Federal aid for mortgage borrowers

            On August 31, the president announced new initiatives to help troubled borrowers with high-risk mortgages.  A key element is to allow homeowners with a good credit history, but who cannot afford their mortgage payments, to refinance into mortgages insured by the Federal Housing Administration (FHA) to keep from defaulting.

            “The markets are in a period of transition as participants reassess and reprice risk,” the president said.  “This process has been unfolding for some time and it’s going to take more time to fully play out.  America’s overall economy will remain strong enough to weather any turbulence.”

Strategies for obtaining the right mortgage

What’s the most effective way to obtain the best possible home mortgage in today’s tight market?  That’s the question asked by many home buyers, and owners wanting to refinance their existing mortgage.

When Borrowers apply for an adjustable-rate mortgage today, lenders approve or reject them based on the fully indexed interest rate and higher monthly payment, not a short-term low rate and low initial monthly payment, it was noted in a special report carried in the September issue of Kiplinger’s Personal Finance magazine.

Many first-time buyers look for 100 percent financing.  That often involves expensive private mortgage insurance (PMI) or “piggyback” loans – two loans issued simultaneously.  The cost of PMI largely depends on the borrower’s credit score.  Many options disappear when scores are lower than 700, according to the report.  With the score is 620 or lower, the buyer would probably not be able to obtain 100 percent financing.

In most cases, it’s much better to make a down payment when purchasing a home – at least 5 percent down.  Most lenders also want borrowers to have funds available for at least two months of principal, interest, taxes and insurance in reserve.  Paying off as much debt as possible before applying for a mortgage is important, but a higher priority should be placed on improving your credit score.  The two top considerations by lenders is the borrower’s credit score and down payment.  However, overall debt is important.  The standard debt-to-income ratio used by lenders is 28-36.  Under that guideline, your monthly mortgage payment can’t exceed 28 percent of your monthly household income, and your total debt payments may not exceed 36 percent.

Mortgage tax deductions at risk

An ominous plan is being proposed in Congress – to eliminate mortgage-interest tax deductions for all houses larger than 3,000 square feet.  The proposal, part of a bill drafted by Rep. John Dingell, chairman of the House Energy and Commerce Committee, will introduce a “comprehensive climate change reform legislation,” it was announced.  It includes this deduction-limiting provision.

“Such a law is essential to reduce carbon emissions by 60 to 80 percent by the year 2050,” he said.  “In order to address the issue of climate change, we must address the issue of consumption.  We do that by making consumption more expensive.”  He noted that houses have long been known to contribute to greenhouse gas emissions through heating, cooling, electrical usage and building materials.  However, most home builders report they have followed “green” procedures in recent years.  Houses constructed within the past few years are the tightest, energy-efficient in history.

New development for TIC investments

There may soon be a jump in the popularity of Tenant-in-Common (TIC) investments in real property.  TIC investments are arrangements whereby two or more owners of a property have an equal or unequal interest.  Each owner has full and simultaneous rights to the same property, regardless of the amount of interest owned.  These investments are particularly attractive to owners of commercial properties who want to sell and avoid paying immediate capital gains tax.  They can do so by executing a 1031 Exchange into a TIC – approved by the Internal Revenue Service.

New home sales up slightly

Sales of newly constructed homes are finally showing signs of rebounding.  Sales were up by 2.8 percent in July after a very sluggish month in June, according to a report from the U.S. Commerce Department.

Scathing report on title insurance industry

Homebuyers are often shocked at the settlement table when they learn how much they must pay for title insurance.  Pressure is building to bring those costs down.  A new book has been published on the subject, simply titled “The American Title Insurance Industry,” written by university professors Joseph W. Eaton and David J. Eaton.

Robert Wright with New York University said, “The authors of this book expose a scam that has fleeced Americans of billions of hard-earned dollars since World War II,” he said.  “They show how the title insurance industry has captured its regulators and imposed exceedingly high costs on homebuyers by means of a cartel-like arrangement.  If that can be broken, price gouging would end and homeowners would enjoy what Canadians and Iowans already enjoy – reasonably priced peace of mind.”

Low rate mortgages still available

Many homebuyers – at least those with good credit records – have no problem in obtaining a needed mortgage at very low rates historically.  That may surprise some readers, after hearing all the bad news about problems plaguing mortgage companies and the lack of availability of certain types of loans stemming from the problem-prone subprime mortgages.

At this writing, prime mortgage interest rates are creeping up a bit, but are still at very low levels.  Funds are readily available for these loans if applicants have good credit scores and histories.  This, along with home prices that have stabilized or lowered in most markets and sellers who are highly motivated, present a window of opportunity for many of today’s home buyers.

“Interest rates on prime conforming fixed-rate mortgages are ticking up a bit in line with 10-year Treasury rate movements,” said Frank Nothaft, chief economist for Freddie Mac, a major government-sponsored buyer of home mortgages.  “Problems in the non-prime mortgage market where funds are expensive and hard-to-get has not affected the prime conforming market.”

Best mortgage system worldwide

Despite periodic problems with mortgages, we have the best home financing system in the world.  That is readily apparent when learning about other systems.

Fractional ownerships on rise

Fractional ownership of vacation homes is one of the most rapidly growing segments of the current real estate market.  It accounted for about $1.5 billion in sales during 2005 in the United States alone.  Sales have continued to grow.

Having a fractional ownership of a vacation home simply means you are sharing total ownership with other owners.  Typically, there are four to 12 owners of a single property, allowing individual owners or their guests to occupy the residence for a total of one to three months each year.  The key advantage is, of course, financial.  Each owner shares the acquisition and maintenance costs, along with taxes and mortgage payments, with fellow owners.

Unlike traditional timeshare units, buyers actually own a portion of their fractional property.  And while timeshare units usually decrease in value over the years, fractional ownerships tend to appreciate like wholly owned homes.  Therefore, they are considered to be more viable investments.  Another advantage of this type of purchase is the “buying power” it provides.  A single buyer can own a portion of a much nicer and better located property via a fractional purchase than they could afford for a totally owned residence.  Also, each owner has an active role in controlling the property.

Meaning of a `Short Sale’

Many consumers are confused by the term “short sale” in real estate lingo.  The term usually applies to a home that has a current outstanding mortgage balance that is more than the market value of the property.  When an owner can’t continue to pay the mortgage payments, the property must be sold or foreclosed.  In some cases, the bank or other lender will accept the sale price of the property even though it doesn’t fully cover the mortgage balance due.  The price falls short of what is owed.  That’s a “short sale.”

Even though the lender does not receive the full amount due, such an agreement usually nets him more than would be received through an expensive foreclosure procedure.  Such a transaction obviously benefits the home owner.  But there are drawbacks, like tax liability.  The amount forgiven by the lender can be regarded as income by the IRS.  That may result in a significant increase in the amount owed in income taxes.