My advice?  Jump in with both feet and your eyes wide open!  Here’s what to watch for.

Mortgage rates are at an incredible historic low, and that will not last. The rate on a 30-year mortgage averaged 5% last week, according to Freddie Mac. Rates are low in part because the Federal Reserve has been buying up about $3 trillion in mortgage-backed securities and mortgage agency debt. The aim is to hold down interest rates and keep mortgages available. But the Fed is slowly removing that financial crutch as the economy improves. It has no plans to buy any more past March 30, 2010- it says. The likely result is an uptick in rates. Meanwhile, the recovering economy by itself should raise rates as the year goes on. Economists at the Mortgage Bankers Association expect to see a 6.1% rate by year end. Such a rise would add about $104 to the monthly payment on a $150,000 mortgage.  What does a healthy economy with still moderate interest rates equal?

Inflation.  Without your feet planted squarely on your own piece of dirt, you could loose out on the next wave of increased prices.  Gold and real estate (the ultimate tangible goods) will usually benefit from inflation.

The home buyer tax credit expires on April 30, 2010 and no one knows if Congress will renew it a second time. Expect a clash between the real estate lobby and fiscal conservatives worried about the $1.35 trillion federal deficit. To qualify for the credit, you must sign a purchase contract by April 30, 2010 and close by July 1, 2010. First-time buyers get up to $8,000. “First-time” is defined as someone who hasn’t owned a home in three years. Move-up buyers get up to $6,500 when they purchase a new primary residence. To get the credit, you have to have lived in the old home for at least five out of the last eight years. The credits start phasing out at $125,000 in adjusted gross income for singles and $225,000 for joint filers.  Keep logging on to www.FairOaksLender.com, email me at je@gbmc.com, or call me at 916-224-7653.

Commissioner David Stevens on Wednesday announced big changes at the government mortgage insurer that now backs a significant amount of the country’s home loans.

The FHA will raise the up-front Mortgage Insurance Premium paid by borrowers from 1.75% to 2.25% as well as request legislative authority to increase the maximum annual MIP that the FHA can charge.  This is the second time in two years that it has raised the premium.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens in a written release.

In addition, in order for new borrowers to qualify for the 3.5 percent down payment program, they will now be required to have a minimum FICO score of 580.  Borrowers with a lower score will be required to put down at least 10 percent.

The FHA will also reduce allowable seller concessions, from 6 percent to 3 percent. The change will give borrowers a greater financial stake in their home purchases, as well as brings the FHA into conformity with industry standards on seller concessions.

FHA, administered by HUD, which does not lend but only insures home mortgages, has been under increased scrutiny of late, as rising defaults put the agency below its required reserves. The authority went from insuring barely 3 percent of all home loans at the height of the latest housing boom to now backing an estimated 40 percent of all new loans.  It has been a significant player in housing’s so far weak recovery.

Earlier in the week on Monday, FHA announced that transactions after 2/1/2010 will no longer be subject to the “flipping rule”, which required private sellers to wait 90 days after purchasing a home before they could enter into a transaction with a new buyer.

“The changes announced by the FHA represent an attempt to navigate a prudent course without negatively impacting access to credit or contributing to a further slowing of the housing market in communities of color,” said David Berenbaum, Chief Program Officer at the National Community Reinvestment Coalition in a written release.

The opposition to this move has mainly been voiced by the mortgage community, which has criticized mainly the drastic reduction in allowable seller contributions.  Most transactions around the $100,000 price range have closing costs that exceed 3%.  Buyers in this price range typically have fewer assets than most and come to the transaction with the bare minimum to purchase the property.  The seller allowable contribution can make or break the borrower’s ability to purchase the property.

Summary of New Changes at FHA

• After 2/1/2010 will no longer be subject to the “flipping rule”, which required private sellers to wait 90 days after purchasing a home before they could enter into a transaction with a new buyer.
• Up-front Mortgage Insurance Premium, paid by borrowers, from 1.75 percent to 2.25 percent.
• In order for new borrowers to qualify for the 3.5 percent down payment program, they will now be required to have a minimum FICO score of 580.  Borrowers with a lower score will be required to put down at least 10 percent.
• A reduction in allowable seller concessions, from 6 percent to 3 percent.

With certain exceptions, FHA has prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver gives FHA borrowers access to a broader array of recently foreclosed properties.

But here’s the deal: only a few lenders are participating.  Most lenders are selling their FHA loans to B of A or Wells Fargo.  These banks are currently not buying flips.  I can do flipped properties.  I can do them with over 20% gain in purchase price.  Just a note, this does not necessarily mean that the investor made 20% on their investment.  They may have purchase the property and assumed existing liens which are not taken into account by FHA.  Many properties, consequently do not fit within the 20% threshold.

In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

The waiver will took effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

•All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
•In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
•The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD’s website.

Transfer the Property Tax Base

Knowing the tax laws can allow homebuyers and the Realtors that assist them to make a move confidently and save lots of money.  California Propositions 13, 60 and 90 can greatly affect folks over 55 years of age.

Proposition 13

Under Proposition 13 the value of a home, for property tax purposes, is reassessed to the new market level (the new purchase price) whenever a change in ownership occurs. This usually results in higher property taxes.

Prop 60

Proposition 60 allows a transfer of base-year value of the principal residence sold of a senior citizen (55 and older) to a replacement dwelling of equal or lesser value within the same county.

Prop 90

Proposition 90, enacted in California in November of 1988, and otherwise known as the “local option law” provides an avenue for property tax relief to owners 55, and older, who sell their principal residence and purchase a replacement home of equal or lesser value in another county.

The County Assessors will require a copy of the tax bill from the other county and a copy of the applicant’s birth certificate to be included with the application. Also include a copy of the grant deed for the new purchase and a copy of the closing statements of both sale and purchase.

SUMMARY OF ELIGIBILITY REQUIREMENTS

The seller of the original residence, or a spouse residing with the seller, must be at least 55 years of age, as of the date that the original property is transferred.

The replacement property must be of equal or lesser “current market value” than the original.

The tax base year of the original property cannot be transferred to the replacement dwelling until the original property is sold…BUT (& this is the cool part)…

…the replacement property must be purchased or newly constructed within two years (BEFORE OR AFTER) of the sale of the original property.  This allows the property owner to take advantage of a low market (like the one we’re in) and sell when things are selling more briskly or visa versa.   This just means that the homeowner will be taxed on the new property at the assessed rate until the sale is made on the original property and the proper paperwork is filed with the county.

The owner must file an application within three years following the purchase date or new construction completion date of the replacement property.

This is a one-time only filing. Proposition 60/90 relief cannot be granted if the claimant, or spouse, was granted relief in the past.

Proposition 60/90 relief includes, but is not limited to: single family residences, condominiums, units in planned unit developments, cooperative housing, corporation units or lots, community apartment units, mobile homes subject to local real property tax, and owner’s living premises which are a portion of a larger structure.

The taxpayer is not eligible for the tax relief until they actually own AND occupy the replacement dwelling as their principle residence.

If the buyer is moving to another county it is essential that you call the co-operating County in question, to verify that they are currently accepting the value transfer under Proposition 90, and what their requirements are. If you have any questions, the property tax office in Sacramento for all counties in California may be reached at (916) 445-4982.

Counties that have rejected Prop 90: Sacramento, Placer, Butte, Yolo, Merced, San Luis Obisbo, Calveras, Mono, Contra Costa, Marin, Santa Barbara, Monterey, Santa Cruz, Napa, Shasta, Siskiyou, Fresno, Nevada, l

Counties that have adopted Prop 90: El Dorado (2/15/1o), Alameda, Modoc, Kern, San Mateo, Orange, Santa Clara, Los Angeles, San Diego,  and Ventura.

Frequently Asked Questions

What is a “transfer of the base year value”? Let’s take this step by step. The base year is the year in which the property or portion thereof is purchased, newly constructed, or a re appraisable ownership change occurs. The base year value, also called “original base year value,” is the full market value of the home in the base year. The full market value is typically determined by either the purchase price or the Proposition 13 value.  Some strategies that some have employed to keep the sale price equal or less than the original property is to pay fees, such as commissions, outside of escrow instead of having them built in to the purchase price.

What other “conditions” must be met to qualify? Both the original and replacement properties must be located in the same county; and The original property must have been eligible for either the homeowner’s exemption (claimant owned and occupied it as principal residence at the time of sale or within two years of the acquisition of the replacement property) or entitled to the disabled veteran’s exemption (veteran with service related disability and California resident on January 1 of claim year); and The replacement dwelling must be of equal or lesser value than the original property; and The replacement dwelling must have been acquired or newly constructed within two years before or after the sale of the original property as long as the replacement property was acquired or newly constructed on or after November 6, 1986; and • The original property must be subject to reappraisal at its current “fair market value” as a result of its transfer, in accordance with Revenue & Taxation Code sections 110.1 or 5803; and • A claim must be filed within three years of the replacement dwelling purchase or completion of new construction of the replacement dwelling.

What if I jointly own the property with someone who is not my spouse? The same rule applies. If there are two or more co-owners of a dwelling, all owners qualify if only one owner of record is over 55 and if that owner/claimant occupies the property as of the date of the transfer.

How often can I claim the Proposition 60 benefit? The benefits of the Proposition 60 exclusion are granted only once in a claimant’s lifetime.

As a co-tenant of the original property with another owner, may I receive a partial benefit if we apply for the exclusion and buy separate replacement homes? No. Only one co-owner of a qualified original property may receive the benefit in this situation. The co-owners must choose between themselves which one will make the claim. The only exception is a multiple-residence original property (such as a duplex), where multiple owners qualify for separate homeowner’s exemptions. In that case, each owner may transfer a portion of the original property’s value to his separate replacement dwelling.

Does Prop 60 apply if I make a gift of my original property to my children and I buy a replacement? No. A gift of the original home to the owner’s child, while the owner is alive or through a will upon the owner’s death, does not qualify. The original property must be sold in exchange for something of monetary value (“consideration”) and be subject to reappraisal at full market value at the time of transfer.

What is “equal or lesser value” of the replacement dwelling? In most cases, where the replacement property is purchased before or at the same time as the original, the market value of the replacement must be 100 % or less of the market value of the original.

Must I buy the replacement home before I sell my original residence? No. You have up to two years before or after the sale of the original residence to buy a replacement. The date of the replacement’s purchase determines the relative market value that is required to qualify under Prop 60. Thus, (1) if the replacement is purchased or newly built before the original property is sold, the replacement’s value must be 100% or less than the market value of the original; (2) if the replacement dwelling is acquired or newly built within one year after the original is sold, the replacement’s value must be not more than 105% of the original’s value; and (3) if the replacement is acquired or newly built within two years after the original is sold, the replacement’s value must be not more than 110% of the original’s. Market value is not necessarily the purchase or sale price—it is determined by the county assessor.

As sole owner of an original property, may I qualify when I jointly buy a share of a replacement? Yes you may, as long as you are otherwise qualified, regardless of how many co-owners buy the replacement. All co-owners will share your benefit, although they need not join in your claim. You may not claim the benefit again, but the others may.

May one sole owner of a qualified original home and another sole owner of a separate qualified original home apply their separate Prop 60 benefits to the same replacement residence they buy jointly? No. Each owner may only receive the benefit of a single claim. The owners may not combine their benefits to buy a replacement dwelling of equal or less value than the combined original value.

As always, contact a qualified tax professional to get expert advice.

1/1/2010 is fast approaching.  First-time home buyers are eligible for the tax credit. To qualify for the tax credit, a contract for the home purchase must occur on or after January 1, 2009 and on or before April 30, 2010 and close on or before June 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. There are limitations and restrictions, so check out the facts and CLICK HERE.

To get your tax credit, you cannot file electronically. You should attach a copy of Form HUD-1 (Settlement Statement) to your return. Also, before filing, it would be a good idea to submit Form 8822 to the IRS to show that you now reside in the new home. Because there have been a rash of  fraudulent claims for this credit, the IRS is getting tough and may ask for a lot of additional information if there are any discrepancies with the return. Although it is not necessarily routine, the IRS may require:

• A copy of the buyer’s driver’s license
• A copy of their latest pay stub
• A copy of their bank statement
• A copy of the receipt for latest mortgage payment
• A utility bill showing proof of ownership

It is recommend that you attach as much evidence as possible to the return to head off further demands for proof by the IRS.

NOTE: If you don’t qualify for the first-time homebuyer credit, you MAY qualify for a $ 6,500 credit.  There are several qualifications that must be met for this $ 6,500 credit.  Call me for details (916) 224-7653.

As always, contact a qualified tax professional to get expert advice.

The real estate market is gaining steam with consumer confidence, albeit cautious confidence, on the rise.  The $8,000 first time home buyer credit and $6,500 move up credit aren’t hurting at all.  

There are worries about the federal deficit and the government’s willingness and abilty to buy mortgage back securities.  Look for corrections in precious metals and oil.  Gold and silver are overvalued.  Gas prices suggest an  anticipation of  a high demand over the holiday season – it ain’t happenin’.   The Fed will probably keep the rates where they are because they want to keep inflation in check.    

This is all good news for low interest rates in a healthy real estate market.  But it won’t last.  Spring brings demand - which brings higher rates and real estate prices.  Couple that with buyers rushing to beat the deadline of April 30 to get their tax credits and you’ll have an over-heated market in late spring come to a halt for three weeks.  The realization that summer will be coming soon will cause another little rush until mid-June.  Things will then come to a stand-still until mid-August.  Mark my words, you can play with cycles, but people will always need a place to live and they will pay someone to have a roof over their head. 

What’s hot?  Investment properties.  A significant segment of the market will either remain pesimistic or not have the ability to buy because of screwed-up credit and shy away from purchasing for a few years.   Buy a duplex for Christmas!  

On January first the federal government is mandating that everyone to be using the new consumer-friendly Good Faith Estimate mortgage disclosures and the new HUD-1 settlement statements.  The only exception is if a mortgage application was made in 2009 and the transaction is closed in 2010.  The new GFE and HUD-1 provide numerous protections the old forms did not.

 The new disclosures make it very hard for sleazy mortgage brokers to offer one thing initially and then have a fee laden net sheet at closing.

Starting January 1, the lender or broker will be subject to what are known as “tolerance” limits for certain types of fees. Any charges over the limits will have to be eaten by the lender or broker.

For example, if a loan officer tells you the origination and processing charges will be $800, he or she won’t be allowed to charge you any more than that at settlement. There will be zero tolerance for increases on these fees.

Other types of charges, such as for title insurance and settlement services, generally won’t be allowed to come in more than 10 percent above the upfront estimate — unless the borrower chooses the title company and it’s not on the mortgage company’s list of recommended firms.

In response to industry complaints that some mortgage firms will not have their systems up to speed to comply with the new rules as of January 1, HUD Secretary Shaun Donovan issued a statement indicating that the department would show “restraint” in enforcing the regulations during the first 120 days of the new year.

But last week, following mortgage and real estate trade publication reports that the department has postponed the January start date to April 30.  That doesn’t mean that lenders can avoid using the new GFE and HUD-1 forms.  The tollerances just won’t be enforced by the government until then.  All consumers making loan applications on or after January 1 must receive the new forms at application and at closing.

The Sacramento area has been hit very hard by the foreclosure crisis. The U.S. Department of Housing and Urban Development (“HUD”) has recently released funding formula allocations and program rules. Allocation of funding was based on state and local need measured by number and proportion of homes in foreclosure, subprime loans, and homes in default or delinquency. Each state receives, at a minimum, $19.6 million for use throughout the state. In addition, severely impacted entitlement jurisdictions whose proportional allocation equals at least $2 million receive their own funding. The State of California and jurisdictions within California will be receiving $529.6 million, or sixteen percent, of the federal grant. In Sacramento County, the unincorporated County, the City of Sacramento and the City of Elk Grove all will receive grants directly from the federal government. The unincorporated County’s grant (which can also be used in Galt and Folsom) is $18,605,460 and the City of Sacramento’s grant is $13,264,829. Unincorporated Sacramento County is receiving the fourth largest allocation statewide, behind Riverside, Los Angeles and San Bernardino Counties, and the City of Sacramento is receiving the largest grant amount of any City in the State. NSP funds are specifically focused on recovery and redevelopment of vacant, abandoned foreclosed homes. However, NSP regulations allow flexibility with use of the funds for rehabilitation, redevelopment, demolition, re-construction and land banking of vacant, foreclosed properties. The NSP funding is intended to complement larger redevelopment efforts, and to make a significant impact on distressed areas.  Call me, John Easterbrook, at 916-224-7653 or email me at je@fairoakslender.com to get your share of the funding.  Also, you visit http://www.fairoakslender.com to check in of the latest news and events from a local Fair Oaks lender.

Dear Realtor,

Please encourage your buyers to invest in real estate.  They will thank you forever- or as long as you’re in the business.  Here’s why:

It’s no surprise that anybody with investments in the security industry has been hit hard over the last few years. It’s also no newsflash that many of them are viable alternatives to intangible investments. It is hard to imagine for some folks who have never imagined owning anything other than one home at a time. The profits, however, are undeniable for them and (of course) for you too. 

This strategy isn’t for get-rich-quick types: we’re talking about clients who you know are serious about investing (or who you feel could be serious). They may be relatively recent empty nesters looking for a pension buffer or property novices looking to boost their purchasing power. Regardless of their life stage, if they’re willing to work hard at researching, searching and ultimately managing property, they can potentially reap significant financial rewards.

There are many different types of real estate investments, of course, so you’ll need to align your client with one that’s suitable for them (a commercial property, farmland, or perhaps a residence for flipping). One approach is the purchase of an income-producing property with the intent to rent a unit (or units) within it. By having tenants, investors benefit not only from the potential appreciation over time, but also the steady rental income.

Share the benefits with your client:

• Rental income can, for the first time in a while, probably cover the investment property’s mortgage payments, taxes and maintenance costs.
• Is the neighborhood that your client is focused on becoming gentrified? When the location increases in value over time, equity gets an additional boost.   Look for up and coming areas that for some reason are poised for a bounce in value.
• For young investors applying for a mortgage, additional revenue from tenants increases their total income. The higher the income, the larger the mortgage they qualify for (in most cases).   So, when they add 75% of their rental income to their salary (or to the cash they have saved, borrowed from family or banked from other investments), their position can be greatly improved.
• The stronger the investment potential of the property, and of the borrower’s financial status, the greater the borrowing position. A higher credit rating is the most critical asset for borrowers.

So, Realtor, you are in charge.  Without your encouragement, your clients may never experience the potential profits of investing in your product.  Check out your database.  I’ll bet there are people just waiting to invest with you. 

If you close your home in 2010 and you are a first time homebuyer, you can get up to an $8,000 credit when you file your 2009 tax returns. This is just one of the many mortgage tips that I have for you as your loan specialist. Move up buyers can also take advantage of this tip too with their $6,500 tax credit.

For questions regarding this and other tip, please reply to this blog.