DEAR BENNY: You often advise homebuyers to refuse to pay junk fees at settlement, but how is it done? We are about to close on a refinance. We have done this once before about eight years ago. We have an estimated settlement statement, but the actual settlement statement may differ significantly when we actually get to closing if the lender has added the infamous "junk" fees.
So at the settlement table what do we do? Do we refuse to sign unless the fees are removed and risk having to walk away from the deal? If we walk away (i.e., if the lender refuses to back down), then we lose the underwriting and appraisal fees and have to find a new lender and go through the whole process again, perhaps with the same result. Is there some other strategy?
I’ve always thought your advice to refuse to pay these fees made sense, but I’ve never quite understood how one would act on that advice during the settlement. –S.A.
DEAR S.A.: There are too many "junk" imposed by lenders and title companies (also called "escrow") when you go to settlement — either to buy a house or refinance an existing loan.
Some of these fees include (1) overcharges on credit reports, (2) tax escrow service, (3) document preparation, or (4) underwriting fee. I am sure that some of my lender friends will vigorously disagree with me, but that’s my opinion, and as they say, "I am sticking to it."
You are correct. In the past, when people went to the settlement/closing table, they suddenly were hit with a number of fees that were not previously disclosed.
In fact, I have been in too many settlements over the years where those fees were so high that the borrower/buyer had to scramble to get the extra dollars to avoid losing the property or the favorable loan.
But, there is good news. Effective Jan. 1, 2010, all lenders for residential loans are required to provide their potential customers with a comprehensive good faith estimate (GFE). This document spells out, in relatively simple terms, all of the various charges (fees and all) that will have to be collected at settlement.
So, when you go to closing, don’t sign the GFE until you carefully review and compare it with your HUD-1 settlement statement.
If there are new charges (or even higher charges), immediately contact the lender from the settlement table and get an explanation. If you are not satisfied, you have two alternatives: (1) cancel the deal or (2) complete settlement and file a complaint with the Department of Housing and Urban Development.
For more information, visit HUD’s website.
DEAR BENNY: I am upside down on my home, which I purchased before getting married, and my spouse has not been added to the loan. Can I do the following: (1) short sale and default on the balance without wrecking my spouse’s perfect credit, or (2) declare bankruptcy without wrecking my spouse’s perfect credit? –Hank
DEAR HANK: You indicate that your wife is not on the loan. Make sure that she is also not on the deed of trust (mortgage) that you signed. Since you bought the house before you got married, I suspect that she is completely out of the loop.
So, yes, you can proceed with either of your alternatives. But before you lose your home, have you tried all available options? Have you explored the various federal and state programs designed to save homes from foreclosure? Have you tried to modify your payments, although this is still a major problem throughout the country?
And finally, have you offered to give the property back to your lender? This is known as a "deed in lieu" — i.e., a deed instead of a foreclosure. Many lenders have now started accepting deeds-in-lieu.
They are beginning to realize that foreclosure costs are expensive, and if they are going to be stuck with the house, (since many foreclosures end up with the bank owning the property anyway), why not save the foreclosure and legal expenses and just take back the property?
If you have time, my priority would be (1) try a short sale. Talk with a good real estate agent in your area and see what can be done; (2) try the deed-in-lieu approach; and (3) then, and only then, file for bankruptcy relief.
Please note, however, that when there is a short sale, many lenders are still trying to collect the deficiency. Often, they sell the balance of the note to a collection company for cents on the dollar, and that company begins to pursue you for the difference. But that’s the subject of another column.
However, since this column is general in nature, married readers should understand that when only one spouse signs the promissory note, the lender will require the non-signing spouse to be on the deed of trust. Why? Because in order to foreclose on the property should the borrower go into default, the lender must be able to sell the property at a foreclosure sale.
The deed of trust gives the lender (actually the trustees selected by the lender) the power to sell the house. But if husband and wife own the property together, unless both sign the deed of trust, the property cannot be foreclosed upon.
So, if you are married, either avenue you pursue will impact on both your credit ratings.
DEAR BENNY: I am qualified for up-to-$250,000 exclusion of gain when I sell my home. If my home is sold by my beneficiaries after my death, will they be entitled to this exclusion? –Marge
DEAR MARGE: I am afraid the answer is not that simple. The up-to-$250,000 exclusion of gain (or up-to-$500,000 for married people who file a joint tax return) has limitations. Your home has to be your principal residence. You have to own and live in the property (called the "ownership and use test") for at least two out of the five years before it is sold.
So when you die, unless your beneficiaries meet the ownership and use test, they will not be eligible for this exclusion of gain.
We used to have a "stepped-up" basis, which actually was better than the gain exclusion. That meant that on a property owner’s death, the tax basis for the heirs was the value of the property at the date of death.
So, for example, if you bought the property for $50,000 years ago, and it is worth $500,000 when you die, your heirs’ tax basis was $500,000. If they sold it for that price, they would have no capital gains tax to pay. (I am not discussing inheritance or other estate taxes here.)
However, for 2010, the stepped-up basis has been repealed. Instead, the tax basis for the heirs is the lesser of the fair market value or the deceased taxpayer’s basis.
So in our example, assuming that you made no improvements to the house (which would increase your tax basis), on your death your heirs would be stuck with the lower value — i.e., the $50,000. The old, stepped-up basis is currently scheduled to come back in 2011, but no one knows what Congress will do before this coming election in November.
DEAR BENNY: I live in a medium-sized condominium and the board just enacted a special assessment. A number of us are opposed to that and we want to call a special meeting for the purpose of having the assessment rescinded. Is this possible? –Jannie
DEAR JANNIE: You first have to look to your association legal documents — which are the declaration and bylaws. Does the board have the right to impose a special assessment? If so, is there a dollar limitation over which the board must get approval of at least a majority of the owners?
Assuming that the board has the absolute authority to pass such an assessment, what can you do? You can ask the board to hold a special meeting for the purpose of throwing it out. You have to comply with the special meeting procedures spelled out in your bylaws.
But, I am not sure that even if 100 percent of the owners voted to rescind, that they would have the authority to do so. If the board has the authority, the owners cannot take it away by a vote.
This does not mean there is no remedy. Arrange to meet with the board and express your concerns. If the board remains firm in its position, you can start a recall petition to "throw the rascals" out of office. Then, the newly elected board can rescind the assessment.
Once again, you have to follow the rules spelled out in your bylaws regarding removal of board members. Hopefully, if the board members believe they may be removed from office, they may change their mind.