You (Practically?)Need To Be A CPA to Be a Good Loan Officer These Days

 Have you noticed that it is harder to get deals financed these days? (Don’t answer that, it’s a rhetorical question.) The reasons are legion, from stricter credit scoring models, to tighter loan-to-value and debt-to-income ratio requirements, to higher asset requirements, to underwriter review of 100% of borrower tax transcripts. The cumulative effect is that an underwriting process that used to resemble getting your earnings temperature taken is now the equivalent of a financial colonoscopy. And just like in the medical field, if you look at something long enough and closely enough, you’re bound to find something to fret over.

So, what are borrowers and/or Realtors to do whose fortunes rise and fall upon expectations embodied in lender pre-approval letters? (To say nothing of the equally problematic (if harder to measure) missed opportunities related to qualified borrowers who never get anywhere because their loan officer doesn’t understand how to document legitimate income!) Of course, your loan officer doesn’t have to be a CPA to provide adequate service, but you are doing yourself a disservice if you are not partnering with someone who is very comfortable navigating individual, corporate, partnership and Limited Liability Company tax returns. (I know it’s self-serving, but, like they say about bragging, “It’s not bragging if it’s true” – and, I would add, widely relevant.)

This is not a low bar that can be met by taking a one-hour class on “underwriting the self-employed borrower”. We are talking about the IRS and the Tax Code here. Consider something as (almost) universally understood as the ability to add back depreciation to a borrower’s income. Seems simple enough, until you realize that there are myriads of places that depreciation can be found on a personal income tax return alone (Schedule A, Form 2106, Schedule C-part 2, Schedule C- part 3, Schedule E-page 1, Schedule E- page 2, and Schedule F…) You get the picture. The difference between a real deal and a satisfied customer and no deal and an unhappy non-customer might just rest upon your loan officer’s familiarity with some fairly abstruse income tax forms.

None of us can wish-away the profound changes that are impacting our livelihoods every day. We can choose to be proactive in how we answer them. You’re still interested in real estate, which means that you are probably having to rethink everything you used to know. It may be time to rethink the level of financial sophistication you expect from your lender relationships.

The opinions expressed in this article are entirely my own and not necessarily shared by Guild Mortgage Company.

Chris Butaud, CPA Masters, Taxation Loan Officer NMLS 13157 Guild Mortgage P#206-686-2999

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Don’t Be Afraid to Show Those Scratch and Dent Properties, We Have Reliable Ways To Fund Them

Do you shy away from showing your clients properties with deferred maintenance issues due to concerns over financing complications? These properties may be short sales, bank owned, or just generally run down due to the owner’s lack of ability or desire to make needed repairs.  Of course, all things being equal, we would take the well maintained property over the run down one.  But, except in thermodynamic equations, very few things in life are truly equal and a run down, short sale property may be just the screaming deal your clients were looking for, if only you could be sure of financing.

The good news is that there are excellent options for financing properties with deferred maintenance issues.  The two most common strategies for dealing with such properties are escrow hold backs and FHA 203K loans.  Each of these options has limits, but, between the two, there are a broad range of options for dealing with otherwise unacceptable deferred maintenance issues. 

The chart below illustrates some of the more salient features of the two programs. 

Feature Escrow Holdback 203K (“Rehab”) Loan
     
Max Costs Varies $5k – $35K
Eligible with Various Loan Programs Yes FHA only
Funds can be paid to sellers Yes No
Do-It-Yourself Allowed No Yes
Contingency Reserve 1.5 x highest bid 10 – 20% of bid
Disbursement (to contractor) at closing No Up to 50% of repair costs
Multiple bids required Yes (2) No
Ineligible Repairs Health & Safety, Structural, Foundation, Improvements / Upgrades, Remodel Health & Safety (with some exceptions),  Structural, Foundation, Relocation of Wells, Septics, Exposed studs, wires, pipes.

Generally, the escrow hold back is the more flexible and less involved of the two, but, it can require borrower to have up to 2 times the cost of the repair in cash at closing. This is because an escrow holdback lender is not providing the repair funds to the borrower (like a 203K lender). They are simply allowing the borrower to close on a property by requiring the borrower to deposit 1.5 times the cost of repairs (bid amount) at closing.  If the contractor also requires a deposit, total cash require from the borrower can reach 2 times the actual amount of the repair. 

Neither of these programs will address every deferred maintenance issue, but, for many buyers / borrowers, they might make all the difference between the dream home and dream on.

The views expressed in this article are entirely my own and do not necessarily represent the views of Guild Mortgage Company.

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The Truth about the 3.8% Medicare Tax What it Means When You Sell Your Home

The new health care legislation includes a 3.8% Medicare tax that may apply to certain real estate transactions in certain very specific circumstances. Unfortunately, this has been misreported all over the internet in some alarming ways.

For example: “The new health care legislation imposes a 3.8% tax on all home sales.” “If you sell your home for $400,000, you’ll pay a $15,200 ‘sales tax.'” “Middle-income people will pay the full tax even if they’re only ‘rich’ the day they sell their home.”

Please note: Every one of the above statements is COMPLETELY FALSE.What the Law Really Says One of the provisions of the Patient Protection Affordable Care Act (PPACA) health care legislation makes so-called “high-income” households subject to a new 3.8% Medicare tax on investment income beginning in 2013. All the misreporting arose because this provision is contained in a complicated section of a complicated piece of legislation.

But here are the facts: The Medicare tax is not a 3.8% “sales tax” on all real estate transactions. In truth, it is not a sales tax at all and it does not apply to all real estate transactions. The 3.8% Medicare tax is a tax on investment income (which may or may not come from the sale of a property). And it is for persons who earn more than certain amounts specified in the bill. When you sell your home, there is still a capital gains threshold of $250,000 per individual or $500,000 per couple. This is profit NOT subject to capital gains tax. However, you will be required to pay the added 3.8% Medicare tax on any gain you realize above your applicable threshold. Most Home Sellers Not Affected Experts tell us most people selling their homes won’t be impacted by this new regulation. Your home sale would have to make you a so-called “high earner” and here’s what that would take. For example, a couple will be subject to the 3.8% tax only if they made MORE THAN $500,000 profit on the sale of their home. And if they did, the 3.8% tax would apply only to the part of that profit that was ABOVE $500,000. So, if their profit were $600,000, they would have to pay $3,800 of that as tax–3.8% of the $100,000 profit above the $500,000 threshold. Their net profit would still be: $596,200.

I hope this clearly explains how the 3.8% Medicare tax is not a tax on all real estate sales. Instead, it is a tax on investment income that may result in an extremely small percentage of home sellers paying additional taxes on their home sale profits above the designated threshold amount that applies to them ($250,000 for individuals, $500,000 for couples). It has been estimated that the bill’s definition of “high earners” includes less than 5% of all taxpayers.In addition, as of March 2011, the median existing home sale price was $159,600. So, mathematically, only a small percentage of home sales will likely be affected when the Medicare tax is implemented in 2013. As always, consult with a professional tax advisor before making any decision with tax implications.

The opinions expressed in this article are entirely my own and do not necessarily represent the views of Guild Mortgage Company.

Chris Butaud, CPA
Masters, Taxation
Loan Officer NMLS 13157
Guild Mortgage
P#206-686-2999

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Borrower Beware – Your Underwriter Will Believe Everything Your Inspector Says About the Property

 

What goes around comes around, sometimes sooner than you think.  I was just reminded of this with a buyer / borrower who instructed his inspector to find every minor flaw in the property and be at his rhetorical best when drafting the inspection report.  Makes for good drama in the negotiations and may actually win your client a few dollars in concessions, not to mention lots of style points with all concerned.

 But here’s the rub – the more involved the inspection negotiations, the bigger the trail left for underwriters to follow.  Underwriters generally don’t ask for inspection reports and I certainly don’t volunteer them.  But, when the trail becomes too big to ignore, the underwriter has no choice but to take it up.  And God help your deal when the underwriter starts reading about the frightening list of deficiencies in the proposed collateral, as told by Stephen King.

Of course, the possibility for an inspection report to intrude upon an otherwise smooth lending process is not really news to anyone who has been in industry for longer than 5 years or so (which is basically all of us now).  It is newsworthy, nonetheless, because, along with all the new lending guidelines, we are also experiencing a heightened emphasis on some of the older neglected rules as well.  And the last thing any of us need is Hollywood-style drama to interfere with our Seattle-style real estate market.

The views expressed in this article are entirely my own and not necessarily shared by Guild Mortgage Company.

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Generous Mortgage Credit Certificate Program – No Poverty Line-Dance Experience Required

Washington State Housing Financing Commission has one of the most widely beneficial and little known programs for first time home-buyers. The main benefit of this program is an annual Federal Income Tax credit equal to 20% of the mortgage interest costs. This can reduce the effective mortgage interest rate substantially as noted in the chart below.

Additional features are as follows:

1 – You don’t need to be doing the poverty line dance to qualify – just a first time home-buyer with reasonably generous income limits($90 to $100K in King and Snohomish counties, depending on household size)

2 – Reduced effective interest costs are also taken into account for purposes of loan qualifying.

3 – Generally available to be used with a wide variety of loan programs from a standard 20% down conventional loan to a 3.5% down FHA program.

Some caveats are also in order. Because the main benefit of this program is dependent on the existence of taxable income, it is not appropriate for everyone. And for those who do qualify, there is a potential recapture of the benefit should their income increase by more than 5% above the max program limits each year for up to a 9 year recapture period. But, for many first time home-buyers, it could be just the thing that opens the door to their home ownership dreams.

 The opinions expressed in this article / post are entirely my own and do not necessarily represent the views of Guild Mortgage Company. Chris Butaud, CPA Masters, Taxation Loan Officer NMLS 13157 Guild Mortgage P#206-686-2999

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Jumbo Rates Have Fallen, So, The Sky Won’t Be On Luxury Properties In September

One of my luxury property Realtor friends just forwarded an article from our local newspaper about luxury buyers “rushing to beat jumbo mortgage deadline”.  The gist of the article was to sound the alarm about the September 2011 expiration of the temporary increase in Fannie and Freddie loan limits applicable to high-cost areas.  These are good loans if you can get them, because they are priced very close to the conforming loan pricing and generally come with more flexible underwriting terms.

The article notes that limits will be reduced from $729,750 to $625,000 in September, which is accurate if you happen to live in certain tony neighborhoods in California or Maryland.  They are a bit over the mark, however, if you dwell in more modest locales – including virtually all of Washington State where I hail from – which are currently capped at $567,500 in the richest 3 counties and less just about everywhere else. Hardly the stuff that luxuriant lifestyles are made of.

 I guess it makes for good reading if you are trying to create a sense of urgency in luxury buyers, but, the reality (and a better story for all of us with a vested stake in the real estate market) is that traditional jumbo mortgage interest rates have already come way down from their highs during the financial crisis and the spread between conforming and jumbo interest rates (upward of 2.75 to 3 points at the height of the crisis) is now sitting only about 5/8th’s and narrowing.  This is good news for all properties because it is symptomatic of a market that is returning to normalcy and this, is good news indeed.

The opinions expressed in this article / post are entirely my own and do not necessarily represent the views of Guild Mortgage Company.

Chris Butaud, CPA
Masters, Taxation
Loan Officer NMLS 13157
Guild Mortgage
P#206-686-2999

Posted in Jumbo / High Net Worth, Uncategorized | Leave a comment