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Foreclosure Defense / Real Estate

FHA Mortgage Loans: What Exactly Are They?

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An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). The FHA program was created to help the housing market by making loans accessible to people that couldn’t afford a big down payment, or with below average credit scores. The federal government insures these loans for FHA-approved lenders, to reduce the lenders’ risk of loss should a borrower default on the loan.

FHA loans are frequently used by first-time home buyers because they allow low down payments even with a low credit score. For non-FHA loans, lenders usually require a down payment of 20% of the loan amount. For example, for a $300,000 home, a traditional loan requires a 20% down payment of $60,000, while the same $300,000 home with an FHA loan will only require $30,000 at 10% down payment, or $10,500 at 3.5% down payment. The actual down payment amount for an FHA loan depends on the borrower’s credit score but will never exceed 10%. Essentially, borrowers can borrow 90% or 96.5% of the total loan amount.

Borrowers can qualify for an FHA loan with a down payment of as little as 3.5% if their credit score is 580 or higher. The down payment is 10% for credit scores between 500–579. As with any loan, the lower the credit score, the higher the interest rate.  Unlike regular loans, borrowers of FHA loans must pay mortgage insurance premiums, which is what protects the lender if a borrower defaults on the loan payments. The mortgage insurance is typically a small amount paid monthly (added to mortgage/ escrow payments) and is required for 11 years or for the life of the loan, depending on the terms of that loan.

OTHER REQUIREMENTS FOR FHA LOAN

  • Steady employment history for the past two years
  • Borrower intends to use the home as a primary residence
  • Borrower has a minimum credit score of 500
  • No bankruptcy in the last 2 years (Lender can make an exception)
  • No foreclosure in the last 3 years (Lender can make an exception)
  • Borrower’s mortgage payment (plus HOA fees, Property taxes, Homeowners’ Insurance and Mortgage Insurance) must be less than 30% of borrower’s gross income (or 40% if Lender approves)
  • Borrower’s monthly debt (mortgage, credit card payment, car payment, student loans, etc.), must be less than 43% of borrower’s gross income (or 50% if Lender approves)
  • Property must pass FHA appraisal standards (if seller won’t make repairs requested by lender, borrower can opt to pay for required repairs at closing; the funds will be held in escrow until the repairs are complete)

If you believe an FHA loan is right for you, ask your realtor, loan officer or lender to help you find out whether you may qualify for an FHA loan. Keep in mind though that not all lenders are FHA approved.

When Real Estate Seller is not a U.S. Resident

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Non-residents can acquire and invest in real estate in the U.S. by sending money over to purchase property located within the U.S. or by purchasing property while physically present in the U.S. Either way, Uncle Sam must get his cut. The law that governs these investments is the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

When the Seller is a non-resident, Buyer is responsible for withholding 10% of the Purchase Price, and reporting to the IRS on IRS forms 8288 and 8288-A (IRS will then send Buyer a stamped copy of the 8288-A and Buyer will give a copy to Seller). The forms and money must be sent to IRS within 20 days of the Closing date, or there might be penalties to the Buyer. Seller must have a TIN (Taxpayer Identification Number) prior to the closing date and can apply for one on the IRS website. These additional requirements are put on the Buyer to ensure that the U.S. government gets the taxes due from the Seller. Since the Buyer is the one bringing funds to the table, Buyer is in a better position to withhold some of the funds and send that directly to the Internal Revenue Service. Uncle-Sam-I-want-Your-Money-freshblue

If Buyer or Buyer’s agent suspects that Seller is a non-resident of the United States, Buyer must ask Seller directly if he/she is not a U.S. resident. If Seller maintains that he/she is a resident of the United States, Buyer must get an original notarized statement from Seller stating that the seller is not a foreign person and showing seller’s U.S. Taxpayer Identification Number (usually a Social Security Number). Buyer would then have no obligation to withhold any funds, or report anything to IRS. However, Buyer must keep an original copy of the signed Seller’s Statement of Residency. Even when Seller is a non-resident, there might be exemptions that allow the Buyer to skip the withholding altogether.

The 2 Most Common Exemptions are:

  1. If there will be no cash to seller (no profit). Seller will need to apply for a withholding certificate from the IRS that will grant Seller the exemption on the transaction using IRS form 8288-B. Seller must give Buyer a stamped copy as proof, and Buyer will then send all the forms in to IRS within 20 days after Closing.
  2. If the total sale price is $300,000 or less, and buyer or buyer’s family will be living in the house for the next 2 years. Buyer must sign an affidavit stating that the purchase price is under $300,000 and the buyer intends to occupy. The Title Company will usually provide a Buyer’s Affidavit of Intent to Reside. If not, have a real estate lawyer provide one to you. All parties must keep an original copy of the signed Buyer’s Affidavit of Intent to Reside but there will be no need to send any forms to IRS.

If there will be a profit to Seller, and Buyer will not be living in the house for the next 2 years, then Buyer must withhold 10% of the Purchase Price through the escrow officer, unless there is another exemption available. The escrow officer will send the funds to the IRS within 20 days of Closing. To avoid penalties, Buyer should make sure that the escrow officer at the Title company gets this done timely.

Lastly, remember that there are other exemptions not covered in this post. Contact a real estate lawyer or tax lawyer for help with figuring out if Buyer or Seller qualifies for any other exemption. Even when there is an exemption, the non-US resident Seller is still required to file a U.S. tax return to report the sale and then some taxes may still be due at that point. Sellers should seek guidance from their accountants or CPAs.

Building a New Home? 8 Things You Must Know

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A new construction contract is very complex. This post summarizes the main issues that homeowners tend to run into the most. Keeping this list in mind should help make the process smoother for you and your loved ones.

1. EARNEST MONEY. Earnest money on a new build is typically much higher than on a resale contract because the builder is creating a specific home for you and you get the option to choose structural upgrades and finishes.  The builder takes on the risk that if you fail to follow through, the next buyer may not love your particular taste in customization.  So, builders will usually require earnest money upon signing the contract. Additional earnest money may be required depending on selected upgrades.

2.  COMPLETION DATE. Most home buyers expect the home to be completed with a few months, based on conversations with builder’s sales agents. Inside the written contract, builders typically give themselves 1 – 2 years to build a home although they are usually done within a year. Do not move into a hotel or put in a lease termination notice until you are absolutely sure of the actual completion date.

3.  INTEREST RATE. You will not know the interest rate of your loan upfront. New build contracts take longer to complete therefore buyers cannot lock in an interest rate until much later in the timeline because lenders don’t lock in rates that far out.  This uncertainty makes some buyers uncomfortable since interest rates may be higher at the time of locking in a rate. Make sure you keep your credit score same or higher over the next year.

4.  INSPECTIONS. The builder’s agents will give you a calendar of expected inspection dates. If you find issues on a new build, you cannot use that as cause to back out of the contract but the builder is obligated to fix those issues while in the building process, or while you’re under warranty after closing.

5.  CHANGE REQUESTS. Most builders build off a preset plan that they offer their customers and are called production builders. These types of builders are not as open to change requests i.e. custom changes. For a more customized build, choose a custom builder. Regardless, all Change Requests should be in writing and approved by you and any additional associated costs made clear in the Change Request Order form.

6.  FINANCING. With new builds, a buyer typically has 30 -45 days to back out for loan issue reasons but some builders will hold back a portion of the buyer’s Earnest Money.  If the buyer’s loan falls through late in the building process, the builder typically keeps the Earnest Money. Do your own due diligence by reading the contract terms and making sure you understand them.

7.  APPRAISAL. Builder contracts are not contingent upon an appraisal matching up with the contract price/ agreed price.  If the appraisal of the home comes in lower than the agreed price (once completed), the builder is not obligated to drop the agreed price to match the appraisal.  In such situations, the buyer will have to bring more cash to the table from another source because the lender will only lend up to the appraised value.  If buyer chooses to back out due to the home appraising lower than anticipated, the buyer usually will lose the Earnest Money.

8. REFUNDABLE FEES/ DEPOSITS. Make sure to ask the builder’s sales agents about this. Sometimes, there are clauses in new construction contracts that provide for nonrefundable fees or deposits. If so, make sure you review those terms inside the written contract in case you need to back out of the contract at some point.

The main complaint we get from buyers is that the builder is taking too long to deliver the  finished goods. Construction involves a lot of steps and processes which are not visible to the buyer. Such tasks and processes include approval of plans, obtaining the required permits, setting up for utilities, ensuring appropriate easements etc.

The written contract trumps any verbal communications. So, study the written contract in detail to make sure all the terms discussed are in there. Keep your credit score up and know under what conditions you are able to terminate the contract without losing your Earnest Money.

7 Steps to Consumer Due Diligence

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Due Diligence is a phrase that’s commonly tossed around in the consumer world, but has a special meaning within the context of a legal dispute. In a broad sense, it refers to the level of judgment, care, prudence, and investigation that a person would reasonably be expected to do under particular circumstances. If a consumer hasn’t done his/her due diligence, it could mean the difference between winning and losing a case, and will pose challenges to being able to dispute the contract terms or performance of the contract.

In the legal world, Due Diligence actually means a complete and appropriate review of documentation and facts by a party, before purchasing a good/service, or engaging in business with another party. It is a full and complete review using the advice of professionals as needed, so that when one is done, one knows all there is to know, before buying or engaging in business.

Due Diligence IS NOT similar to kicking the tires on a car. Due Diligence IS similar to taking the car to a garage, having it checked out completely, and personally checking out every part that does not require the expertise of a mechanic.

BASIS DUE DILIGENCE BEFORE ENTERING INTO CONTRACT

  1. Who exactly is going to be entering into the agreement?
  2. What is the price/ consideration for the products or services?
  3. What exactly are the products or services to be delivered?
  4. When and where are the payments, products, or services to be delivered?
  5. How long is the term of the agreement? (One-time; Month-to-Month; A year etc.)
  6. What constitutes a default or non-performance under the contract?
  7. What is the cancellation policy or early termination policy?

At minimum, all consumers should be fully clear on the 7 terms listed above, before entering into any agreement. There is no real valid excuse under the law for not clarifying these basic questions prior to signing any contract. Depending on the type of contract or transaction, there might be many more questions needed to be asked. Do your due diligence accordingly.

In addition, the consumer is required to read the contract thoroughly (front and back) prior to signing it (or hire someone to help), to ensure that the verbally communicated terms are consistent with the written contract terms. Do your due diligence. The best time to challenge a bad contract is before entering into one!

Inheriting Real Estate from a Sibling

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Siblings of a deceased most commonly inherit real estate in two ways – through conveyance by Will of the deceased, or through the State’s Intestacy laws. Intestacy laws are those laws that apply when there is no Will, or when the time period to probate a Will has completely closed. A person could gift the property to a sibling by putting it into a Will or Trust while alive, or in some instances, by filing the proper property documents for a survivorship transfer.

In Texas, a Will must be submitted to probate within 4 years from the date of the death. In most instances, if not done within the 4 year period, the intestacy distribution laws must be followed. In very limited situations can a Will be probated after the expiration of the 4 year period. Inheritance-3-2-boost

Things to Keep In Mind Under Texas Intestacy Laws

  1. The term “Children” includes biological and adopted children.
  2. If the Property is considered Separate Property of a married person, the Children inherit 100% of the Real Property. However, a surviving spouse has the right to live on the Property until his/her death.
  3. If the Real Property is considered Marital/ Community Property, and ALL deceased’s children are also children of the surviving spouse, 100% of the Property goes to the surviving Spouse.
  4. If the Property is considered Marital/ Community Property, but NOT ALL deceased’s children are children of the surviving spouse, then the surviving spouse gets 50% and all of deceased’s children split the remaining 50% equally.
  5. Anytime a person that could have inherited is no longer alive, we pass that person’s share to his/her children.
  6. The law always first looks to pass down (to descendants), then if not possible, next looks to pass up to parents (ascendants), and then finally looks to pass around to siblings if one parent is dead, or if both parents are dead.
  7. Siblings only inherit under Intestacy laws, if the deceased had no children, AND one (or both) of the deceased’s parents is dead.

This is a broad overview and summary of the main parts of the intestacy distribution laws for real property. To obtain an exact determination of your right to inherit from a family member, consult a Real Estate or Estates/Probate lawyer. The lawyer will take all circumstances into account, thoroughly review your family tree, and also make sure the proper documentation is filed into the Property Records to secure your ownership rights.

Homestead Protection & Multiple Properties

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The Homestead of a family or single adult is protected from forced sale for purposes of paying debts and judgments, with the exception of limited situations such as mortgage lenders, taxes, and home improvement loans. Homestead protections are available only to individuals—not corporations, partnerships, or LLCs.shutterstock_343813226_gold-house

Generally speaking, Texas only allows a property owner to claim a Homestead Exemption on one property – the primary residence. Legal primary residence is one that is occupied most of each year by the homeowner but the focus is on intent not actual occupancy. Second homes, vacation homes and investment homes are not primary residences and won’t qualify for homestead exemptions.

However, there are instances where one may claim more than one property as a homestead. In Urban areas, a homeowner may claim contiguous properties as his/her homestead i.e. adjoining or adjacent properties. The properties must touch along a boundary or share a common area. To make a homestead designation on contiguous properties, the county may require that the contiguous properties are in the same exact names according to the deeds (recorded title).

It is useful both for property tax purposes and for protection from creditors, to file an affidavit designating the homestead in the real property records of the county where the property is located. NOTE: This is not the same as the form submitted to the county’s property tax office for tax exemption.

NOTE: this is not the same as the form filed with the property tax office.

Tax Liens and Foreclosure

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On January 1st of each year, a tax lien attaches to all real property in Texas, to secure the payment of property taxes. This is pursuant to the Texas Property Tax Code. The Property Tax Code also sets this lien’s priority in terms of superiority (or simply put, seniority). This means that even if the tax lien attaches to a property after another valid existing lien, the tax lien is considered senior to the other lien e.g. mortgage lien, or judgment lien.  MoneyDNA

Property Tax bills are mailed out to property owners in October and November of each year. Payment is due by January 31st of the following year and by February 1st, the payment is considered delinquent. Interest then accrues at a rate of 1% per month or 12% per annum.

Tax Suit:
At any time after tax payment on Property becomes delinquent, a taxing unit may file suit to foreclose the lien securing payment of the tax. In reality, taxing units rarely exercise this right immediately. Most times, property taxes will remain delinquent for at least two years before a taxing authority will initiate a tax lawsuit. However, it is best to try and resolve the delinquent payments before a lawsuit is filed.

Judgment:
If the past due payment remains unresolved after notice of the lawsuit has been given to the property owner and any lienholders, the civil court will grant an order for foreclosure of the lien and for sale of the real property.

Sales:
In Texas, tax foreclosure sales are done by public auctions that take place on the first Tuesday of each month. Following the sale, the property owner has a right of redemption, but that comes with a higher interest rate and may include additional costs. For more on redemption, see our video: Getting Property Back After Tax Foreclosure.

Recourse vs. Non-Recourse Loans

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Recourse loan means that the lender may collect the outstanding loan balance, even after seizing and selling the collateral. Non-recourse means the lender only gets up to the value of the collateral and the rest of the outstanding balance is wiped out.  The outstanding balance after applying sale proceeds from collateral, is called the deficiency. The lender has two years from date of foreclosure sale to file suit to collect any deficiency.

Some states don’t allow recourse loans at all and are therefore called non-recourse states. Texas is generally a recourse state. Commercial loans are all recourse loans, unless specifically negotiated as non-recourse. Purchase Money Loans have recourse but Home Equity loans and Reverse Mortgages have no recourse unless such loans were obtained by fraud. Purchase Money Loans are those loans used to actually buy the property. 

Many homeowners have two mortgages on their home – a first and a second mortgage. Lenders rarely pursue deficiencies on the first mortgage unless the deficiency is a sizable amount. Following foreclosure by the first mortgage lender, second mortgage lenders will sometimes pursue a deficiency judgment.

In a deficiency lawsuit, the borrower/ homeowner has the right to argue that the property was sold for less than the Fair Market Value. If able to prove this to the court, the deficiency amount will be adjusted by applying the appropriate Fair Market Value to the then existing loan balance (as at the time of the foreclosure sale.) If successful, this will reduce the overall deficiency amount. 

Texas Law – Insurance Claims on Home Damage

By | Consumer Rights, Foreclosure Defense / Real Estate | No Comments

Starting Sept. 1, House Bill 1774 becomes law in Texas. Under this new law, many insurance companies will pay property owners as little, as late as possible. Texans can expect only more delays and denials.

The new law reduces the amount of interest insurance companies will have to pay to homeowners if they take too long to pay for a claim. Currently, if a court finds that the company delayed payment, the company must pay the claim with 18 percent interest. The new law reduces the interest down to about 10 percent.

The law also reduces the amount of attorney fees that homeowners can recover if they don’t estimate with 80 percent accuracy the amount of damages done to their home when they file suit against the insurer.

This might make it harder for homeowners to demand timely payment for the damages done to their homes and will make it more difficult for them to find lawyers willing to sue insurance companies.

Be diligent in filing and following up on your claim. If too much time has passed or you believe the claim was underpaid or wrongfully denied, find a lawyer that is willing to go up against the insurance company.

Quit Using Quitclaim Deeds!

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Maybe you’ve been told you can be released from liability for a mortgage by signing a Quitclaim Deed. This isn’t true. If you are attached to the loan via a Promissory Note, and not just to the deed/title, then even after you sign over your interest using a Quitclaim deed, you will still be liable for the loan. The Quitclaim Deed will not remove you from the debt obligation.

Questions to See Who is Liable For the Loan

  1. Is the debt (mortgage) showing up on your credit report or was your name simply just on the Deed document?
  2. Does the mortgage company show you on the Note as a borrower?
  3. Does your name show up on the mortgage statements?
  4. Is there a Deed to Secure Assumption from the other party?
  5. NOTE: Do not go by what’s showing up in the property tax records.

In Texas, sometimes a spouse is added only to the Deed pro forma (as industry habit), but not added to the mortgage debt (Note). Make sure first which of these documents you are attached to. Sometimes the Promissory Note will be called by  other names so check with the lender if in doubt. A short-cut is to check to see whether your name is on the mortgage statements – if so, you are on the Note. If your name is attached to the Note, the spouse/other party will need to refinance to remove your name, or find a buyer – no other way around it.

In the meantime, you could still indicate your intention to relinquish all rights and all liability. The proper way to do this is by using a Deed to Secure Assumption which will be signed by the other party who is assuming full responsibility for the mortgage debt. This must be used in conjunction with a Warranty Deed that will transfer your interest to the other party.

The Deed to Secure Assumption is a contractual agreement that may be filed into the county records for the world to see. It says that the other party has promised to be 100% responsible for the loan, even if your name is still attached to the loan. This does not mean the lender has to agree to it, but it gives you a chance to go after the other party for payment. The Deed to Secure Assumption also gives you the power to force sale under certain circumstances/ conditions.

So, although a Quitclaim Deed may be used to transfer property rights, it won’t release you from the debt and it is not the best way to transfer title as it does not come with any warranties. Title companies frown upon them for that reason.