The summer congressional session produced two important real estate measures.
Q–You mentioned two proposals in Congress earlier this year, one that would raise the Federal Housing Administration’s loan limits and another that would make it easier for owners to cancel their private mortgage insurance. Were they approved?
A–Yes, both measures were approved and sent to President Clinton for his signature.
The FHA’s loan limits were raised to $197,620 in high-cost housing markets from the previous $170,362, and to $109,032 in more affordable areas from the old limit of $86,317. Supporters of the increase said the previous limits had rendered the FHA’s low-down-payment program virtually useless in many areas because buyers couldn’t find a home cheap enough to qualify for a government-backed loan.
The new rules concerning private mortgage insurance — the policies that usually must be purchased by buyers who make a down payment smaller than 20 percent — will make it much easier to cancel their insurance and save up to $1,000 a year in premiums if their home increases in value.
Under the new PMI rules, owners can demand that the lender cancel the insurance if they pay for an appraisal themselves and the report shows that the rising value of their home has increased their equity stake in the property to 20 percent.
For example, if you were forced to buy PMI a few years ago because you made a 10 percent down payment but the home has since risen 10 percent in value, you could cancel the coverage by providing an appraisal showing that your equity had reached the magic 20 percent mark.
Beginning next summer, most lenders will also be required to automatically cancel the insurance when their own records indicate that a borrower’s equity stake has risen to 22 percent of the home’s value. The onus will be on the lender, not the borrower, and the borrower won’t have to pay for an appraisal.
All in all, Congress’s summer session turned out well for new buyers and existing homeowners alike.
Q–I am trying to find an address or telephone number for the National Association of Home Builders, but there is no listing in my phone book and directory assistance couldn’t help. Can you?
A–You couldn’t find the National Association of Home Builders in your local phone book because the trade group is headquartered in our nation’s capital. Its address is 1201 15th St. N.W., Washington, D.C. 20005.
The NAHB’s toll-free telephone number is 800-368-5242. It also has a good Web site: http://www.nahb.com.
Q–My monthly payment is $738, but I have always followed your advice to add an extra $25 or $50 principal-only payment each month to pay the loan off sooner and save on interest. Now my lender has sold the loan and a new company is processing my payments. The company sent me a letter last week stating that such prepayments are not allowed. What do I do now?
A–Check the promissory note the lender gave you when you first got the loan. If you can’t find a copy, the lender should be able to send you a duplicate for a nominal charge.
Look at the section of the note that details your repayment schedule. If it says your payment must be $738 but is followed by the words “or more,” you’re free to continue adding a small principal-only payment each month. Circle the two words and send a copy of the promissory note to the new company, attaching a letter demanding that it accept your additional payments.
The new company can, indeed, refuse your additional payments if the promissory note doesn’t include the phrase “or more,” even though your original lender wasn’t such a stickler for details.
Q–My mother owns her house and paid the mortgage off a long time ago, but she is barely getting by on Social Security since my dad died in 1995. I want to buy my first home. Someone suggested that my mom and I enter a “sale and lease-back,” but I’m not sure how that would work. Could you explain?
A–Sure. Executing a sale and lease-back with your mom would give her the cash she needs to live a more comfortable life and provide benefits to you, too.
Let’s say the current market value of your mother’s home is $100,000. You could agree to buy her house with a 10 percent down payment of $10,000 and get a bank loan to finance the remaining $90,000, just as you would if you bought a home owned by a nonrelative.
Simultaneously, you and your mom would sign a lease agreement that would let her stay in the home for as long as she wants. She would pay you $700 a month rent, or whatever the going rate is for similar homes in her neighborhood. The lease would constitute the second half of the sale and lease-back agreement.
Your mom would get $100,000 in sales proceeds when the deal closes and wouldn’t owe any taxes on the money because single people can keep up to $250,000 of their home-sale profit tax free (married couples can keep up to $500,000). She would also have the comfort of knowing that the lease will allow her to stay in the home for as long as she wishes.
Meantime, you would collect monthly rental payments from your mom and get to take depreciation deductions and other tax write-offs that landlords enjoy. When your mom either moves out or dies, you could move into the house yourself, sell it or rent it to another tenant.
Sale and lease-backs involve some tricky tax and legal issues. You and your mom won’t need to hire an agent to market the home, so take some of the money you’ll save by avoiding a sales commission and use it to consult both a tax expert and real estate lawyer.
Q–We are looking for a house to buy, but we can’t understand an abbreviation we see in the classified ads. What does “CAC” mean?
A–An advertisement that includes the term “CAC” usually means the home has a “central air-cooling” system that’s built into the walls and cools the entire house with the flick of a switch. A home with CAC will usually sell for more than a similar house with a boxlike air conditioner attached to a window that cools only a single room, or a property that has no air conditioner at all.
———-
Write to David Myers, P.O. Box 2960, Culver City, Calif. 90231-2960.
