Real Estate Information Archive

Although the housing market has been unpredictable in recent months, the existence of a seller’s market and the availability of low interest rates are providing incentives for potential buyers. Obtaining a mortgage, especially one which is attractive to you, is not as easy as it was a few years ago. As a result of the extreme increase in the number of foreclosures, banks have raised their lending standards for all borrowers, and there is little reason to believe that these stringent requirements will lessen anytime soon. This tight credit situation affects would-be buyers of Chester County real estate in numerous ways, among them down payments, credit scores, documentation, debt-to-income ratio, and appraisals.

        1. Down payments: Requirements will be higher. Generally speaking, to get the best interest rate you need to put down at least 20% of the purchase price of the Chester County real estate. FHA loans are available for a down payment of only 3% to 5% but these loans will include additional costs for insurance and a slightly higher interest rate.

        2. Credit scores: You will most likely need a score of 730 for the best rates, whereas the average score for an FHA borrower is about 690. Financial advisors strong urge you to obtain a copy of your credit report six months before loan shopping (you are entitled to one free report from each of the three bureaus annually at www.annualcreditreport.com) and examine it carefully to detect any errors/misinformation.

        3. Documentation: Be prepared! Lenders will ask for a great deal of documentation regarding your salary, savings, job stability, debts, and the like. You will need to provide pay stubs for the past 30 days; W-2 forms for the past two years; bank, retirement, and investment account statements; and a listing of debts and monthly expenses. Monthly housing expenses should not exceed 28% of your gross monthly income, and total debt should be less than 37% of that amount. If you are self-employed, you will also have to submit two years of tax returns and possibly a profit-loss statement.

        4. Appraisals: Gone are the days of a sure-thing, easy appraisal. Lenders today want a thorough inspection of both the interior and exterior or your Chester County real estate, and the less money put down, the more extensive the scrutiny of the home’s market value. It is wise to include an appraisal contingency in your offer so that your earnest money deposit will be returned to you if the appraisal fails to meet the negotiated price.

How can you find the best rates? Check out available interest rates daily and discloses the best “par rate.” In addition, if you provide contact information, the site will forward that information to the local lender offering the best rate.

If you are considering refinancing your Chester County real estate, take advantage of this calculator to help determine if this is a good financial move for you.

You should also avail yourself of the consumer-friendly good faith estimates (GFE) that lenders are required to give you and with which you can compare offerings. (Search online for “HUD + good faith estimate” for an example.) This form clarifies the type, rate, and features of the loan for which you’re applying. These rates are guaranteed, and if the charges are underestimated, the lender, not you, if responsible for the difference.

If you are among those who received a tax credit of up to $7500 when you purchased your Chester County home in 2008, you are now required to begin repaying that credit with this year’s tax return. The entire amount is payable in 15 equal annual installments.

The IRS is sending letters of explanation of the repayment procedure to all taxpayers who claimed the credit in 2008. Generally speaking, all first-time 2008 home buyers will need to pay an additional $500 on their taxes from 2010 to 2025, provided the house is not sold before then and remains the owner’s primary residence.

If you sell your Chester County home before 2025, any profits will first go to paying back the tax credit in full. If you sell at a loss, the difference will be forgiven, although, as is typical with most forgiveness agreements, you must record that amount as income and pay taxes on it.

If, within 36 months after buying your home, the property is no longer used as your primary residence due to a divorce in which your spouse retains the house; conversion to rental property, a business, or a vacation home; or foreclosure, the full amount of the unpaid credit must be paid in full with the tax return for the year in which the change occurred. You will need to file IRS form 5405 with your return in this case.

Because individual situations vary, it is important for 2008 Chester County home buyers to consult a qualified tax professional to make sure they are fulfilling all obligations of their purchase and subsequent credit.

Happy New Year! January is the time for starting out with a clean slate and vowing to make changes that are good for us. In spite of our good intentions, however, by now many of us have made--and broken--many familiar resolutions and have fallen back into bad habits. Despair not. There is one action you can begin right away, stick to without hardship or self-denial, and benefit greatly from in just a few months. The holiday season may be behind us, but tax season is not far away, and you can resolve to get an early start by identifying house-related tax deductions now and gathering the necessary documentation for them.

Doing so provides you with a win-win situation. Not only will you get a head start on a sometimes onerous task, you will also derive pleasure from seeing how much money you will save simply by owning Chester County real estate. The following information is current as of now, but I urge you to check with your accountant, visit the IRS website, or call the IRS assistance line at 800-829-1040 for verification and/or specifics.

PRIMARY RESIDENCES

• MORTGAGE INTEREST: As you know, much of your mortgage payment goes toward paying off interest, especially in the early years. All this paid interest, on debts of up to $1 million on a joint return, is tax deductible. The amount you have paid is reported to you on a 1098 form sent by your lender and should be reported by you on line 10 of a Schedule A form (itemized deductions).

• HOME EQUITY LOAN INTEREST: Interest paid on home equity loans (second mortgages, equity credit lines, and some refinancing) is fully deductible up to $100,000--regardless of how you use the proceeds. If you use some or all of the proceeds for home improvements, that amount can be added to the $100,000. Be sure to carefully document all improvement costs. Note: The limits mentioned apply only as long as all debt secured by the residence does not exceed the fair market value of your Chester County real estate.

• POINTS: The points you paid to the lender at closing are deductible for the year in which you paid them. This amount is also reported to you on the lender’s 1098 form. See publication # 936 from the IRS for more specific information, especially about points paid for refinancing.

• PROPERTY TAXES: Chester County real estate property taxes are fully deductible.

• PRIVATE MORTGAGE INSURANCE: If your mortgage was taken out between 2007 and 2010 and your joint income is below $100,000, you can deduct any premiums you paid. Note: This is the last year that you can take this deduction.

• HOME OFFICE: If you use a portion of your home exclusively for business purposes, there are certain costs you can deduct. Such expenses may include a percentage of your utilities, repairs, qualified insurance premiums, and even property taxes. The IRS has specific requirements for these deductions. Consult IRS publication #509.

• SELLING YOUR HOME: In addition to being able to pocket as much as $500,000 tax free in profit if you file jointly and have lived in the piece of Chester County real estate for two of the past five years, you can also deduct from your taxable capital gain many costs which you incurred while selling the property. Such costs usually include realtor commissions, legal and inspection fees, and title insurance. In addition, cosmetic repairs and improvements you made to the home within 90 days of the sale are also deductible.

TAX CREDITS: These are even more beneficial than deductions and fall into two categories for the 2010 tax year.

• HOMEBUYER TAX CREDIT: Buyers who purchased a house before May 2010 and qualified for a Homebuyer Tax Credit may claim that credit by mailing in (you cannot file electronically) your return with IRS Form 5405. Members of the military, foreign service, and intelligence communities have until April 30, 2011, to purchase a home and be eligible for this credit.

• HOME ENERGY TAX CREDIT: If you installed qualified energy-efficient systems, windows, and/or appliances in your home before December 31, 2010, you may be eligible for a tax credit of up to $1500. Again, you may not file electronically, and you must complete and attach IRS Form 5695 to your return.

FORGIVEN DEBT: Mortgage debt to buy a principal residence that is forgiven (as in a short sale, foreclosure, or debt restructuring) is no longer taxable in many cases. Restrictions apply for investors, equity lines, refinancing, etc. See IRS Publication 4681 for detailed information and use IRS Form 982 for filing.

Your credit score is a number that helps lenders predict how likely you are to make your payments on time. This score affects your ability to obtain credit and helps determine what you pay for credit cards, auto loans, and mortgages on Chester County homes. Even your insurance rate is related to your score. The higher your score, often referred to as a FICO score, the more apt you are to be approved for and pay a lower interest rate on new loans. Scores ranging from 650 and below are considered bad and indicate to the lender that you are a very high risk. Chances are you will be unable to secure a loan, or if you are, it will be at a much higher interest rate and/or require a cosigner.

What If there Are Errors

What to do if you have a low score and do not qualify for a mortgage on a Chester County home? Your first action should be to check your credit report for errors. If you find erroneous information, you need to act immediately by contacting both the credit bureau (the three major ones are Equifax, Experian, and Transunion) and the organization that provided that information.

• The credit bureau/agency: Send a certified, return receipt requested letter to the bureau pointing out each inaccuracy and enclose copies of documents which support your claim as well as the report itself (with the misinformation highlighted). Factually explain why you dispute each item and request a deletion or correction for each one.
• The creditor or information provider: Send the same type of letter and enclose the same documents. Request that the provider notify you of action taken (generally within 90 days) so that you can verify the amended information.

If there are no errors on your report, then you should take immediate steps to improve your credit. Ways to do this include the following:

• Stop using your credit cards. Do not continue to accumulate debt.
• Get current on delinquent accounts. Since payment history makes up 35% of your score, this action will have a great impact on your score.
• Keep accounts with balances open, but don’t apply for more credit.
• Call your creditors. Explain your financial situation and ask about possible hardship programs which will temporarily reduce your monthly payments.
• Begin paying off your existing debts, even if you have to sell some belongings to do so. Come up with a get-out-of-debt plan and stick to it.
• Get professional help. There are resources available to help you reestablish a good credit rating. Contact the National Foundation for Credit Counseling for assistance.
• Be patient. Realize that improving your credit score takes time and that there is no quick-fix --and keep in mind your goal of owning a Chester County home.

The Federal Housing Administration (FHA) is a government agency whose main objective is to help people who do not qualify for conventional lending programs obtain home loans. The FHA is not in itself a lender; rather it insures a loan, thus making banks/lenders more willing to grant a home loan on real estate to those in underserved groups.

Because of the economic downfall and the increased number of foreclosures, the FHA, in an effort to strengthen its capital reserves, as made significant changes to its policies, effective this summer. Basically, the changes involve insurance premiums, FICO scores (credit rating), seller concessions, and increased enforcement of lenders.

Mortgage insurance premiums: The previous upfront premium payment of 1.75% of the loan amount has been raised to 2.25%. The option of financing this amount into the loan is still available. In addition, the FHA has requested the authority to increase the annual MIP from its current .55% in an effort to reduce the upfront MIP costs.

FICO scores: The new minimum score for those with a 3.5% down payment has increased to 620 (up from 500).

Seller concessions: In previous years the seller could pay up to 6% of the buyer’s closing costs and fees. It is proposed that amount be lowered to 3%.

Lender enforcement: The FHA will make public (on the HUD website) lender performance; increase its monitoring of lender performance and adherence to the new guidelines; and pursue further legislation to increase its enforcement capabilities.

Additionally, in November 2009 new rules affecting the insuring of the condominium segment of Chester County real estate became effective. FHA insurance availably will be subject to location restrictions based on noise concerns, safety, flood possibility, and wetland disturbance.

                Condo-based changes include:

                1. Increase the loan limits.

                2. Eliminate the practice of separating condo loans from single-family home loans.

                3. Set the owner-occupation requirement at 50%.

                4. Reduce the unit presale requirement from 50% to 30%

                5. Limit the number of FHA loans in any on building to 30%

                6. Cap the number of units in any one building which can be owned by one investor at 10%.

                7. Replace the “spot check” approval process with a more streamlined one when a condo project has not been previously approved

                This is a list of approved condos. 

To a Chester County home loan shopper, there may seem to be an endless--and confusing--array of mortgage types. Of course you want to choose the option that is best suited to your current and future financial situation, but understanding the terminology, types, and monetary ramifications is not always easy. Mortgages generally fall into four categories (fixed rate, adjustable rate, step, and balloon) according to the interest rate and duration of the loan.

Basic terminology;

    Fixed rate--The interest rates do not change during the life of the loan, thus allowing you to know the amount of your payments.

    Adjustable rate (ARM)--the interest rate is tied to certain indexes plus a margin and can fluctuate up or down, thus affecting each payment,

    Step--the interest rate and monthly payment remain the same for a specified period of time. After that the interest will change to the prevailing rate and will remain there for the duration of the loan.

    Balloon--a loan payment that expands after a certain amount of time. Basically it functions similarly to a fixed rate mortgage in the earlier months/years with a delayed steep increase at the end,

The following information, courtesy of Mortgages.Interest.com, outlines the type of mortgage, the loan characteristics, and the situations most appropriate for each one. If, for instance, you plan to live in your Chester County real estate more than 10 years and desire stability in payment amounts, then a fixed rate mortgage is for you. If, however, your finances are currently strained, but you know that in 5 to 10 years your monetary situation will improve or that you will most likely move within 10 years, then an ARM or balloon mortgage may be better for you. Being familiar with these options allows you to discuss them intelligently with your real estate agent and/or lender and then select the type which best fits your circumstances.

 Fixed rate mortgage (30, 20, 15, 10 years)*

• Interest rate & monthly payment remain the same for the entire term of the loan

• plan to live in property more than 10 years

• like total payment stability

0/1 year adjustable rate mortgage

• Interest rate & monthly payment remain the same for 10 years

• Starting the 11th year, interest rate adjusted every year, so payment is subject to change every year for remainder of loan

• plan to live in property more than 10 years

• like initial payment stability, can accept later changes OR

• plan to move within 10 years

•   want loan to remain in force in case plans change

7/23 (2-Step) or '30 due in 7' mortgage

Interest rate & monthly payment remain the same for 7 years

• Conversion option: On the 8th year, interest rate adjusted to reflect prevailing interest rates, resulting payment will remain the same for remainder of loan

• plan to live in property more than 10 years

• can tolerate one payment adjustment OR

• plan to move within 7 years

• want to remain in force in case plans change

7/1 year adjustable rate mortgage

• Interest rate & monthly payment remain the same for 7 years

• Starting the 8th year, interest rate adjusted every year, so payment is subject to change every year for remainder of the loan

• plan to live in property more than 7 years

• like initial payment stability, can accept later changes OR

• plan to move within 7 years

• want loan to remain in force in case plans change

7 year balloon mortgage

• Interest rate & monthly payment remain the same for 7 years

• At the end of 7 years, loan is due in full. Borrower must refinance into new loan at prevailing interest rates

• plan to live in property more than 7 years

• are willing to refinance at prevailing market rates OR

• plan to move within 7 years

• like payment stability

In addition, there are variations of the ARM, step, and balloon mortgages which differ primarily in the duration of the loan and of the planned residency.

Another good source of information for first-time Chester County home buyers is the Department of Housing and Urban Development (HUD), an agency which oversees FHA loans. This type of loan is particularly useful if you have little money for a down payment, less than great credit, or large monthly bills. An FHA loan requires as little as 3% down (and it can be a gift from a relative or friend). In terms of your credit rating, the FHA is primarily concerned that for the past two years you have paid bills in a timely manner and have been steadily employed. With FHA you have to wait only two years after declaring bankruptcy, and your debit-to-credit ratio can be higher than for a conventional loan. You can qualify for an FHA loan if your monthly payments are no more than 43% of your income, and, as with conventional loans, you can choose from many types.

Of course, there are some negatives to consider before taking on an FHA loan. Interest rates generally run about 1/8 of a percentage point higher than conventional rates, but the real disadvantage of an FHA loan is that the borrower must pay an up-front insurance premium of 1.75% of the mortgage if the down payment is less than 20%. This cost can, however, be added to your total loan amount.

So there you have it--an easy-to-understand guide to mortgage types. As always, you should feel free to contact me anytime with questions. I am glad to recommend a number of outstanding mortgage lenders if you are interested in talking with one.

Yes, it’s tax season again, and given the state of the economy, saving every penny is very appealing. As an owner of Chester County real estate there are many deductions and tax credits you will want to take claim on your 2009 return…provided you qualify of course!!

Here are a number of money-saving ways to reduce the amount of tax you owe--or even increase the amount of your refund!

First, let me explain the difference between a tax deduction and a tax credit.  A tax deduction reduces (adjusts) your taxable income. A tax credit reduces your tax dollar for dollar. You do not have to itemize deductions to claim a tax credit.  

Tax Deductions for Primary Residence

Tax deductions on your primary residence include:

• Interest paid on your mortgage
• Refinancing points paid in 2009
• Real estate taxes
• Interest on major home improvement loans
• Mortgage insurance premiums
• Home improvements required for medical care
• Any sales commission, legal fees, or closing costs associated with the sale of Chester County real estate in 2009

Home Energy Efficiency Improvements Tax Credits

Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, and heating and cooling equipment in existing homes can receive a tax credit for 30% of the cost, up to $1,500, for improvements "placed in service" starting January 1, 2009, through December 31, 2010. See Federal Tax Credits for Energy Efficiency for a complete summary of energy efficiency tax credits available to consumers.

Residential Renewable Energy Tax Credits

Consumers who install solar energy systems (including solar water heating and solar electric systems), small wind systems, geothermal heat pumps, and residential fuel cell and microturbine systems can receive a 30% tax credit for systems placed in service before December 31, 2016; the previous tax credit cap no longer applies. Details are explained here.

Home Buyer Tax Credit

• First-time buyers who have not owned a home in the last three years are eligible for a credit of 10% of the purchase price, not to exceed $800,000. Ownership of a vacation home or rental property not used as a prime residence does not disqualify a buyer as a first-timer.
• Current home owners, or those who have owned and lived in a principal residence for at least 5 consecutive years of the last 8, may qualify for a credit of up to $6500.