DEAR BOB: I have a FICO (Fair Isaac Corp.) credit score of 750 and wonder why I am still paying PMI (private mortgage insurance)? –Jennifer R.
DEAR JENNIFER: Congratulations on your superb FICO credit score. However, that has nothing to do with your obligation to pay PMI.
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When you bought your house or condo, you probably paid little or no cash down payment. Because of your high FICO credit score, your lender approved a high loan-to-value-ratio mortgage. But the lender insisted on PMI to eliminate its high foreclosure loss risk.
After you achieve at least 20 percent equity in your house or condo, ask your mortgage lender to cancel your PMI premium, which is then unnecessary to protect the lender’s 80 percent or lower mortgage. Until you have at least 20 percent equity, your lender still views you as a high risk, which requires PMI to protect the lender.
However, until your home loan has at least 24 months of on-time monthly payments, most mortgage lenders will refuse to cancel PMI. Some especially nasty lenders won’t cancel PMI until the loan balance declines below 80 percent of its original balance, ignoring your home improvements and market value appreciation.
That usually takes 10 to 15 years, depending on your interest rate. If you have one of these really bad lenders, my best advice is refinance with a better lender who doesn’t require PMI.
HOW TO DETERMINE COST BASIS ON EXCHANGED PROPERTY
DEAR BOB: A few years ago, we made an Internal Revenue Code 1031 tax-deferred exchange of our rental property for a beautiful single-family house where we eventually wanted to live. Following your sound advice, we rented that house to tenants. They recently moved out and we moved in to our “dream home.” My question is what is our adjusted cost basis for this house? –Edward W.
DEAR EDWARD: Of course, you know I will suggest you consult your personal tax adviser for exact details.
However, an easy way to estimate your adjusted cost basis on the property acquired in a tax-deferred exchange is to subtract from your purchase price the amount of your tax-deferred capital gain.
For example, suppose you paid $400,000 for the rental property acquired and you had a $150,000 deferred capital gain on your old rental property. Subtracting the $150,000 deferred capital gain results in a $250,000 adjusted cost basis for the acquired property for which you paid $400,000 in the trade. From that amount, don’t forget to subtract the depreciation you deducted on the acquired rental house.
DEED WITH INCORRECT LEGAL DESCRIPTION CONVEYS NOTHING
DEAR BOB: My father-in-law resides in New Jersey in his own home. But he has been and continues to be the victim of financial exploitation. His grandson’s wife recently had him sign a quitclaim deed (he has dementia and did not know what he was signing). The grandson’s wife prepared the deed but she put the wrong block number on it. Is this enough to invalidate the transaction while the district attorney investigates the case? I am afraid the grandson and his wife will try to sell the house –JoAnn D.
DEAR JoAnn: Elder abuse is a major nationwide problem. You were wise to call this situation to the attention of the local district attorney for investigation.
The general rule is a deed with an incorrect legal description of the property conveys nothing. That is why it so important the legal description on a deed be absolutely 100 percent accurate.
However, if the deed contains other evidence describing the property your father-in-law owns, such as street address or county parcel number, a court might rule such information prevails over an incorrect legal description in the deed.
I hope you will keep on top of this matter until the local district attorney investigates and takes action. You might wish to speak to a local real estate attorney about recording a “lis pendens” against the title to prevent a title conveyance.
IS A REVERSE MORTGAGE OR HOME EQUITY CREDIT LINE BETTER?
DEAR BOB: I am a senior citizen homeowner, age 68, who is, as you say, “Property rich and cash poor.” My house, worth at least $400,000, needs a new roof. Roofers estimate it will cost $15,000 to $20,000. My daughter says I should take out a home equity loan at my bank. But when I ask her how I will afford the monthly payments on my limited retirement income, she says “Take the payments out of savings.” She knows I have about $35,000 in CDs but I don’t want to touch that money except for an absolute emergency. What would you do in my very limited cash situation? –Nancy R.
DEAR NANCY: I don’t blame you for wanting to keep your $35,000 liquid cash reserves. However, spending up to $20,000 of that amount on a new roof would be the least costly of your alternatives. But it will leave you with depleted liquid reserves.
It sounds like you need increased monthly income to fully enjoy retirement. My suggestion is to consider a reverse mortgage which never requires repayment until you sell the home, move out for more than 12 months, or die. Meanwhile, you can enjoy any combination of (1) monthly lifetime income, (2) lump sums as you need them, and/or (3) a credit line (except in Texas).
As you correctly emphasize, a home equity loan requires monthly payments. If you are already short of cash, making monthly home equity loan payments will further deplete your cash. A senior citizen reverse mortgage can solve your cash problem. The best place to find local reputable loan originators is www.reversemortgage.org.
WHAT IF HOME SELLER CAN’T OR WON’T DELIVER TITLE?
DEAR BOB: I entered into a home purchase contract that was supposed to close on October 22, 2005. It has yet to close because the bank I am buying from does not yet have the title. What can I do? –Chantelle D.
DEAR CHANTELLE: It sounds like you are buying a bank REO (real estate owned) foreclosure property. The bank should not be selling that property unless it already holds marketable title or unless the contract clearly disclosed the bank does not yet hold title.
I suggest you and your real estate attorney read that sales contract very carefully to see what it says about conveying marketable title. If the bank misrepresented it held marketable title, the bank might be liable to you for damages.
Unless the bank can clear up its title problem quickly, I suggest you ask your attorney about suing the bank and recording a “lis pendens” (which means litigation pending) against the title to that home. There is a possibility the bank realizes it sold to you for a bargain price and they can get a higher price from another buyer. Especially in a situation like this, don’t trust the banker.
$250,000 HOME SALE TAX BREAK AVAILABLE EVERY 24 MONTHS
DEAR BOB: Suppose I have owned and lived in my house over two years. Then I rent it to tenants and move into another home I own for two years. Will I qualify for that $250,000 home sale tax exemption on each house when I sell both of them at the end of the second two-year period? –Dale McG.
DEAR DALE McG: No. You win the “nice try award” for this week. But Internal Revenue Code 121 can only be used once every 24 months.
Although you will meet the 24 out of last 60 months ownership and occupancy tests for both houses, you can use the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a qualified married coupe filing a joint tax return) just once every 24 months.
For this reason, I suggest selling your current principal residence now and take your IRC 121 tax exemption. Then re-use that same exemption in 24 months on the house you are acquiring. You will then become known among your friends as a “serial home seller.” For full details, please consult your tax adviser.
WHY CAN’T A PROMISSORY NOTE BE RECORDED?
DEAR BOB: You helped me once before and I hope you can help me again. Recently you suggested to another reader that she record her promissory note for money loaned to help relatives purchase their home. I have a similar situation. But when I took my notarized promissory note to the registrar of deeds for recording, I was told “There are no provisions in the law to record a promissory note.” What should I do? –Beth R.
DEAR BETH: I do not suggest recording a promissory note. But I recommended recording a mortgage or deed of trust (depending on which is used in the state where the property is located) to secure the promissory note. The recorder is correct that promissory notes cannot be recorded.
Only a mortgage or deed of trust, signed and notarized by the property owner is recordable. For full details, please consult a local real estate attorney.
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