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12-7-18: I have tax liens; will that prevent me from purchasing a new home?

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Question of the week:  I have tax liens; will that prevent me from purchasing a new home?

 

Answer:  Liz is an attorney and specializes in negotiating settlements with federal and state tax authorities, and a friend of mine. We were having a few weeks ago and this question came up as we often have clients that have state and/or federal tax liens and it was great to get some input on some options for tax liens.

 

Before we answer the question of whether tax liens will prevent you from obtaining a mortgage to purchase a new home, let’s answer the question: What is a tax lien?

 

A lien is the right to keep possession of someone’s property until a debt or obligation is paid. In the case of the government it is the right to take possession of someone’s property until a tax debt is paid—i.e. a tax lien.

 

If you have unpaid taxes and a lien has been filed against you the guidelines for all loans are that until the obligation is paid a loan will not be funded and closed.

 

Example: You are purchasing a new home for $575,000 and applying for a mortgage of $517,500 and are qualified to obtain loan approval. You have a lien for unpaid state taxes of $5000 from 2014 that is recorded in the county where you lived when the lien was filed. We submit your loan and the underwriter approves the application with a condition that we must show proof that the state tax lien from 2014 is satisfied and show evidence of where the funds for satisfying lien came from before the loan will be able to close. In many instances we coordinate satisfying the lien with the title company so you can pay the amount owed, initial amount plus penalties and interest, as part of the total funds needed for closing. Title will then guarantee to the lender, and you, the lien is paid and record the deeds needed for closing.

 

There are some instances with FHA mortgages where if you have established a payment plan to satisfy a lien recorded against you and are making payments on a constant and consistent basis. These situations are approved on a case-by-case basis, so if you are in such a situation do not assume you are automatically able to be approved. Before you write an offer and open escrow we would want to run your situation and any evidence through an underwriter for an opinion as to whether the lender would approve the loan with your payment agreement.

 

For unpaid taxes, or other debts, to become liens or judgments the obligation has to be outstanding for a fairly significant period of time. If you are aware of an unpaid obligation, especially taxes, it is strongly recommended you contact the public agency to which the obligation is owed and establish the amount owed and if necessary a payment plan. Many tax debtors are fearful of contacting the public tax authority thinking they may attach bank accounts or employment income to repay the back taxes due. This is not the case, these measures happen if a lien is filed and there has been no communication from you for a long period of time. Generally, for most private citizens for what the tax authorities would consider small amounts owed, the agency is willing to wait until you are forced to pay the tax obligation because you are purchasing a home or some other event.

 

Should you have an outstanding tax obligation it is strongly recommended you contact the agency to which the taxes are owed and negotiate a settlement amount and if you are unable to pay the full amount do at that time to set up a payment plan to pay off the taxes and retire the debt. In almost all cases, if you set up a payment plan and make the payments on time for the amount owed the agency will not file a lien against you. Depending on the loan type for which you are applying some lenders will approve and fund a loan if you show you are making consistent and timely payments on your obligation—counting the monthly payment amount as part of qualifying.

 

If you are having your pay garnished to collect a judgment or other obligation the garnishment is not considered a payment plan since it was not voluntary. Before a mortgage can be approved and funded the total obligation must be paid and the garnishment removed.

 

Prior to this year when running credit reports public records would show on the report that would impact whether we would be able to obtain loan approval, or what steps we would need to take to obtain loan approval: Federal and state income tax liens, county property tax liens, judgments from lawsuits or court cases, unpaid child or spousal support and bankruptcy being the most common. Beginning earlier this year these types of public records were no longer reported on credit reports, with some exceptions if a case somehow fell through the cracks.

 

Because a lien or judgment is not on your credit report does not mean we will not find out about it. As part of the mortgage process we obtain title insurance, part of the title insurance process is your completing a Statement of Information that includes name, addresses and employment for the past ten years, spouse(s), etc. The title companies runs this information through their data bases to determine if there are any public records filed in your name and notify us if that are any.

 

When there is a public record filed it needs to be addressed before we can obtain final loan approval and fund your mortgage. Because this is now the only way any public records will be discovered it is highly recommend you inform us at the beginning of the transaction if you have any public records for taxes, support payments, bankruptcy etc so we can begin working on the issue at the beginning of the transaction instead of waiting to find out from title closer to our scheduled closing date.

 

We have had transactions that have fell apart because borrowers delayed in completing their Statement of Information until close to closing, a lien popped up with title and we were unable to solve the issue in a timely fashion to satisfy the seller.

 

If you know, or suspect, there may be a lien let us know up front, complete a Statement of Information right away for title to run it through databases and if there is something filed we will have to ability to determine our best options and proceed accordingly.

 

Ignoring tax or other public record obligations thinking they will go away is not a long term success strategy. We have helped many families over the years with serious debt delinquency get their debt paid and in a position to purchase a home. The longer you wait to begin the process of satisfying the debt and clearing your public record the longer before you are free and clear. Start the process today, you will have a tremendous mental weight lifted just by beginning the process.

 

As always, if you or someone you know has public records and feel they will prevent obtaining a mortgage please contact me to discuss your situation and potential solutions we can begin to work on so you can become a homeowner.

 

Have a question? Ask me!

 

Higher loan limits for 2019 were announced by the Federal Housing Finance Agency. Starting for loans funded after January 1st, 2019 the conforming loan limit for single family residences (including condos) will increase from $453,100 to $484,250; for “high-balance” areas (LA and Orange Counties for example) the limits for Fannie and Freddie mortgages increase from $679,650 to $726,525. Will the loan limit increases have a dramatic impact on the housing markets? Not so much, at any given time the rate difference between the conforming loan amount and the high-balance amount is from one-eighth to one-quarter of one percent (0.125% or 0.25%). There will be some advantage to those borrowing more than the prior limit and at or below the new limit for high-balance as qualifying for the high-balance mortgage is generally easier than for “jumbo” or non-conforming mortgages.

 

November employment report contains no news that impacts rates. First Fridays are a big event for economic data geeks such as myself and investors as the Department of Labor releases job reports for the prior month. Today’s reports are nothing too exciting. The economy created 155,000 new jobs last month, significantly less than the 237,000 in October and below the expectations of most investors; however the total jobs added is not insignificant and still reflect a healthy employment market. Enough jobs were added to keep the unemployment rate at a near 50 year low at 3.7%. Wages continue to grow, up 3.1% over the past year—a factor in whether the Fed will increase rates later this month.

 

Rates for Friday December 7, 2018: Last week’s WR&MU mentioned that Presidents Trump and Xi were meeting at the G20 summit to discuss the tariff disputes. Following the meeting they announced a 90 day moratorium on new tariffs and agreed to negotiate the recent tariffs enacted by both countries. The news was well met by investors and stocks and bonds improved. As the week has progressed many have noticed the decline in stock markets, due in large part to continued uncertainty as to the trade war truce. Rates have benefited from this  uncertainty as the funds pulled out of stocks have flowed into long-term fixed assets, i.e. mortgages. As a result rates drop for the second Friday in a row and are at their lowest in three months.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.50%      Down 0.125%

30 year high-balance conforming                   4.75%     Down 0.125%

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the past year I have been listening to an incredibly detailed podcast about World War II. To give you an idea how detailed, the podcaster began the podcast in December 2011, this past week he finally got to Pearl Harbor—seven years to cover three to four years. As a history buff I love the detail, he spends about ten episodes just on Churchill, but now that I am caught up I will have to wait a week or more (he is great at putting together information and his commentary, not so great at sticking to a schedule) before his next podcast. I anticipate his completing the war in around 2026.

 

I bring this up because today is the anniversary of Pearl Harbor and I feel its importance in our nation has declined over the years—not surprisingly. When the Japanese planes approached Oahu and began their bombing and strafing many on the island, civilian and military, thought the planes were part of a drill—even as bombs exploded many thought there must have been some mistake made. Once reality hit the general attitude went from disbelief to anger very quickly. Sentiments quickly echoed across the country as the news was broadcast that Sunday.

 

In Gilmore, Iowa seventy-seven years ago a boy named Don had turned twelve that morning, and the radio told his parents and the community what had occurred in far off Hawaii earlier that day. I asked Don several years ago what was his memory of that birthday and Pearl Harbor. His response was, “I didn’t get a chance to ride the pony.” They lived on the farm and he had eleven brothers and sisters and before it was his turn to ride the family pony they were all called into the house.

 

Happy 89th birthday to Don McCormick, my father in-law.

 

On a final note, thank you to everyone who bore with my very long WR&MU last week and those who replied with positive comments!

 

Have a great week,

 

Dennis

 

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/My-Blog

8-24-18: Do you have a will and trust? If yes, please read on. If no, please read on.

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Question of the week:  Do you have a will and trust? If yes, please read on. If no, please read on.

 

 Answer:  What did Prince and Aretha Franklin have in common besides prolific performers and writers? Both of these musical icons passed away without a will or trust. There could be many reasons why. Prince, who passed away suddenly, perhaps he thought he had more time to live and prepare an estate plan. Aretha could not have had such thoughts as she had been diagnosed with pancreatic cancer several years ago, a disease which median survival rate of one year or less. Now the attorneys in Minnesota and Michigan have a tremendous amount of work as they represent various potential heirs to large estates. Who gets the real estate, the rights to their royalties, family heirlooms and memorabilia?

 

Why they had no plans for their estates baffles the mind of anyone in the legal and financial industries who spend their careers encouraging their clients to have plans for their families and estates for when the inevitable happens.

 

There are many objections that many individuals and families raise for not preparing a will and or trust, some of the most common are, “I am still young,” “I do not own enough to worry about having a will,” “my family will know what to do.” Instead of “objections,” I should have said “excuses” as none of these are valid reasons not to have an estate plan that includes at minimum a will and ideally a will and trust.

 

If you have children you must, not “should” but must, have a legal written directive as to who will take care of your children should both parents become incapacitated, i.e. hit by a bus while on vacation in Mazatlan. A family consists of mom, dad and three children ages 12, 9 and 6. Mom and dad are on a long ski weekend in Utah and tragically killed in an avalanche. They each have two siblings. Where will the children live? Can they be kept together? What will happen with the home the family owned, who receives the proceeds? They had life insurance with only each other named as beneficiaries, how are those proceeds divided and ensure the children benefit? Eventually all these questions will be answered, but it will be expensive and the state, i.e. the courts, will be making the decisions for the family. It will take a lot of time and money at a time when everyone, especially the children will be deep in grief.

 

Will your family know what to do? What if your sister and your spouse’s sister do not get along and both feel they should be the guardians of your children should something tragic happen? How does that play out?  “Bob told me we would get the children and raise them.” “Well Susie told me we would get the children and raise them.” The children have lost both parents and now will be in the middle of a legal fight between their aunts.

 

Even if you do not have a home or significant assets, you should have a will and ideally a trust. The will determines how your assets are divided upon your passing, the trust determines whether the bulk of your assets are transferred as you wish or if the bulk, or majority, of your assets will go through probate and potentially be subject to higher taxes, leaving less for your intended heirs.

 

Age is not a consideration. While statistics indicate that you should live into your late seventies as that is the life expectancy in the United States, one must consider the key word in the phrase “life expectancy.” Accidents and diseases happen to people of all ages. Whether you are 28 or 78 it is strongly advised you have a plan in place that protects your assets for your heirs and dictates what happens to those assets.

 

Once you have a plan make sure you keep it current. Did you prepare your will and trust when your children were in elementary school and now one or more are over the age of 18? Did you prepare your plan more than five, ten, fifteen years ago? Laws have changed, especially in California regarding inheritance and trusts, is yours compatible with current laws?

 

I have too many clients who when I ask if they have a trust say, “We keep planning on doing this…” Well, no you haven’t been planning on doing it, you have avoided doing it. Planning is sitting down with an attorney and discussing all the issues and matters that need to be addressed, saying you need to do it is not planning.

 

Every family needs to have an estate plan, and most single adults as well. A proper comprehensive plan will cost a bit of money. For those who want to save money, or get a “deal” or “bargain,” keep in mind that you will never know if your trust and estate plan was properly prepared or was able to fulfill your intentions. But your family will know and the legacy you do not want to leave is them having to spend significant time and resources with attorneys and the courts because you wanted to save money when creating your estate plan.

 

Being an adult, a responsible adult, comes with responsibilities. Many of those responsibilities cost money. There are many areas where it is advised you do not scrimp, save or look for deals. Some that come to mind for you and your family are brain surgery, an unlicensed electrician re-wiring your home, or a car seat for your baby. Add to this list estate planning. Scrimp, save money or look for deals when it comes to the $5 daily Starbucks purchase, the eating lunch out every day, buying a new car every two years, flying business class, don’t try to get by on the cheap when planning your estate when the results will have tremendous impact on your heirs, and ultimately your legacy with your family.

 

Don’t be Prince or Aretha.

 

Need someone to talk to? Call  or email me.

 

Off my soapbox.

 

Have a question? Ask me!

 

Home sales softened in July. Data from the California Association of Realtors and the National Association of Realtors show existing home sales have softened in the number of sales and/or prices.  Nationally existing home sales dipped 0.7% in July from June and the annual rate dipped to the lowest level since February 2016. More locally, sales of existing single family homes in California dropped 0.9% from June to July and 3.4% from July 2017 to July 2018, the statewide single family median price was down 1.9% month over month and up 7.6% from last July. Even more locally…sales in Los Angeles County were down 20.3% for the month and down 0.9% for the year, the median priced home in July was $597,520, up 2% for the month and 5.5% for the year. Moving south to Orange County 5.8% fewer homes sold in July from June and 1.4% fewer than July 2017. The median Orange County home sold for $829,000, down 0.8% from June and up 5.6% from a year ago. Inventory is still very low which has the impact of restricting the number of sales and putting upward pressure on prices as long as there is demand—which there appears to be as the median homeowners in Los Angeles and Orange Counties “made” $31,280 and $44,000 respectively with the price increases from last year.  Between the higher prices and rates up around one-half of one percent (0.50%) from last July those who have been waiting to purchase a home have cost themselves quite a bit of money.

 

Rates for Friday August 24, 2018: Not a lot of economic news to move rates this week and all the domestic political talk did not impact markets. Looking ahead to next week there is potential for some rate impacting news, primarily the first revision of second quarter GDP and personal income and spending report which includes the inflation data the Fed uses for rates. If GDP is adjusted significantly higher and/or the inflation number comes in higher than June’s 0.4% price increase rates could bump up. Neither of these is expected to be reported, keyword “expected.”

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.50%               Flat

 

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

 

Long time readers of the Weekly Rate & Market Update, actually original readers received the first year or so of the update monthly, have tangentially watched our daughters grow up. When I started the WR&MU our oldest was probably in kindergarten and youngest in pre-school. Tomorrow Leslie and our oldest board a JetBlue aircraft early in the morning and head to Boston where our daughter will be moving into her dorm room at Boston University to start her freshman year. Seems like a long time ago I was writing in this space about tooth fairies and braces, while also seeming like yesterday. Go Terriers!

 

Have a great weekend,

 

Dennis

Weekly Rate & Market Update 11-3-17: Should we be worried about the new tax plan that will cut the mortgage deduction?

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 Question of the week:  Should we be worried about the new tax plan that will cut the mortgage deduction?

 

Answer:  With the biggest tax reform plan working its way through the House of Representatives and the Senate it is no surprise that various aspects of what have been released and talked about so far have been a hot conversation topic. Last week at meeting with a group of professionals from family law attorneys to CPAs to business owners we discussed various parts of what had been floated through the media for almost an hour. The only consensus was that we were debating what we don’t know since until both houses in Congress agree on a bill, pass it and present it to the President everything is negotiable.

 

That said….the two features of the plan presented to the House of Representatives that impacts the housing markets are deductions for mortgage interest and property taxes; under the plan released this week both would be reduced from the current tax code allowable deductions.

 

Currently if you own a home with a mortgage you have the opportunity to deduct the interest paid on the mortgage and property taxes. “Opportunity” basically means there are limitations on the deductions. First, in order to claim deductions for property taxes and mortgage interest on your primary (and possible second/vacation home) residence you must itemize your deductions and they must exceed the standard deduction given to tax filers (for married couples $12,700 in 2017). If you meet these criteria then you can deduct all property taxes paid to the local tax authority. Second, a married couple can deduct interest paid on a mortgage used to acquire, build or substantially improve the property up to one million dollars of mortgage liens. For example if you own a home with a $1.3 million mortgage at 4% interest you can deduct $40,000 in interest paid, not the full $52,000 you actually paid in interest.

 

The current plan that will be debated in the House and put through many separate committees before a final bill is presented for a vote increases the standard deduction to $24,000 for married couples and limits the mortgage interest deduction to interest paid on mortgages up to $500,000 and the property tax deduction to a total of $10,000.

 

What does this mean in plain English and simple math?

 

Before we do some math, let’s answer the question: What is a tax deduction? Many people confuse a tax deduction with a tax credit, the difference is that deduction is an amount that reduces your taxable income and a credit is an amount that reduces your tax obligation.

 

Note I am not a tax professional, all examples are very fundamental calculations and used for comparative purposes only.

 

For example if you and your spouse make $80,000 and file your taxes with the standard deduction of $12,700 for 2017. Before the deduction your tax bracket is the 25% tier based on your $80,000 taxable income. After the tax bracket your taxable income drops to $67,300, and your top out at the 15% tax bracket. The deduction saves you approximately $2300 in federal income tax from about $11,500 without any deduction to approximately $9200 after the standard deduction is applied.

 

The deduction lowers your income, which can change your upper tax bracket and lowers your tax liability.

 

A tax credit is applied to your income tax liability directly after your taxes are calculated. Using the same couple above, during the year they installed energy efficient rated windows for a total of $4000. The federal tax code allows a credit of 10% of qualified windows installed on a primary residence, up to a maximum of $200. This lowers the tax obligation from about $9200 to $9000—the credit results in a direct reduction of taxes owed.

 

Back to the tax proposal.

 

Currently if you have a mortgage used to purchase your home with a balance of $600,000 and a rate of 4% you will pay approximately $24,000 in mortgage interest. Since this exceed the standard deduction for a married couple, is a mortgage on your primary residence and the mortgage is under $1 million you can deduct the $24,000 from your income when you file your taxes.

 

To qualify for the $600,000 you may make around $140,000 as a couple. Taking the interest deduction you taxable income drops from $140,000 to $116,000. You are still in the 25% tax bracket, absent any other deductions, so you save 25% of $24,000 in taxes, or $6,000.

 

Under the new proposal you will only be able to deduct the interest on the first $500,000 of the mortgage, $20,000, so you lose $4000 in deductions from your income. In this scenario your tax obligation will drop $5000 instead of $6000 so the tax proposal as written costs you $1000 more in taxes for the year.

 

Similar calculations can be made for property taxes if your annual tax bill exceeds the proposed $10,000 limit.

 

A couple of points regarding this discussion. First, tax reform is constant in our nation’s history. Every President and Congress from 1789 has passed changes to the tax code, some small and some quite major. Any changes in the tax code made by the current 115th Congress and signed into law by President Trump will be subject to future changes as a result of elections changing members of Congress and residents of the White House.

 

Second, at this stage in the process everything is negotiable. What is in the tax plan today may not be in the tax plan tomorrow. What items in the plan are in there for purposes of negotiation? If some members of Congress want the mortgage interest and property tax deductions levels to increase what are they willing to give up to get their way? Increase the proposed corporate tax rate? Change the elimination of the estate tax to a higher level of tax exemption?

 

Third, in California we look at taxes in a whole different light than most of the country for a couple of reasons. Our property values are significantly higher than most of the country so our mortgages are higher and our property taxes are higher in dollars paid (several states have higher percentage of property taxes) so limiting those deduction will impact Californians more than those who own homes in Oklahoma, Utah or Kentucky. So, while collectively we may be against the reduction in the deduction limits for interest and property taxes in California, through much of the country the limitations have little to no impact and is more than offset by the increase in the standard deduction. We are represented by 53 Representatives (12% of the total) and two Senators (2% of the total), and while it is the largest state contingent in Congress it still represents just 12% of the population and many Representatives and Senators representing the 88% of the population see more advantages to their constituents than detriments.

 

Taxes are the ultimate political tool and tax reform is only political. As the plan works through Congress I am going to assume that the mortgage interest and property taxes proposals will be amended—maybe trade a higher mortgage deduction for eliminating the property tax deduction, or raise both limits and trade for something else, or…..the Republican majority cannot keep the party members together and the plan collapses completely and we see no changes to the tax code.

 

At this point it is all speculation, I hope I have been able to present a fairly clear and understandable example of the potential impact of the proposed changes to the tax plan that could impact California homeowners that you can use to sort out future proposals and potential personal impact.

 

Have a question? Ask me!

 

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

 

The first week of the month means labor data. October saw Americans earning more and spending more—both good news for the economy—but prices are stagnant—which is not great news. Workers saw income increase 0.4% for the month and led by a surge in durable good spending due to hurricanes increased spending by 1% from September. Prices were flat going up only 0.1% for the month and 1.3% from last October, well below the Fed’s inflation rate. The news is mixed for mortgage rates as the stronger earnings and spending would tend to push rates up but the low prices keep rates down.

 

More workers, a lot more, is the news from the Labor Department’s October report. Total payrolls increased by 261,000 workers, 252,000 in the private sector. This is a very large increase, however much of it is the result of those displaced by hurricanes going back to work. For example, restaurants lost 98,000 workers in September and gained 89,000 in October. There was a dark cloud in the report and that is wages not increasing for the month. Overall the report is mortgage rate neutral.

 

Big news for the Federal Reserve yesterday when Trump nominated Jerome Powell to replace Fed chief Janet Yellen when her term expires in February. Powell is considered a moderate and unlikely to change any current policies of the Federal Reserve is confirmed for the post by the Senate.

 

Rates for Friday November 3, 2017: Rates are flat for conforming and dip back down on high balance loans after ticking up last week. All eyes, ears and noses are focused on Congress and the debates, negotiations and horse-trading over the tax bill. Depending on what moves through the process investors may react by fleeing to safety, rates drop, or loading up on equities in private companies, rates increase. Stay tuned, there should be plenty for office water cooler and weekend barbecue discussions.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:

30 year conforming                                            3.75%           Flat

30 year high-balance conforming                   3.875%        Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

 

What was more depressing for you, the outcome of the Game 7 or the amount of candy left over in your bowl for Trick-or-Treaters on Tuesday night? My disappointment was less in the outcome of the game on Tuesday than the lack of a great game that kept us on the edge of our seats all night. Congratulations to the Astros. Two things for baseball fans, right now every team is tied for first place, including my Phillies, and its only 102 until pitchers and catchers begin to report for Spring Training!

 

Have a great week,

 

Dennis