DEAR BOB: What is the difference between a subprime and a predatory home mortgage? I ask, because as a real estate broker working in a low-income neighborhood that is rapidly “turning around” and improving, I often talk with homeowners who either have or are thinking about obtaining refinanced mortgages that have horrible terms. Not only are the interest rates much higher than the market rate, but they also often have stiff prepayment penalties and huge up-front loan fees –Stephen R.
DEAR STEPHEN: Congratulations on trying to help homeowners in your vicinity. Today, virtually every home buyer and homeowner can obtain a mortgage to buy or refinance their home. However, as you discovered, the terms of mortgages to borrowers with poor credit are often much different than those available to borrowers with good credit.
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The key criteria for most mortgage lenders are (a) total household income and (b) the borrower’s FICO (Fair Isaac Corp.) credit score.
Although each lender has different criteria, if the borrower’s FICO score is below 620, that is usually considered a “subprime loan,” which will require a higher interest rate and higher loan fees than a regular home loan. The reason is these are high-risk loans so the lender needs a higher potential return to compensate for the probability of default.
Personally, I know several subprime borrowers who obtained such home loans at higher-than-normal interest rates, made their payments on time for one to two years, and were then able to refinance at more normal interest rates.
But predatory home loans are much different. They are made by “hard money” lenders who are sometimes known as “loan to own” lenders. Their loan terms, although legal, are outrageous with stiff up-front loan fees, high interest rates, prepayment penalties, lots of junk or garbage loan fees, and other outrageous terms. Even several major nationwide finance companies have admitted to being predatory lenders.
Predatory lenders often solicit loans from senior citizen homeowners in low-income neighborhoods who need money for home repairs or living expenses. The unfortunate result is these borrowers often lose their homes due to inability to pay the high monthly payments.
WILL HOME INSTALLMENT SALE BE TAX-FREE?
DEAR BOB: My wife and I own our home free and clear. We have lived here over 20 years. We plan to sell our home for about $500,000 with a cash down payment of $300,000 and will carry back a $200,000 mortgage for the buyer. Will the $500,000 sale price be tax-free? I am aware we will have to pay ordinary income tax on the interest we receive on the $200,000 mortgage. Is there anything else we should know? –Mr. H.O.
DEAR MR. H.O.: Presuming you and your wife both owned and occupied your principal residence at least 24 of the 60 months before its sale, Internal Revenue Code 121 provides up to $500,000 tax-free capital gains. Therefore, you won’t owe any capital gains tax on your home sale.
However, as you correctly anticipate, you will owe ordinary income tax on the mortgage interest you receive from your buyer. But the principal portion of each payment received will be tax-free because your sale price and capital gain is below $500,000.
But your plan doesn’t seem very realistic. How many home buyers have $300,000 cash for a down payment? By requiring such as large down payment you are limiting your pool of potential home buyers. If you can reduce the amount of up-front cash required, you will greatly increase the probability of selling your home quickly for top dollar.
ROUTINE PROBATE OF ESTATE SHOULD NOT TAKE THREE YEARS
DEAR BOB: In May 2002 my brother and I were notified we were named as beneficiaries of the estate of our late aunt. The letter said the will is recorded in the Office of the County Clerk in Charleston, W. Va. But as of this date, nothing has been done by the executors of the estate to file an appraisal or take any steps to carry out the terms of the will. The only thing we have learned is there was a fairly large sum in a checking account, and several buildings need to be torn down and the land sold. Our inquiries go unanswered. Is this an extraordinary long time to finalize the estate and should we take any legal steps to ensure the matter is resolved? –Sheila B.
DEAR SHEILA: Your situation shows the pitfalls of leaving a will that requires transfer of assets to the heirs by a probate court. The delays and costs can be endless, depending on the circumstances.
If your aunt held her major assets, such as the checking account and the buildings, in her living trust, the distribution could have been concluded within a few months without probate court costs and delays.
In your situation, if the estate value is considerable, you and your brother should retain a probate attorney in Charleston to represent you. A delay over three years to settle an estate is far too long, unless there are complications. The executors should have distributed the assets to the heirs long ago.
Information on living trusts is available in my special report, “24 Key Questions: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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