declines to zero once you earn $150,000. Married individuals filing separately can write-off up to $12,500 per year.

Passive write-offs which cannot be deducted during the year in which they occur can be used in future years or added to the property basis if a property is sold.

The IRS provides this example:

Example. Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and less than $100,000 of modified adjusted gross income. She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages).

See: http://www.irs.gov/businesses/small/article/0,,id=146325,00.html

Information is available from IRS Publication 925. However, there are a bunch of qualifications to consider (active versus passive, low-income housing, marital status, etc.), so please see a tax pro for details and specific advice.

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