DEAR BOB: A few months ago, my husband and I were first-time home buyers who had trouble getting “pre-approved” for a mortgage, as you often recommend. Then we saw a mortgage broker’s little real estate newspaper ad that said, “Loan problems welcome.” It turned out our situation wasn’t a big problem, although we thought it was. My husband’s income varies widely from year to year. He is an independent equipment sales representative. In 2003, he earned over $275,000. But the previous year, his commissions were only about $112,000. The mortgage broker got us “pre-approved” for a “no doc” stated income mortgage. Then we had no trouble shopping for a nice home. Now we are happily settled in our three-bedroom house with a fixed-rate mortgage at 6.12 percent interest. Why don’t you tell your vast readership about these “no doc” stated income mortgages? – Sharon V.
DEAR SHARON: Shame on me. I should mention unusual mortgages more frequently. So-called “no doc” or “stated income” mortgages are for unique home-buyer income situations like yours.
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To qualify for your mortgage, your lender required a FICO (Fair, Isaac and Co.) credit score of at least 700. In addition, most stated income mortgage lenders require proof of adequate liquid reserves.
The fact you pay your bills on time makes up for the wide fluctuations in income. Fortunately, FICO scores don’t consider monthly cash flow of the borrower or liquid assets such as savings.
For prospective home buyers who want to check their credit report and FICO score, I recommend www.myfico.com. The charge is $12.95. Smart home buyers check their credit reports, to correct any errors, before shopping for a home.
REAL ESTATE BOOK FOR 13-YEAR OLD “PUNK ROCKER” SON
DEAR BOB: My 13-year-old punk rocker son announced at the dinner table a few nights ago that he wants to become a real estate investor! He wants to buy houses, fix them up, and sell them. After I picked my jaw up off the floor, I suggested he read your newspaper columns. You now have a new fan, Mohawk hair and all! Needless to say, I’m very happy. What would be a good real estate book for him to read to get started? – George C.
DEAR GEORGE: Your letter is amazing! Congratulations to your 13-year-old, motivated son. Of course, because he is not yet 18, you will be asked to sign any real estate papers for him. You can then double-check his real estate investment decisions. Please keep us informed how he succeeds.
By far, the best real estate investment book for your son to read is “How to Be a Quick Turn Real Estate Millionaire” by Ron LeGrand. What I especially liked about this new book is the many examples of successful real estate investors (including investor photos and copies of their profit checks) who profitably followed LeGrand’s methods.
Your son will especially relate to “Marco,” age 32, who earned more than $2 million on a $100 investment. Even author LeGrand admits he has never done that well. This great new realty book is available in stock or by special order at local bookstores, public libraries and www.amazon.com.
WHERE TO GET A SENIOR CITIZEN REVERSE MORTGAGE
DEAR BOB: You frequently write about reverse mortgages for senior citizens. Where can I go to get one? I checked with several local banks but the loan officers have either never heard of reverse mortgages or don’t know where to get them. Your information will help me and my church members – Rev. Clifford W.
DEAR REV. CLIFFORD: Just between us, the reverse mortgage industry does a terrible job of explaining their wonderful mortgages and where to obtain them.
However, they are only available to senior citizen homeowners at least age 62. In fact, the older the homeowner is the better.
The reason is reverse mortgage eligibility depends on the homeowner’s age and the market value of their home. That’s why I suggest homeowners in their early 60s not apply for a reverse mortgage unless they really need additional income.
There are only three nationwide reverse mortgage lenders, FHA, Fannie Mae, and Financial Freedom Plan. But these mortgages are originated by mortgage brokers in every state.
The easiest way to find reputable reverse mortgage representatives is at www.reversemortgage.org. Just click on your state to find nearby specialists. More details are in my special report, “Secrets of Tax-Free Reverse Mortgage Income for Senior Citizen Homeowners,” available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.
REALTY BROKER ASKS ABOUT HOME-SALE EXEMPTION FOR PARTIAL OWNER
DEAR BOB: As a real estate broker, I will soon be listing for sale a home that is occupied by a husband and wife. The husband is the pastor at a local church. The home is 60 percent owned by the church and 40 percent owned by the pastor and his wife. They have occupied the home more than five years. Would I be correct in assuming the husband and wife will be entitled to 40 percent of the $500,000 principal residence sale exemption of Internal Revenue Code 121 and the church gets zero exemption? – Walt M.
DEAR WALT: No. I presume you have covered all the listing basics, such as getting the signatures of the pastor and his wife for their 40 percent share, and the proper person representing the church, such as the chair of the board of directors, for the church’s 60 percent share, on your listing contract.
As to the 40 percent ownership share of the pastor and his wife, Internal Revenue Code 121 appears to give them the entire $500,000 principal residence sale tax exemption ($250,000 each). That presumes they both owned and occupied their home at least two of the last five years before the sale.
Obviously, the church doesn’t qualify for the IRC 121 exemption. However, it is probably tax-exempt as a religious organization for its share of the sale profit. All owners should consult their tax advisors.
WHAT IS A “LADY BIRD DEED?”
DEAR BOB: Please explain the phrase “Lady Bird Deed.” My lawyer suggested I set up a “Lady Bird Deed” for my only child and me on my mortgage-free home. As I am retired and elderly, is this a good idea? – Stephen T.
DEAR STEPHEN: Sorry, although I’ve been a real estate investor and broker for 37 years, I have never heard of a “Lady Bird Deed.” But I’m sure my brilliant readers will enlighten me and I will then inform everybody so we all can learn. Why didn’t you just ask your lawyer what it means?
RECAPTURE OF DEPRECIATION AFTER 1997
DEAR BOB: We recently completed a tax-deferred exchange of three rental properties to acquire an upscale condo rental property. All the requirements of Internal Revenue Code 1031 were met. But two of the rental properties were acquired in 1978 and 1980. I recall reading in your articles that depreciation taken prior to 1997 would not be recaptured. But my tax adviser is unaware of such a requirement. Please clarify – Curtis B.
DEAR CURTIS: Internal Revenue Code 121 specifies that rental depreciation deducted after May 6, 1997, shall be “recaptured” (that means taxed to us ordinary taxpayers when the property is sold. There is a special 25 percent federal tax rate for recaptured depreciation.
However, because you made a tax-deferred exchange, and there was no sale, you need not be concerned now about recapture of depreciation previously deducted.
When you eventually resell the rental condo, that’s when Uncle Sam will be waiting to tax the recaptured depreciation (unless you make another tax-deferred exchange). However, if you die while still owning the rental condo, there will never be any recapture tax due.
MORTGAGE BROKER SAYS BLAME LENDERS FOR JUNK FEES
DEAR BOB: As a mortgage broker, your articles are a “must read” because my clients often ask me about something you mentioned. But why are you so harsh on us mortgage brokers? We’re just trying to make a living! You blame us for “junk fees.” These are usually a surprise to us, charged by the actual mortgage lender. We don’t know about them until just prior to the loan closing – Kevin L
DEAR KEVIN: As you know, a mortgage junk or garbage fee is any charge that was not disclosed to the borrower on the lender’s “good faith estimate” of loan costs, which was provided to the borrower within three days of loan application.
Perhaps a better junk or garbage fee definition is any borrower charge that is not paid to a third-party service provider, such as for an appraisal, credit report, recording fee, attorney or escrow charge, etc.
Examples of negotiable junk fees that are not for a specific service to the borrower include document preparation fee, underwriting fee, processing charge, loan review fee, warehousing charge, administration fee, and (when lenders run out of names) miscellaneous fee.
If the charge was disclosed on the borrower’s “good faith estimate,” such as your loan fee, that’s fine. The borrower either accepts or rejects it. But when borrowers are confronted with unexpected last-minute junk and garbage fees, that’s what is unfair.
The new Robert Bruss special report, “Robert’s Realty Rules: How to Avoid the 10 Worst Home Buyer Mistakes,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.
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