DEAR BENNY: Why does one have to pay monthly insurance payments in escrow to the lender? Also, after having paid this payment in escrow for five to six years, why can’t this be cancelled? –Marcelle
DEAR MARCELLE: First, let me express my personal view. I dislike the concept that homeowners have to pay money into a lender’s escrow account, on a monthly basis, so that lenders can pay the real estate tax and the yearly insurance premium. While lenders claim this is to protect their security, the reality is that lenders make a lot of money on these escrow accounts. At the very least, lenders should be required to pay interest on the moneys they are holding.
I have had a number of clients who have complained that despite the fact that the lender is escrowing, the real estate tax was not paid. I don’t think this is deliberate, but with lenders selling their loans all over the country, many lenders just do not know where to send in the tax payments — or even when such payments are due.
Having said this, however, I want to respond to your question. The lender has a mortgage loan on your property, and even if you have 95 percent equity, should your house burn down, the lender’s 5 percent equity will be jeopardized. That’s the reason lenders give when they require escrows for insurance.
My suggestion: Talk to your lender and see if it will be willing to release you from the escrow obligation (for both the real estate tax as well as insurance) so that you can pay your own insurance premium and your own real estate tax. Some lenders will go along with this, on two conditions: (1) that you send the lender annual proof of payment, and (2) should you not send in that proof, it can reinstate the escrow.
DEAR BENNY: When my mother bought her house several years ago she placed my name on the title along with hers. She passed away in January. We want to sell the house with the proceeds going to my sister. Is there a simple way I can transfer the property to her? If so, would there be any tax liability on my part? What would the basis be for my sister? –Jim
DEAR JIM: For specifics regarding your case, you really should consult a tax accountant. Furthermore, because I do not know where the property is located, my answer has to be very general. Different states — such as community property states — have different rules about determining basis in cases such as yours.
I also do not know how you and your mother held title. If it was as joint tenants with right of survivorship, then on her death, by operation of law you became the sole owner. On the other hand, if title was as "tenants in common," then on her death, her assets (including her interest in the property) has to go to probate.
Let’s assume for this discussion that you are the sole owner. You can do with the property as you see fit; you can sell it and give the sales proceeds to your sister, or you can give the house to her.
If you sell it, (and assuming that you had an ownership interest for more than two years) unless you also have lived in the house for at least two years before it is sold, you will not be eligible for the up-to-$250,000 exclusion of gain.
You have to determine your basis, which as I indicated will be different depending on where the house is located. If you sell the property for a price above the basis, you will have to pay the federal capital gains tax, which currently is 15 percent. You may also have to pay any applicable state or local income tax.
On the other hand, if you give the property to your sister, her tax basis will be your basis. Remember: When a person gives a gift, the recipient of the gift (giftee) takes the basis of the giftor.
If you sister will then own and live in the house for the "two out of five" rule, then she can exclude up to $250,000 (or up to $500,000 if she is married and files a joint income tax return).
This is just an outline to assist you in making your decision. You must talk to an accountant to determine your tax basis.
DEAR BENNY: My husband and I are purchasing a house from the estate of his uncle. The house is assessed at $300,000, but they have agreed to sell it to us for $150,000. Why is it necessary for us to pay PMI if the LTV ratio is at 50 percent? I almost feel like the mortgage companies are just trying to get extra money from us by having us refinance soon. Even in this economy this house would sell for higher than the loan amount. –Hollie
DEAR HOLLIE: Generally, lenders require that home buyers obtain private mortgage insurance (PMI) when they do not put down at least 20 percent of the purchase price. This is referred to as the "loan to value" (LTV). In your situation, although the house is worth $300,000, the purchase price (which is what lenders look at) is only $150,000. Thus, unless you put down $30,000 and get a loan of not more than $120,000, I can understand why a lender may be insisting on PMI.
I agree with you, however, that it makes no sense.
Here are some suggestions. First, talk with several lenders and see if they can be convinced to waive the PMI requirement. Second, see if you can get what is known as a "piggyback" loan; you would get a first trust of $120,000 and a second trust of $10,000-$15,000. You will need to put down at least $5,000 in my example.
This kind of loan is part of the cause of our current "mortgage meltdown," and piggybacks are now very difficult to get. However, you may be able to convince a lender that because the property is worth so much more, they will have plenty of equity — i.e. security — and thus should make the loan.
If all else fails, get the lowest adjustable-rate loan that you can get, and consider refinancing shortly thereafter. It will cost you a little more for the second settlement (called escrow in the West), but should be much less expensive than having to pay monthly PMI payments.
However, you have to make sure that you will be able to refinance quickly, and that there will be no prepayment penalty.
Discuss all these options with a number of lenders. Mortgage lenders want more business, and I suspect that some lender will be willing to cooperate.
DEAR BENNY: My sister and I own a house together. She is getting married and wants to give me full ownership of the house. What would be the best way to handle the paperwork without having to refinance? –Rosie
DEAR ROSIE: You have a very nice sister; you should be proud. Your sister can deed her interest in the property to you, and because this is a transfer between children, your lender cannot try to call the existing loan. I suspect that there is a "due on sale" clause in your mortgage loan documents, but federal law makes it clear that lenders cannot use that clause under certain circumstances, and your situation appears to be one of the exclusions.
However, your sister may have gift tax consequences, and before she transfers the property, she should consult a tax attorney for specific advice.
DEAR BENNY: My wife and I are gifting our son $15,000 for a down payment on a condominium in our community. This is his first venture in home ownership, and the property was purchased from HUD. The mortgage company is asking for a letter stating that we gave him the money as a gift and do not expect to be repaid. The form letter provided by the mortgage company requests our account numbers from the accounts where the funds originated. I feel uncomfortable providing this information. Is this request mandatory in order to secure the mortgage? –Frank
DEAR FRANK: Unfortunately, if your son wants a loan from that lender, you will probably have to comply with its requests. I appreciate your concern, but also understand why you are being asked to provide that information. There are too many situations where false gift letters are provided, and the lender — especially in today’s uncertain market — is merely attempting to protect itself.
You should talk with the lender and see if it will accept a written, sworn affidavit from you that this is a true gift. Otherwise, I think you will have to comply with the lender’s demands.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.
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