Q–I have been pre-approved for a home loan with a 10 percent down payment if the seller will carry back part of the sales price with a second mortgage. The lender quoted a 13.9 percent interest rate.
I filed for Chapter 13 bankruptcy, but it was dismissed because of my lack of follow-through. I am writing to the credit bureaus to clear this off my reports. Also, I did have a home foreclosure, but it was under duress and fraud. I am filing a lawsuit because the home seller’s disclosure statement to me was a lie. I couldn’t get refinancing. I also had bad luck in a pet-grooming business. The Small Business Administration wouldn’t make me a loan since I had not been in business for two years.
Now I have been in business for five years so I don’t need the SBA, but I need my own home so I don’t get thrown out on the street. Should I go ahead with that 13.9 percent sub-prime mortgage? What should I do?
A–Although I often say anyone with a decent income can afford to buy a home, your situation might be an exception. Face facts. You have bad credit and are an extremely high credit risk.
Even 12 percent interest is too high to pay when you put up your residence as loan security. Nine or 10 percent would be reasonable for a few years until you clean up your credit.
My suggestion is, forget the past. Admit you made some mistakes. If you had followed through on a repayment plan, filing Chapter 13 bankruptcy could have helped you avoid foreclosure. For example, I currently hold a second mortgage on a house, and the borrower filed Chapter 13 a few years ago.
You sound bitter, blaming everyone but yourself for your financial problems. .
The economy is booming. Benefit from it. You’re not yet ready to buy a home until you clean up your credit report. Forget about suing that home seller. Look to your future, not the past.
Q–About three years ago, my wife and I bought our first home with a 95 percent mortgage and private mortgage insurance (PMI). Since then, we added a family room and a second bathroom, greatly increasing our home’s market value. We read your columns and notice you have many questions about canceling PMI. Our monthly PMI premium is $86. Because our loan-to-value ratio is now about 74 percent, I asked our loan servicer to cancel our PMI, and I offered to pay for a new appraisal.
I received a curt, nasty reply that our mortgage must be at least 7 years old before the loan servicer will “consider” canceling PMI. I thought borrowers could cancel PMI after two years. Who is right?
A–Your situation shows why Congress passed a law, effective in 1999, requiring mortgage lenders to drop PMI when the loan-to-value ratio drops below 78 percent. Unfortunately, your situation doesn’t qualify because you have a pre-1999 mortgage.
Who owns your mortgage? Ask your loan servicer, who must tell you. If you’re lucky, Fannie Mae or Freddie Mac owns your home loan. They both have fair policies about canceling PMI when the loan-to-value ratio drops below 80 percent, if you have an on-time payment record.
If your mortgage is not owned by such enlightened lenders, you may be stuck, unless your state has a law requiring the lender to cancel PMI when specified conditions are met. For example, California has a statute requiring lenders to cancel PMI when the loan-to-value ratio drops below 75 percent. All states should have similar laws. For further details, please consult a local real estate attorney.
Q–I am 63 and just sold my home. Several people told me that I will not owe any profit tax because of my age and because the money was reinvested in another house. Is this correct?
A–Your friends are three years out of touch. The 1997 Tax Act changed home-sales tax exemptions, eliminating age requirements.
If you owned and occupied your principal residence an “aggregate” two years out of the five years before its sale, up to $250,000 ($500,000 for a married couple filing jointly) in capital gains are tax exempt. Whether you reinvest the sales proceeds in another principal residence is irrelevant. Please consult your tax adviser for full details.
Q–I am an investor who, with my wife, owns 14 properties, including our home. After reading your advice, we went to a local lawyer who specializes in living trusts. She handled everything, including durable powers of attorney, for a total of $870. Of course, we had to pay the recording fees to transfer our realty titles into our living trusts. Those lawyers, who charge more than $1,000, unless the situation is very complicated, are ripping off their clients.
A–I agree with you that living trusts should be reasonably priced. If I ever go back to full-time law practice, I would specialize in living trusts. Lawyers who are experts in living trusts perform valuable services to help realty owners’ heirs avoid probate costs and delays.
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PLEASE NOTE: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, IL 60611.
