Beware of Homestead Declaration Scam

If you have ever purchased or refinanced a house in California, you have most likely received a letter offering to prepare a Declaration of Homestead. This company typically offers to prepare the document for a fee ranging from $25 to $75. If you send the company the amount they request, they will prepare the Homestead Declaration for you and send it back so you can take it to the County Recorder for recording.

This is a "sales letter" and it is designed to scare you into action. The company uses public records (i.e., Grant Deeds, Deeds of Trust, etc...) to obtain your personal information and targets First-Time Homebuyers, due to their inexperience, and presents the offer in a way that the target (the reader) assumes it is legitimate and is something that needs to be completed and paid.

So what is a Homestead Declaration?

A Homestead Declaration is a legal document and process whereby a homeowner can protect the equity in his/her/their property, not the asset value, but the equity, from creditors. Homestead protection is limited to a homeowner's primary residence. The protection can be lost if the homeowner no longer occupies said residence, but is portable and can be relocated to the new primary residence.

Homestead exemption laws prevent the forced sale of a house to meet the demands of creditors. The laws protect the following:

• the first $75,000 of house equity for single persons
• the first $100,000 of house equity for married couples, or single persons with at least one child
• the first $175,000 of house equity for persons over 65 or legally mentally or physically disabled
• the first $75,000 of house equity for single persons 55 years of age or older with a gross annual income of not more than $15,000, and
• the first $75,000 of house equity for married couples 55 years of age or older with a gross annual income of not more than $20,000

However, there are exceptions, such as mortgages, mechanics liens, and property taxes.

The laws also provide an exemption from property taxes. In California, the first $7,000 of the value of your primary residence is exempt from property taxes. If you need proof, look at your own property tax bill and see for yourself.

You can declare a homestead on your own by filing a one-page document (Homestead Declaration) in the County Recorder's office where your property is located, but it may be redundant since homestead protection is automatic in California.

Consider this article a "heads up" since I am not a lawyer and would not presume to give you legal advice. You may wish to consult with a legal professional for all the details on how this may apply to you. However, perusal of your personal property tax bill may satisfy your curiosity as to whether you are protected or not. My desire is simply to protect you from wasting money on a service that is not only unnecessary, but that you can do for yourself, should you so desire.

What Is Your Ideal Lifestyle?

As the new year is officially under way I am reminded of a something a close friend of mine said to me, "Most people make a living instead of designing their lives?" While I am not a big fan or advocate of New Year's Resolutions, I do like to contemplate the year that just passed and consider what, if anything, I want to do differently in the year ahead. With that in mind, Who is it important for you to design your ideal life for?

The key is not to prioritize your schedule, but to schedule your priorities. A book that I read some time ago shared this story to make the point.

I attended a seminar once where the instructor was lecturing on time. At one point, he said, "Okay, it's time for a quiz." He reached under the table and pulled out a wide-mouth gallon jar. He set it on the table next to a platter with some fist-sized rocks on it. "How many of these rocks do you think we can get in the jar?" he asked.

After we made our guess, he said, "Okay, let's find out." He set one rock in the jar, then another, and another. I don't remember how many rocks he got in, but he got the jar full. Then he asked, "Is that jar full?" Everybody looked at the rocks and said, "Yes."

Then he said, "Ahhh." He reached under the table and pulled out a bucket of gravel. Then he dumped some gravel in and shook the jar and the gravel went in all the little spaces left by the big rocks. Then he grinned and said once more, "Is the jar full?" By this time we were on to him. "Probably not," we said.

"Good," he replied. And he reached under the table and brought out a bucket of sand. He started dumping the sand in and it went in all the little spaces left by the rocks and the gravel. Once more he looked at us and said, "Is the jar full?" "No!" we all roared.

He said, "Good!" and he grabbed a pitcher of water and began to pour it in. He got something like a quart of water in that jar. Then he said, "Well, what's the point?" Somebody said, "Well, there are gaps, and if you really work at it, you can always fit for more into your life.

"No" he said, "that's not the point. The point is this: If you hadn't put these big rocks in first, would you ever have gotten any of them in?"

That story impacts me each and every time I hear it because it is so applicable to what each of us is doing with our time everyday. We're always trying to fit more activities into the time we have. But what does it matter how much we do if what we're doing isn't what matters most? The big rocks represent what matters most to each of us. Are you scheduling time into your day, week, month, quarter, and year, for the things that matter most to you?

The most powerful influence in your life is what you say to yourself, THAT YOU BELIEVE! Goals are neither right or wrong. They simply get us to take action (or not). So whether you believe in making New Year's Resolutions or not, I challenge you to answer these two questions for yourself;

1) Who is it important for you to design your ideal life for? and

2) What is YOUR Ideal Lifestyle?

If you take just a few minutes and answer these two questions you may very well set yourself on a path and progress toward what you defined as important to you and those you care about. For far too many people, life is "Groundhog Day" and it's high time we snap out of it. As Albert Einstein is credited with saying, "If you do what you've always done, you'll get what you've always got!"

Yet Another Hike In Mortgage Fees For Those Who Wait

You've Gotta Love The Gov. In December 2011, Congress voted to extend the Payroll Tax Cut. To pay for this tax cut extension, an estimated cost of $33 billion, Congress decided to increase fees on all mortgages starting in early 2012. Fannie Mae and Freddie Mac will increase their loan fees by 0.10% on each loan they insure. That will result in an 0.125% increase in interest rates, which correlates to about $25 to $30 per month on a $250,000 mortgage.

Congress also instructed FHA to increase its monthly mortgage insurance premium by 0.10%. That will result in a $20 per month on a $250,000 mortgage. While the increase won't cause the world to end, it is another installment in the long list of hits the mortgage market, and ultimately YOU, the homeowner and homebuyer, have taken since the housing and mortgage crisis began.

As interest rates have dropped, loan costs have increased, significantly.

• In 2008, the government introduced loan-level price adjustments (LLPAs) on all loans
• In 2009, the government increased those LLPAs 7 times throughout the end of the year
• In 2010, closing costs jumped 37% as banks met government compliance standards
• In 2011, the FHA more than doubled monthly mortgage insurance premiums

In fact, the FHA has increased its monthly mortgage insurance premiums 5 times in as many years.

Let's look closely at that $250,000 FHA mortgage to see the cumulative impact of these monthly mortgage insurance premium increases.

• In 2008, the monthly mortgage insurance was $100.52
• In 2009, the monthly mortgage insurance was $110.57
• In 2010, the monthly mortgage insurance was $180.94
• In 2011, the monthly mortgage insurance was $231.20
• In 2012, the monthly mortgage insurance will be $251.30

That's an increase of $150 per month on the same $250,000 mortgage from 2008 to 2012. This is yet another example that shows how waiting to buy a house or waiting to refinance your mortgage can cost you in ways you may not even realize. I wrote about this in January 2011 in a commentary entitled "Waiting To Purchase a Home Can Cost You." Congress continues to penalize current and new homeowners that are fully qualifying for their respective mortgages to pay for the recklessness of past homeowners and homebuyers.

Each time loan costs rise, it diffuses the effects of falling mortgage rates. Low rates don't matter if high costs wipe them out. Please feel free to contact me at Support@YourFavoriteLender.com if you would like to go over your specific situation.

Why Some Homes Sell Faster

A recent study by National Renewable Energy Labs found that home powered by a solar system sold 20 percent faster and for 17 percent more money that non-solar homes. Installing energy-efficient features can make your home more appealing to buyers, especially in a down market.

A great tip is to highlight the energy and money saving aspects of your home to prospective buyers in language the average person can relate to. For instance, "our average electricity bill is $8 a month" will mean more to a potential buyer than "our solar panels produce 6 kilowatt hours of electricity per day."

A 2011 study by the National Association of Home Builders showed smaller homes are selling faster than larger homes. One-bedroom homes actually sell 13 percent faster than others and homes with two stories or more took more than 20 percent longer than single story homes.

With the introduction of the Home Valuation Code of Conduct (HVCC) appraisers have become for more conservative, maybe even downright lazy, in their valuations. With no fear of adverse action for low appraisals because they are essentially accountable to no one, it would behoove a seller or Realtor to provide to the buyer's appraiser with important information such as comparable sales, great schools or low crime in the area, in addition to a detailed list of improvements made to the property and the approximate cost of each improvement.

A Canadian study of over 20,000 real estate listings found descriptions that focused more on "curb appeal" or general attractiveness helped a property sell faster than those focusing on value and price.

• Describing a property as in "move-in condition" quickened the sale by 12 percent.
• Listings with the words "beautiful" or "gorgeous" sold 15 percent faster.
• Using the word "landscaping" hastened a sale by 20 percent
• Language that conveyed desperation, such as "motivated" or "must sell" took 30 percent longer to sell.
• Homes that have been professionally staged sell at least 20 to 40 percent faster than vacant homes.

With homes sitting on the market so long, so many deals falling out of escrow due to low appraisals among other things, and the increased number of closings delayed by a variety of glitches, anything a seller can do to give himself/herself an edge may save a seller a lot of anxiety and headaches.

Borrow Smart Realtor CE Class is a Big Hit!

On December 15, 2011, I hosted my third Realtor Continuing Education Class and the feedback has been nothing short of amazing. Most of the Realtors that attended the class admitted that they came simply to get the 4 hours of continuing education credit. However, they also admitted that within the first 45 minutes they realized that they were going to get so much more, and that by the end of the 4 hours their knowledge and understanding had been transformed.

Of course, I had to ask if that transformation was a good thing or a bad thing and they responded by saying that they wish they had known this information earlier in their career. It definitely would have changed the advice that they gave their clients as well as changed some of the decisions they made for themselves around real estate and borrowing.

The class was designed to show the role the house plays in creating wealth for their clients, and themselves. The house is the greatest single asset and liability for most Americans and, yet, owning a house can be one of the best tools for creating wealth. It is likely that more wealth will flow through your house than all of your other assets combined. How you manage that wealth and the associated cash flow may well determine whether or not you achieve financial independence.

In the class I cover how the house compares to other investments as it relates to safety, liquidity, rate of return, and tax treatment. House equity, the net value of a house-related investment, is still the most common form of wealth in the United States today. For many of us, it is the first step toward wealth development. Options for managing the wealth in the house can be very confusing, yet that wealth as a percentage of total assets, may still account for a huge proportion of your total net worth.

We discussed in detail the four threats to the wealth in the house, more commonly known as equity, and the four hurdles to accessing that wealth. We also covered how the tax benefits of owning a house really work and explained how wealth in the house has a zero percent rate of return.

Financial institutions tell us to do one thing with our money while they do the complete opposite with the money we blindly give them. Americans are not afraid to borrow money. In fact, we borrow money in record amounts every year. However, it could be argued that our borrowing is not always smart.

If you know a Realtor that you believe would benefit from knowing and understanding this information have them click here for more details or here to reserve a seat.

The next class is:

Date: January 19, 2012
Time: 10:00am to 2:00pm
Location: El Cajon Library
201 E Douglas Avenue
El Cajon, CA 92020

Seating is limited to 20 attendees! The cost is $25.00. Lunch and 4 hours of continuing education credit are included!

To reserve a seat they should go to www.AgentCEClass.com. Click here to view a flyer about the class. Feel free to contact me at (619)994-1110 or e-mail me at SPerkins@NIOFE.org with any questions.

What is the Difference Between Price and Cost?

In a nutshell, price is what you pay for a product or service at the moment you pay for it, and cost is what you pay for that same product or service over time.

Let's say you decide to go to a store to purchase a TV because you just saw that it was marked down 25%. The amount you paid for the TV is $1,392.11. That is considered the price. When you add a 7.75% sales tax, your adjusted price is $1,500.00.

If you paid cash, then the price and the cost are the same, theoretically. The reason I say theoretically is because there is an opportunity cost that exists, but that is outside the scope of this example.

If you're like most people, you paid for the TV with a credit card, even if only to receive a 15% discount for opening an account with that retailer that day.

The following chart shows that if you financed the $1,500.00 and paid the minimum payment of 4% of the outstanding balance, a fairly standard formula for calculating a minimum payment, your initial monthly payment is $60.00.


Assuming that this is the only purchase you made with that credit card and you made the minimum payment until the balance was paid is full, it would take you 87 months to pay the credit card off. That would mean that you paid $2,274.00 for your TV. This number represents the cost of the TV.

That means that you paid $774.00 ($2,274 - $1,500) in interest over that 87 months. If you purchased that TV at 25% off and the price you paid was $1,392.11, then the original price was $1,740.14 ($1,740.14 - 25%). The 25% discount you received was $348.03, but you paid $774.00 in interest. Not only did you NOT save the 25%, you paid an extra $425.97 ($774.00 - $348.03) for the TV.

The opposite side of the chart shows the results if you had paid $100.00 per month instead of the minimum payment of 4% of the outstanding balance. In that example you would have paid the account off in 18 months and you would have paid back $1,712.00 for the TV. That $1,712.00 would be the cost of the TV. The interest would total $212.00. As we showed before, the 25% off saved you $348.03, but you paid back $212.00 in interest, so the real discount was only $136.03.

Credit has a cost and it can be a rather steep cost. This is just one example. This scenario is played out daily by millions of people all over the world.

Year-End Tax Planning: 10 Things to Keep in Mind

The window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there's still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.

1. Deferring income to 2012 means postponing taxes

Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you're able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.

2. Paying deductible expenses sooner may help you in 2011

Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.

3. Income tax rates to remain the same in 2012

The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you'll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you're in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply.

4. Is AMT a factor?

If you're subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You're more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you've been subject to the AMT in the past, or think that you might be for 2011, you'll want to make sure that you understand how the AMT rules might affect you.

5. IRA and retirement plan contributions

Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren't deductible, so there's no tax benefit for 2011--they're still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.

6. Special distribution requirements at age 70½

Once you reach age 70½, you're generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It's important to make withdrawals by the date required--the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).

7. Depreciation and expense limits to drop for business owners and the self-employed

If you're a small business owner or a self-employed individual, you're allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this "bonus" first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.

8. Last chance to deduct energy-efficient home improvements

This is the last year you'll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there's a lifetime credit cap of $500 ($200 for windows). So, if you've claimed the credit in the past--in one or more years since 2005--you're only entitled to the difference between the current cap and the amount you've claimed in the past.

9. Other expiring provisions

Barring additional legislation, this is the last year that you'll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.

10. Get help

Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. A financial professional can help you evaluate potential opportunities, and can keep you apprised of any last-minute legislative changes.

GAO Says Income Annuities May Be A Good Retirement Option

The U.S. Government Accountability Office (GAO) reports that financial experts typically recommend that middle-net-worth retirees use a portion of their savings to buy an income annuity (immediate annuity) to help meet necessary retirement expenses. The report, Ensuring Income Throughout Retirement Requires Difficult Choices, finds that while Social Security continues to be the primary source of fixed income in retirement, it is not enough to meet the income needs of most retirees. Also, the shift from employer-sponsored defined benefit pension plans to defined contribution plans, coupled with increasing life expectancies, is forcing retirees to assume more responsibility for managing their savings to ensure that they have sufficient income throughout retirement. An income annuity is an alternative to self-managing savings that offers retirees a steady source of income they won't outlive.

Why income annuities?

Generally, an income annuity, also referred to as an immediate annuity, is issued by an insurance company. It is typically purchased with a single lump sum of money (premium) paid to the issuer in exchange for payments made for life (single life income annuity), or for the joint lives of the annuity owner and his or her spouse or partner (joint and survivor income annuity). Payments generally begin no later than one year from the date the issuer receives the premium. The GAO report suggests income annuities:

• Help protect retirees against the risk of underperforming investments
• Help protect retirees against the risk of outliving their savings (longevity risk)
• Help relieve retirees of the task of managing their investments at older ages when their capacity to do so may be diminished, and
• Provide a base of guaranteed income that may serve as a dependable "cushion" for retirees who might otherwise spend too little for fear of outliving their assets (guarantees are subject to the claims-paying ability of the annuity issuer)

Why income annuities may not work?

Income annuities aren't for everyone, nor do they work in every situation. Particularly, income annuities may not be appropriate for people:

• With predictably shorter-than-normal life expectancies
• Who have limited savings, since the funds used to purchase income annuities generally are not available to cover large, unanticipated expenses
• Who are concerned about income taxes, since the income from annuities purchased with non-qualified funds is typically taxed as ordinary income, whereas some or all of the investment return on liquidated savings in stocks, bonds, or mutual funds may be taxed at lower capital gains or dividend tax rates
• Who want to provide a bequest of their assets at their death

When might an income annuity be appropriate?

The GAO study describes examples when an income annuity may be appropriate. In one scenario, the study suggests that a household with a total net wealth of $350,000 to $370,000, of which $170,000 to $190,000 is savings (and which does not have a defined benefit pension plan), should consider purchasing an income annuity with a portion of their savings. Retirees with defined benefit pension plans should consider an income annuity option rather than taking a lump-sum rollover to an IRA. Conversely, an income annuity may not be as useful for households with significantly greater net wealth or those households with appreciably less net wealth.

Proposals to access annuities and increase financial literacy

Typically, defined contribution plan sponsors do not offer account holders income annuities as an option. In response, the study makes several recommendations to promote the availability of income annuities for defined contribution plan distributions. These proposals include legislation that would require plan sponsors to offer income annuities as a choice to plan participants, or set income annuities as the default election for plan participants when accessing defined contribution plan benefits. The study also recommends options aimed at improving individuals' financial literacy, particularly concerning the risks and available choices for managing income throughout retirement.

Report recommendations

The report seeks to offer options to retirees on how to have an adequate income throughout retirement. Generally, the study suggests that middle-income retirees should consider delaying Social Security retirement benefits at least until full retirement age, consider working longer, draw down savings systematically and strategically (typically at an annual rate of between 3% and 6%), elect an annuity instead of a lump sum withdrawal for employer-sponsored defined benefit plans, and for retirees who don't have a defined benefit plan, purchase an income annuity with some of their savings. To view the report in its entirety, go to www.gao.gov/new.items/d11400.pdf.

If you have questions regarding whether an income annuity is a good option for you or you simply have questions please feel free to contact me at Shawn@YourFavoriteLender.com.

House Values Continue Downward Slide, But At A Slower Pace

According to the Case-Shiller Home Price Index, the leading measure of U.S. House prices, 18 of the 20 cities the index tracks show a drop in value in September 2011 as compared to September 2010. Only Detroit and Washington DC showed positive rates of change year-over-year.

Equally important is the month-to-month change in value. Only New York, Portland, and Washington DC posted positive gains from August 2011 to September 2011.


The national index posted an annual decline of 3.9%, an improvement over the 5.8% decline posted in the second quarter, which suggests that the pace of decline has slowed. Only 3 cities posted new lows in house values in September 2011; Atlanta, Las Vegas, and Phoenix. Nationally, house prices are back to their 2003 levels.


Living in San Diego, I am most concerned about my local market. Unfortunately, San Diego posted a 0.8% decline from August 2011 to September 2011 and a 5.4% decline since September 2010. Essentially, that means a drop in value of $2,400 on a $300,000 house from August to September and $16,200 from September to September.

The Case-Shiller Home Price Index tracks the price of typical single-family houses located in each metropolitan area provided. Condominiums, multi-family houses, and new construction are not included. Additionally, the data is a quarter old and may not reflect the current market activity. While the index can provide you with a general idea of the housing market, it shouldn't be used as the basis for a decision as to whether or not now is a good time to buy.

It is always best to seek the advice of a local real estate agent you trust because all real estate is local and they are in the best position to provide data relative to your specific purchase, be it a particular city, zip code, neighborhood, or street.

Mortgage Delinquencies Down Nearly 30% From The Peak, But Foreclosure Inventories Up

A new report by Lender Processing Services, Inc. shows mortgage delinquencies continue their decline, now nearly 30% off their January 2010 peak. Meanwhile, foreclosure inventories are on the rise, reaching an all-time high at the end of October 2011 of 4.29 percent of all active mortgages.

The average days delinquent for loans in foreclosure extended as well, setting a new record of 631 days since last payment, while the average days delinquent for loans 90 or more days past due but not yet in foreclosure decreased for the second consecutive month.

According to LPS, 7.93% of mortgages were delinquent in October 2011, down from 8.09% in September 2011, and down from 9.29% in October 2010.

LPS reports that a record 4.29% of mortgages were in the foreclosure process, up from 4.18% in September 2011, and up from 3.92% in October 2010. That's a total of 12.22% delinquent or in foreclosure. It breaks down as follows:

2.33 million loans less than 90 days delinquent
1.76 million loans 90+ days delinquent
2.21 million loans in foreclosure process

For a total of 6.30 million loans delinquent or in foreclosure in October 2011.

This graph shows the total delinquent and in-foreclosure rates since 1995.

The details in this report suggest slow improvement with the exception of the large number of loans stuck in the foreclosure process.

Is The Housing Market In Recovery Mode?

You may not want to crack the cork on that Champagne bottle just yet. While the government insists that the housing market is recovering, other, more reliable sources, say otherwise. I have heard and read many stories professing that the housing market is turning around and that we don't have to worry about a double-dip in home values. I'm not convinced.

It is not my intention to be a doomsayer. Simply to be realistic. We can't fix it if we don't know what's broke. It's obvious that the housing market has been in trouble for several years now, but the government manipulating the data and spreading propaganda through the media regarding economic recovery, in general, and the housing market, specifically, only serves to make matters worse and delay true recovery.

The National Association of Realtors says sales of previously owned homes dropped 4.8% to 4.91 million units last year, the lowest level in 13 years. Many economists believe it will take years for home sales to rise to a normal level of around 6 million units a year. Some say home sales in 2011 will be even weaker than 2010 due to more foreclosures and home prices that are likely to keep falling through the first six months of the year.

The Commerce Department says new home sales for all 2010 totaled 321,000, the lowest level in 47 years. New home sales in 2010 dropped 14.4% from the 375,000 homes sold in 2009. It's the fifth consecutive year that sales have declined after hitting record highs for the five previous years during the housing boom. Economists say it could be years before new home sales hit a healthy rate of 600,000 units a year.

While these are national statistics, it is important to remember that California's real estate market was hit harder than most and that these statistics could easily be representative of California exclusively. The bottom-line is that it is going to continue to be a bumpy ride in the housing market during 2011, despite what the media says.

Interest rates are on the rise and purchasing a home now, before rates go up any higher, is still the right thing to do even if home values settle a little further because it may be a very long time before we see interest rates this low again.

Waiting To Purchase a Home Can Cost You

With interest rates as low as they are and home prices at the lowest level since 2002-2003 there should be a lot more home buying activity than there is. There is no doubt that the $8,000 Homebuyer Tax Credit inspired a lot of aspiring homeowners to accelerate their plans to purchase a home, but there are still a lot of people that got passed by the last time home prices were this low and I don't want to see those same people get passed by again.

What most aspiring homeowners may not realize or simply don't know is that waiting to purchase a home can cost them thousands of dollars or the ability to purchase a home at all. With lending guidelines constantly in flux you never know when a new guideline may disqualify you from buying a home when just days before you were qualified. Something as simple as an increase in the minimum credit score required to qualify for a home loan can end your bid for a home overnight.

Not only have minimum credit score requirements been increased, but debt ratios (the percentage of your income that can be obligated to your total debt payments) have been reduced from 55% to as low as 40%, which can significantly reduce your buying power. The minimum required down payment has been increased from 3% to 3.5% for an FHA loan and there is talk of raising it again to 5%. It has become very difficult, if not impossible to obtain mortgage insurance, which is required when you intend to purchase a home with less than a 20% down payment. Many loan programs have increased reserve requirements and some programs have reduced the amount of the credit a seller can provide to pay a buyer's closing costs.

While changing lending guidelines can have a disastrous effect on your ability to purchase a home, rising interest rates run a very close second to hurting your ability to purchase a home. The combination of rising interest and decreasing debt-ratios can have an exponential effect on your qualifications. Then there's the possibility that as the housing market recovers seller's may be less willing to negotiate on the sales price and/or a credit to cover the buyer's closing costs.

There are countless issues that can come up that can at best interfere with your ability to purchase a home and, at worst, prevent you from buying a home altogether. I recorded a short video that goes into more detail. Click here to view the video.

If you, or anyone you know, is interested in purchasing a home and would like to discuss how today's lending guidelines effect you please feel free to contact me to go over your specific situation by e-mail at Shawn@YourFavoriteLender.com.

A New Assault On Small Business That May Affect You

I read an interesting article in BusinessWeek magazine entitled "Health-Care Bill Surprise: 1099 Nightmare" the first week of June and I think it is newsworthy enough that I decided to share it with you. It is yet another little gem buried deep in the new healthcare bill. Like the '3.8% "Sales Tax" on Your Home?' this provision is intended to help pay for the new healthcare bill.

The provision will require companies to report to the IRS payments of more than $600 a year to ANY vendor. That means that if your company pays more than $600 to a cell phone provider, a gas station, FedEx, the Post Office, etc... you will have to obtain their tax ID number so you can send each respective company a 1099 for those services. The motivation behind this is to capture the estimated $2 billion or more a year in taxes on income that currently goes unreported by contractors and small businesses.

The paperwork nightmare coming to small businesses is going to be huge because now the staff is going to have to track the company expenses in a brand new way; by how much is spent with each vendor. What if a small business doesn't have a staff or enough staff to keep up with this? This provision will impose extra costs on business owners who, in turn, have to pass this extra cost on to the consumer via higher prices, which is not likely in the current economic environment, or the business will simply have to absorb the cost and make less profit.

If you don't own a small business you may glance at this and decide it doesn't affect or concern you and skip reading it. However, it could very well affect you going forward and here's how. If you pay for child care, under current law, you have to provide the IRS with the child care provider's Social Security number or tax ID. Why? So that the IRS can make sure that the child care provider is reporting their income. How about the fact that you have to provide the IRS with the Social Security number for each child you plan to claim as a dependent on your taxes? You have to prove to the IRS that you have children so you can claim them as dependents. It's just another example of the government putting an extra burden on those who do things right to catch those who do things wrong.

So where am I going with this? Is it possible that the IRS will take this 1099 provision and bring it down to the consumer level? They have with child care. What will you do if the IRS starts requiring you to track every business that you spend $600 or more with? Do you have a housekeeper? Do you pay him or her more that $600 per year? Do you have a yard maintenance service? Do you pay him or her more than $600 per year? Do you spend more than $600 per year on your cell phone? Gas? Auto maintenance? The list goes on.

Do you know how to fill out a 1099? Do you know where to get a 1099? Do you track your expenses close enough to know who you need to send a 1099 to? This bill essentially forces every single businessperson to become a watchdog for the IRS. Is it so hard to believe that the next step could be to make you and I watchdogs as well? Remember what Nancy Pelosi said? "You are just going to have to pass the bill so you can find out what's in it!" Are you liking it so far? I would love to hear your thoughts. Feel free to comment below.

A 3.8% “Sales Tax” On Your Home?

Buried deep in the new health care law is a new and little known tax of 3.8% on the sale of your home. It is actually a tax on “unearned” net investment income, but I’ll get to that in a minute. Unfortunately, there is not much information out there about this new tax and, consequently, most of it is misinformation or outright misrepresentation.

You may have already seen an e-mail alluding to this new tax. The e-mail states that if you sell your $400,000 home you will have to pay $15,200, or 3.8%, in tax on that sale. I’m not sure whether this is an example of misinformation or misrepresentation, but this post will clear up the confusion once and for all. The truth is that only a tiny percentage of home sellers will pay the tax, but it doesn’t change the fact that this is a new tax above and beyond the existing capital gains tax.

The “Medicare Tax,” as it is called, takes effect January 1, 2013. The revenues generated from this tax will be allocated to the Medicare Trust Fund, which is part of the Social Security System, and is designed to decrease the shortage that currently exists.

As I already mentioned, the tax will apply to what is referred to as “unearned” income. Unearned income is income that an individual derives from investing his/her capital. It includes capital gains, rents, dividends and interest income. Income derived from the sale of a home is considered capital gains. Under current tax law, any gain from the sale of a principal residence that is less than $250,000 for individuals or $500,000 for married couples may be excluded from the capital gains tax. According to the IRS, to qualify for the $250k/$500k exclusion, a seller must have owned the home for at least two years, with few exceptions, and lived in the home as a primary residence for at least two years out of the last five years prior to the sale. The capital gains tax and the new “Medicare Tax” would apply only to any gain realized that is more than the $250,000/$500,000.

While the law imposes a 3.8% tax on the capital gains over the $250k/$500k exclusions in an effort to make the “wealthy” pay, the exclusion only applies to primary residences. There are a lot of “not so wealthy” individuals who own rental property, vacation property (second home) or vacant land. These properties are not shielded from this 3.8% tax increase.

Let’s look at two examples:

1) Take an “empty nester” couple with combined income of over $250,000 a year who sell their $1 million primary residence to move to smaller quarters. If they cleared $600,000 on the sale, they would be taxed on the $100,000 of profit (the amount over the $500,000 exclusion). Their “Medicare Tax” on the sale would amount to $3,800 ($100,000 x 3.8%) over and above the usual capital gains tax.

2) Take a single executive making $210,000 a year who sells his $300,000 ski condo for a $50,000 profit. His/her tax on the sale of that vacation home would amount to $1,900 ($50,000 x 3.8%), in addition to the usual capital gains tax.

The situation is similar in the case where someone owns a rental property. The rents received and the profit from a sale are taxed. However, the income from these sources are reduced by any expenses associated with earning that income. Thus, in the case of rents, the taxable amount would be the gross rents minus all expenses (including depreciation) incurred in operating the rental property.

Who will be subject to the new tax? “High Income” taxpayers. In this law a high income earner is defined as a “single” person with an Adjusted Gross Income (AGI) of $200,000, a married couple filing a joint return with an AGI of $250,000, or a married couple filing separately with AGI of $125,000. These income levels are even more important when you consider that they are not indexed for inflation. That means that over time more and more people may become subject to this tax, just like happened with the Alternative Minimum Tax. Over time a person’s income typically increases. Someone making $75,000 today may be making $125,000 in ten years or less. If the spouse also works they could see themselves making more than $250,000 and now be subject to a tax that was supposedly not designed to apply to them.

Hopefully, this explanation of the “Medicare Tax” is clear and easy to understand. If you have any questions please feel free to call me or comment below.

How Will You Celebrate the Fourth of July?

Last week I mailed out a letter entitled "A Tribute to America," which is a speech written and given by economist Barry Asmus by Presidential request. I hope you enjoyed that Tribute as much as I did.

Now I would like to share a great BLOG post by a Mentor of mine, Andy Andrews. In it he shares how his family celebrated the Fourth of July and I think you'll enjoy his insights as much as I did. To see the original BLOG post click here.

Tuesday, June 29, 2010
Letter to the Editor

This morning, I am looking at a “letter to the editor” that I cut from our local newspaper. It’s been professionally framed and I’m deciding where in my office it should hang. As I sit at my desk, looking for the perfect spot, I am thinking about our upcoming holiday. . .

When I was growing up, the 4th of July wasn’t just an excuse for a long weekend. Do you remember? The 4th of July was one of the “big four” holidays and uniquely celebrated. Thanksgivings held lavish feasts. Christmas was for hot chocolate and a manger and we actually got to put a tree inside the house. Easter meant new shoes for church. New shoes that mama liked and I didn’t. But Independence Day was totally different. Firecrackers and homemade ice cream. Ribs on the grill. We spent long summer evenings at the lake or a swimming pool or even in our own backyard.

I noticed then that everything about “the Fourth” was more relaxed. Daddy cooked. Mama laughed with her friends, who walked around in baggy Bermuda shorts drinking lemonade out of that special pitcher that was “just for the adults” while we caught fireflies or hit sweet gum balls over the fence with a wiffle bat. Mae Mae and Granddaddy were always there. So were my other grandparents, Nana and Daddy Mac.

Families—sometime whole neighborhoods—would gather, pausing to connect in a way that seems almost embarrassing now. Grandmothers fed kids they didn’t even know from their own plates after they’d already had the spoon in their mouth and shushed anyone who dared object. One daddy might teach another daddy’s boy how to stand when he held a bat or how to make a sound with only his hand and an armpit. Children fell off swing-sets and cried like their legs had been cut off, but nobody threatened to sue anybody or even acted mad.

Later, when it was completely dark . . . when we were tired of catching frogs under the street lights, when the big kids had said goodbye and left in their cars to do whatever big kids did in their cars . . . a lot later, after all the “black-cats” and bottle-rockets and cherry bombs were used up, after the little kids had burned all their sparklers . . . much, much later, when the cicadas were droning in the darkness . . . the grown-ups gathered together.

It always seemed an impromptu moment to me, but it happened every 4th of July, so maybe it wasn’t. The location varied (“maybe over there, by the side of the house to catch the breeze”) but we kids could hear the adults closing a lazy circle as the aluminum lawn chairs scraped across the concrete driveway.

Lighters flared and more lemonade was passed around as we crept closer to the proceedings. It was a fact, known by all kids and passed down through generations of kid-dom, that if we could just stay quiet—snuggle in close to the bare, sunburned legs of our mamas and daddies and stay still—they wouldn’t make us leave. No one would tell us to go to bed. Sometimes, if we waited long enough—lying there on the cool concrete in our damp bathing suits, smelling like chlorine and barbeque sauce—we got to hear our grandparents talk about the time “during the war”.

Quietly, they would “remember out loud” about crackly newscasts from Europe and victory gardens and the ways folks helped each other here at home. They talked about places like Italy and France and Saipan. I remember Saipan because that was where Timmy Underwood’s granddaddy had fought. It was a neat word to me. Saipan. I remember saying it several times when I heard it just because it was so unusual. Saipan. Saipan. It seemed dark and wet and mysterious.

Sometimes, we fell asleep there with somebody’s grandma propping her worn out bare foot on our backs or legs as we listened to their soft, old voices drifting through the hot summer night, fireworks booming in the distance. Saipan seemed far away.

It’s even farther away now. My boys, Austin and Adam, eight and ten, lost their last grandparent this year when Polly’s mom—Patsy Jones—passed away. The true stories of our Greatest Generation are fading now as their souls leave this earth. There no longer seems to be time or even a desire for families and neighbors to gather and love and listen to each other. Our backyards are barricaded with prefab fences, our front yards don’t welcome visitors with porches anymore, and our old people have been silenced, taking their stories—historical perspective; lessons that could save our lives—to their graves.

As an amateur historian, I know how easy it is for history itself to be rewritten. Those with any agenda at all can shift and change an event to make it fit the point of their movies or books or stories. Knowing this, my wife and I are purposing to insure that our boys grow up with a unique perspective in today’s society—the unvarnished truth. Without it, how, I ask you, can our children make a future that is bright and pure?

This Fourth of July, I urge us all to take advantage of the lives and wisdom in our very midst before it is too late. In our neighborhoods, let’s endeavor to find the eighty-something year old Billy Stimpsons or Cliff Callaways or Violet Cowdens (who flew a P-51 Mustang during the war) and give our children the opportunity to learn from the best among us.

Let us encourage our older friends to tell our kids what it still means to them when someone salutes our flag. We need to ask questions in front of our children. Were you scared? Why did you fight for our country? How did people act when you got home?

Back to that “letter to the editor” which is resting for the moment beside my keyboard . . . At present, it has been prepared for my office. To inspire me. To encourage me. But really, I framed it for my boys.

When I am gone, I want them to remember the truth about those who went before. I want them to know that one can choose the way in which we live our lives and fight for that right if he must . . . that one can choose to sacrifice time or money or life itself so that our families or another person whom we might never know may prosper. I want my boys to be grounded in the simple examples contained in the wisdom of their grandparents. That includes the words they choose to use as adults.

And that’s why I framed the letter to the editor. It is just one tiny piece of truth that has been forgotten already. One day, it will be important for my boys to read and understand.

You can read that letter here.

Happy Fourth of July!

Your friend,

Andy

© 2009-2010, Andy Andrews. Used by Permission. Originally posted on www.AndyAndrews.com.

If you enjoyed this post you may also wish to view the "How Will You Celebrate the Fourth of July?" post I wrote in 2008. Click here to view.

I wish you and yours a safe and Happy Fourth of July.

Your Favorite Lender, Shawn Perkins

Are You Ready For The Coming Rise In Interest Rates?

For the past two weeks interest rates have been trending upward. That's the bad news. What's worse is that interest rates will continue to rise throughout 2010 and beyond. Back in January 2009 the Federal Reserve, which is neither Federal nor a reserve, announced that they intend to drive interest rates to 4.5% on 30-year fixed rate loans. Since the Federal Reserve doesn't set mortgage interest rates they did the only thing they can do, which is begin purchasing Mortgage-Backed Securities.

Interest rates on mortgages are determined by the buying and selling of Mortgage-Backed Securities offered by Fannie Mae, Freddie Mac, and FHA. The more of these mortgage bonds that are purchased the lower mortgage interest rates go. However, the converse is true as well. If the mortgage bonds for sale do not get purchased then interest rates will trend up as a result.

Up until August 2007 a great deal of the Mortgage-Backed Securities offered for sale were purchased by foreign investors such as China, Japan, England, Australia, etc... They purchased upwards of 50% to 60% of the mortgage bonds on a fairly consistent basis. However, as the housing and mortgage crisis hit full stride the appetite for Mortgage-Backed Securities began to wane and interest rates began to rise. Foreign participation dropped to about 20% to 30% which hit interest rates pretty hard.

The government and the Federal Reserve knew that a housing and economic recovery was not likely in a higher interest rate environment and that is what prompted the Federal Reserve to come up with its plan to purchase Mortgage-Backed Securities. The strategy worked throughout 2009 but is coming to an end. The program was approved to purchase $1.25 TRILLION in mortgage bonds through March 2010 and year-to-date the Fed has purchased about $1.07 TRILLION. That leaves them with about $180 BILLION of the original amount for purchasing mortgage bonds through March. The Fed has purchased on average $20 BILLION per week and will be scaling that back weekly until the program expires. At the last Federal Open Market Committee meeting the Fed said that they will not be extending the program. That means that unless foreign participation picks back up interest rates will continue to rise to where they should have been all year.

All of this is a long way to warn you that higher interest rates are coming and if you want to take advantage of the current interest rate environment you should move quickly. If you have any interest in refinancing you should call right away before the interest rates move any higher and make it so there is no benefit in refinancing. If you are interested in purchasing a home you should accelerate your home search so you can benefit from both the lower interest rates and the Homebuyer Tax Credit currently available to those that qualify.

Please feel free to contact me with any questions or comments. I can be reached by e-mail at Shawn@YourFavoriteLender.com.

The HomeBuyer Tax Credit Gets Extended and Expanded

The Homebuyer Tax Credit jumped its final hurdle on Friday, November 6, 2009, as the President signed a bill to extend the tax credit through June 30, 2010. The bill also opens up opportunities for non-first-time homebuyers as well.

While the tax credit has been extended it now has two deadlines instead of just the one. The first deadline states that the homebuyer has to sign a purchase agreement by April 30, 2010. The second deadline states that the homebuyer must close by Jun 30, 2010.

For those in the armed forces and persons stationed outside the United States on official duty for 90 days during the period from January 1, 2009 and before May 1, 2010 eligibility is extended for binding contracts signed by April 30, 2011 but must close by June 30, 2011.

Although increasing the tax credit to $15,000 was proposed, the maximum allowable tax credit remains at $8,000. Something added to this bill that wasn't there in the two previous bills is a maximum purchase price of $800,000. The homebuyer still has to occupy the property as their primary residence for the three years following the purchase or they must repay the tax credit in full.

Qualifying for the tax credit became a little easier for higher income homebuyers due to an increase in the income restrictions. Previously the income restrictions were $75,000 for single filers and $150,000 for joint filers. Those limits were increased to $125,000 for single filers and $225,000 for joint filers. The tax credit is reduced incrementally above $125,000 and $225,000, respectively and eliminated at $145,000 and $245,000, respectively.

Now that I've addressed the extension of the tax credit, I would like to move to the expansion of the tax credit. Those who currently own a home now and would like to purchase a different home are now able to take advantage of the tax credit. To qualify the current homeowner must have owned and occupied a primary residence for a period of five consecutive years during the last eight years. The tax credit available to a qualified homeowner is $6,500 instead of the $8,000 available to the first-time homebuyer. As a point of clarification, I think it is important to note that the new home does not have to cost more than the current home.

The tax credit remains a credit, which differs from a tax deduction in a very significant way. A tax deduction is a reduction of the amount of income one pays taxes on. A tax credit is a dollar for dollar reduction of the tax owed. If the homebuyer owes less than $8,000 in taxes the homebuyer will receive the difference in a refund (i.e., If your tax bill is $4,000, you will now owe zero and receive a refund of $4,000).

While the tax credit has served to increase homebuying activity since its inception, Congress realized that to allow the tax credit to expire now could slow the momentum enjoyed to this point. The mix of phenominally low interest rates, reduced home prices, home sellers and lenders willing to pay closing costs, and the huge tax credit make this the best time in 10 years to buy a home. Who do you know who could and should take advantage of this awesome opportunity? I would be honored if you would refer them to me. I can be reached on my mobile number at (619)994-1110 or by e-mail at Shawn@YourFavoriteLender.com.

Do You Really Have Til November 30, 2009 To Benefit From The Tax Credit?

As I've reminded you of many times, the $8,000 First-Time Homebuyer Tax Credit is set to expire on November 30, 2009. I am not trying to beat a dead horse but in order to claim the tax credit, the IRS requires you to close on or before that date. December 1, 2009 is too late. But should that be the date a first-time homebuyer sets his/her/their calendar by?

I would suggest not targeting November 30, 2009. The biggest reason is that there are no do-overs. If you do not close by November 30 , 2009, you lose. If anything goes wrong, as is usually the case in a real estate transaction, you just missed out on $8,000. That's a pretty expensive oops! Making a problem more likely to happen is the fact that recently the County Recorder of San Diego County modified its recording guidelines to eliminate funding a loan and recording the Deed on the same day, except on the last day of a given month. Since every other first-time homebuyer is targeting that date there is a strong chance that many first-time homebuyers will be very dissappointed and wish they had the advance notice you are getting.

The optimal time for closing your home purchase just might be the week of November 16th to build in the proper cushion for potential delays. And the earlier in the week, the better. To further understand why, let's start with the fact that home sales volume is through the roof. New home sales data and existing home sales data have been very strong and first-time homebuyers account for nearly 1/3 of all transactions.

It is reasonable to conclude, threrefore, that with the combination of low homes prices, record low interest rates, and the $8,000 tax credit, buyer interest will remain strong all the way through the November 30, 2009 deadline. You should plan now to avoid the panic of missing out on the tax credit.

Now let's consider the calendar.

• November 30, 2009 is the Monday after Thanksgiving weekend.
• November 28-29, 2009 is a weekend. No closings on weekends.
• November 27, 2009 is the Friday after Thanksgiving; an unofficial holiday.
• November 26, 2009 is Thanksgiving. No closings.
• November 25, 2009 is the day before Thanksgiving; typically a "half-day."

So, that backs the November 30, 2009 first-time homebuyer tax credit deadline up by 6 days to Tuesday, November 24, 2009. That would mean that your loan has to fund on Monday, November 23 in order to record on Tuesday. That may workout okay for you depending on whether or not something goes wrong and how long it will take to fix the problem. With your closing date set for the week of the 16th you'll meet your tax credit deadline with plenty of time to spare.

This commentary may prove to be completely unnecessary if Congress extends the First-Time Homebuyer Tax Credit, but if Congress elects not to extend the tax credit it may save you $8,000. Good luck and happy house hunting.

$8,000 First-Time Homebuyer Tax Credit Extension?

On October 8, 2009 the House of Representatives voted 416 to 0 to pass the Service Members Home Ownership Tax Act of 2009 which extends the current $8,000 first-time homebuyer tax credit for another 12 months for members of the military, Foreign Service, and Intelligence Corps who served at least three months of qualified overseas duty in 2009. The current program is set to expire on November 30, 2009. In my opinion there is definitely justification for extending the credit to members of the military and the like because serving abroad for our country obviously makes it very difficult for those members to look for a house and take advantage of the program. At the moment the bill has passed only the House of Representatives so it is not law yet. But once the bill or some variation thereof passes the Senate it will be sent on to the President to be signed into law. As for the current first-time homebuyer tax credit, which is set to expire on November 30, 2009, there are discussions about extending the credit an additional six months. The problem is that there are several versions of the extension of the tax credit being proposed. The first, and most likely to pass, is simply the extension of the existing tax credit for an additional six months. However, there are proposals to extend the tax credit another year, to make the tax credit available to ALL homebuyers, not just first-time buyers and, lastly, to increase the credit to $15,000. While these other variations are fine to propose, the concern that I have is that they are a distraction from the real issue, which is simply extending the credit so that the momentum in the housing market continues. If the decision is whether or not to extend the existing tax credit then the answer is simply yes or no. What these other proposals do is take the focus off of just extending the tax credit and now create a whole new discussion and debate about whether these other proposals make sense. The $15,000 tax credit proposal has already been voted down in the past as was making the tax credit available to ALL homebuyers. This economy needs the momentum of the housing market to continue forward otherwise we risk undoing much of the progress that we have made due to the tax credit. The focus should be on 1) whether to extend the tax credit at all, and 2) for how long (i.e., 6 months or 1 year). I will keep you informed of any developments as I find out about them so stay tuned.

Buy Now or Risk Higher Prices!

As we approach the end of our summer break from school you will likely see real estate activity pick up. There are still a lot of homebuyers out there and most people don't like to move during the school year, especially if their kids have to change schools. People just don't want to disrupt their kids routines and they're absolutely correct. So those interested in buying a home will likely ramp up their efforts to close on that home and get moved in before the new school year begins, which is just 5 or 6 weeks from now for most of us.

This increase in buying activity will also help stabilize the housing market even more. The Case-Shiller Home Price Index, which tracks home prices in 20 of the nation's most populace cities, indicates that for the fourth consecutive month the pace at which home prices declined slowed considerably. What this means to you is that if you now know this information, it is likely that the short sale and foreclosure lenders know it also. This means that we may see lenders less willing to pay a buyer's closing costs because they see a recovery in the works.

That recovery is also evidenced by an ongoing decrease in the inventory of homes for sale. It appears that the combination of low home values, low interest rates and the $8,000 First-Time Homebuyer Tax Credit are working to stabilize the housing market. Let me encourage you to download the report I wrote called "Understanding the First-Time Homebuyer Tax Credit", which explains how the $8,000 Tax Credit works. Read it for yourself and give it to those you believe would benefit from knowing this credit is available to them.

It has been said that over 60% of first-time homebuyers don't even know the tax credit exists and adding to the pick up in activity will be the rush to buy a home prior to the expiration of the tax credit. I have included a countdown timer in the upper right-hand corner of this blog and my website www.YourFavoriteLender.com to remind homebuyers how much time they have left. For those that miss the boat, they will have lost out on an $8,000 gift from the government for doing something they intended to do anyway. Please help me get the word out about the tax credit.

To recap, there are several dynamics in motion right now that make now the best time to buy a home. They are as follows: 1) The lowest home prices seen in years
2) The lowest interest rates seen in years
3) The first-time homebuyer tax credit and that it expires November 30, 2009
4) As lenders and sellers perceive that a bottom is forming they will be less inclined to agree to a credit to the buyer for closing costs
5) Decreasing inventory of homes for sale feeds the lenders and sellers belief that the bottom is here leading to #4
6) An abundance of homebuyers competing for a decreasing inventory of homes for sale These six points show the market moving in a direction that benefits the buyer less and less. It is very likely that months from now or years from now as you look back on this time in the real estate market you will see that this was the best time you could have pulled the trigger on buying a home.

What You Need To Know About The Current Real Estate Market - Part III

Typically, the real estate market is either neutral, controlled by the seller or controlled by the buyer. However, in today's market we are dealing with an anomaly not seen since the early '90s; The Short Sale! In this commentary I will cover details of a market controlled by a new player; The Lender.

In part I of this commentary I described the characteristics of a seller's market, which is what we experienced from about 2002 to 2007. A seller's market typically results in rapid home price appreciation and many buyers are unable to buy because they are simply priced out of the market.

In part II of this commentary I described the characteristics of a buyer's market, which we began to experience in late 2007. But that lasted just a year or so, until lenders became the sole decision maker in a very high percentage of home sales due to short sales and foreclosures.

A lender's market resembles and shares characteristics of both a buyer's and a seller's market, yet has some of its own distinctive characteristics, as evidenced by the following:
1) An abundance of homes for sale, giving buyers greater options
2) An abundance of interested, qualified and active homebuyers
In this case, the dynamics of supply and demand are tilted on their side because there are plenty of homes for sale and plenty of buyers ready, willing, and able to buy them.
3) Real estate agents and lenders tend to list homes for sale for significantly less than the homes actual value in order to generate multiple offers
4) Virtually every home has multiple offers; some as many as 40 offers
5) Homes tend to sell for more, and sometimes significantly more, than the asking or list price
6) Offers to purchase can require multiple approvals; first is acceptance by the seller of the home, and in the case of a short sale, a second approval by the lender(s)
7) Lender approval on a short sale can take several months, leading to a great deal of frustration for the buyer, the real estate agent, and the buyer's lender
8) Homes are offered in "as-is" condition
8a) Termite inspections are routinely excluded
8b) Requests from the buyer for repairs are denied
9) Lenders tend to dictate the terms of the purchase contract
9a) Lenders tend to shy away from FHA and VA offers (I will cover this in more detail in a future commentary)
9b) A disproportionate amount of all cash offers, which tend to be real estate investors either looking to fix up the home and flip it for a profit or hold until the market rebounds
9c) Lenders will entertain a credit to the buyer for closing costs, though there are certain lenders that simply refuse to pay the buyer's costs due to some "company policy"
9d) Lenders rarely entertain contingent offers, which are offers contingent upon the buyer finding a buyer for their own home. This isn't typically a problem in today's market because most home sales are to first-time buyers
9e) Time frames for appraisal and loan approval contingencies, currently 17 days from date of acceptance, are strictly adhered to, if not shortened or removed entirely
9f) Contractual deadlines, while not strictly adhered to, are taken seriously
9g) If contractual deadlines are extended, fines can be imposed and can range from $50 to $200 per day until the transaction closes
9h) Earnest money deposits tend to be increased 10) Whether the home is a short sale or a foreclosure, the buyer's offer must include, at a minimum, a letter of qualification or even approval from a lender, and, in many cases, the buyer is forced to speak with a "preferred lender" of the short sale or foreclosure lender to determine the buyer's ability to perform There you have it; the major differences between a seller's market, a buyer's market, and, the newly defined, lender's market. While the seller's market and the buyer's market have characteristics almost exactly opposite one another, the lender's market exhibits characteristics of each, but has some very unique characteristics of its own.

My conclusion is that we are currently in a lender's market, but one where the buyer still plays a major role. I hope you found this information helpful.

What You Need To Know About The Current Real Estate Market - Part II

In my last commentary I posed the question "Who is in control in the current market?" I then described the characteristics typically found in a seller's market and in this commentary I will describe the characteristics typically found in a buyer's market.

A buyer's market is typically characterized by the following:
1) An abundance of homes for sale, giving buyers greater options
2) A limited number of interested, qualified, and active homebuyers
In this case, the dynamics of supply and demand puts the buyer in charge because there are a lot of home sellers competing for a limited number of homebuyers.
3) Multiple offers on a home for sale is either very rare or non-existent
4) Homes tend to sell for less than the asking or list price
5) Homes tend to sit on the market for an extended period of time
6) The buyer tends to dictate the terms of the real estate purchase contract
6a) Sellers will entertain any and all offers, whether FHA, VA, or conventional
6b) Seller credits to cover the buyer's closing costs are very common
6c) Sellers will entertain contingent offers, which are offers contingent on the buyer finding a buyer for their own home
6d) Time frames for appraisal and loan approval contingencies are typically extended beyond the contractual 17 days or not removed until closing, although a seller can still cancel the transaction and keep the buyer's deposit
6e) Earnest money deposits can be minimal
6f) Contractual deadlines become more of a guideline or target than a hard fast rule
6g) The extension of contractual deadlines, if necessary, tend to be granted without penalty
7) Requests for repairs can be both lengthy and costly to the seller
While this list is meant to be exhaustive, it certainly doesn't cover every circumstance that constitutes a buyer's market. In the next commentary I will describe characteristics of a new player in the real estate market. One that is changing the dynamics of the market and frustrating a lot of people in the process.

What You Need To Know About The Current Real Estate Market - Part I

This is the first in a series of related commentaries I am writing about the current real estate market, which will be chock full of valuable, enlightening, and relevant information you need to know regardless of whether you are buying, selling, or neither.

Let's begin by asking a question. "Who is in control in the current market?" In other words, Are we in a seller's market or a buyer's market? The best way to answer these questions is to first consider the signs of each of these markets.

A seller's market is typically characterized by the following: 1) A limited number of homes for sale
2) A large pool of interested, qualified, and active homebuyers
In this case, the dynamics of supply and demand puts the seller in charge because there are a lot of buyers fighting over a limited supply of homes.
3) Virtually every home seller entertains multiple offers
4) Homes tend to sell for more than the asking or list price
5) Homes tend to sell rather quickly
6) The seller is the decision maker and tends to dictate the terms of the real estate purchase contract
6a) Sellers are reluctant to consider FHA and VA offers (I will cover this in more detail in another commentary)
6b) Sellers are unwilling to agree to a credit to the buyer for closing costs
6c) Sellers are less willing to entertain contingent offers, which are offers contingent upon the buyer finding a buyer for their own home
6d) Time frames for appraisal and loan approval contingencies, currently 17 days from the date of acceptance, are shortened or removed entirely
6e) Earnest money deposits tend to be increased
6f) Contractual deadlines tend to be strictly adhered to and, if not met, the transaction can be canceled and buyers' deposit becomes the property of the seller
6g) If contractual deadlines are extended, fines can be imposed and can range from $50 to $200 per day until the transaction closes 7) Requests from the buyer for repairs are denied as properties tend to sell "as-is"
While this list is meant to be exhaustive, it certainly doesn't cover every circumstance that constitutes a seller's market. In the next commentary I will cover the characteristics of a buyer's market.

What is a "Short Sale?"

There appears to be a lot of confusion out there about short sales so I thought I would take a few minutes and explain what a short sale is.

I believe the confusion stems from people in the real estate industry using industry "lingo" or terminology in conversations with people outside the real estate industry. Every industry has its own lingo and each of us needs to be aware of that as we talk with others about our respective industries. To be fair though, it isn't limited to just industry. Have you tried to communicate with a teenager via text message? I'm not even sure they are using letters in the English language.

Anyhow, contrary to popular belief, a short sale has nothing to do with a particular time frame. In fact, if you've ever been involved in a short sale you can attest to the fact that a short sale is anything but short. A short sale can take anywhere between 60 - 180 days, and that's if it happens at all.

A short sale, quite simply, is any home for sale where the total combined mortgages or loans on the property exceeds the current value of said home and the seller is unable to pay the shortage. For example, a homeowner that has a first mortgage for $300,000 and a second mortgage or home equity line of credit for $100,000 owes a total of $400,000 on the home. If he/she decides to sell the property and it is determined that the current value is $325,000 the seller of the property would have to write a check for $75,000 plus the real estate commissions ad closing costs. If the seller was unable to raise that kind of money then he/she would approach the current owner of the outstanding loan(s) on the property and ask that one or both lenders accept less money than is actually owed to them in order to allow the seller to complete the sale of the property. Not only would the lender(s) be accepting less money but they would be paying the real estate commissions and the closing costs.

That is the definition of a short sale in a nutshell.

"Monetizing" the First-Time Homebuyer Tax Credit

After much ado, on May 29, 2009, the Department of Housing and Urban Development issued Mortgagee Letter 2009-15, which opens the door for homebuyers who are eligible for the $8,000 First-Time Homebuyer Tax Credit to use the tax credit as a down payment, to buy down the interest rate, or pay closing costs.

Before you start the celebration, let me explain how this will work. There are two methods for converting the $8,000 First-Time Homebuyer Tax Credit into "cash."

The first method is via secondary financing (second mortgage) equal to the tax credit. The following conditions apply:

a) The tax credit advance, when combined with the FHA-insured first mortgage may not result in cash back to the homebuyer;
b) The second mortgage may not exceed the total amount needed for the down payment, closing costs, and prepaid expenses;
c) Secondary financing may be "soft" (silent) or require a monthly payment. Soft or silent means that no repayment is necessary if certain conditions are met;
d) If a payment is required, it must be included in the homebuyers qualifying debt ratios and ,when combined with the first mortgage, cannot exceed the homebuyers' reasonable ability to pay;
e) Payments must be deferred for at least 36 months to not be included in the qualifying debt ratios;
f) The secondary financing may not require a balloon payment before ten years.

For the tax credit to be eligible to be used as any portion or all of the down payment it must be via secondary financing provided by state or local housing finance agencies, government agencies, or certain FHA-approved non-profit groups. Unfortunately, as of the typing of this blog post there is no agency or non-profit organization providing the secondary financing for California. I will notify you via another blog post if I hear of any agency or non-profit providing secondary financing but I wouldn't get my hopes up. For one, the First-Time Homebuyer Tax Credit is set to expire on December 1, 2009. And two, I predict that it will work like other programs of this nature, which is on a first come, first served basis, be underfunded, and require the homebuyer to be in escrow prior to applying for the tax credit advance.

The second method method allows FHA-approved lenders and FHA-approved non-profit organizations as well as Federal, state, and local government agencies to purchase the tax credit from the homebuyer and works a lot like a payday advance. A fee will likely be charged to access the tax credit advance. The following conditions apply:

a) The amount of money provided on behalf of the homebuyer may not exceed the anticipated tax credit due the homebuyer based on the computations of IRS Form 5405;
b) The homebuyer must submit a signed certification that the tax credit is not subject to or obligated to some other unpaid indebtedness (i.e., another debt owed to the government);
c) Any fees charged by an organization or agency for the purchase of the tax credit are to be no more than 2.5% of the anticipated tax credit (i.e., $8,000 to be refunded, with all fee considered, the homebuyer should receive not less than $7,800 for the sale of the tax credit);
d) The tax credit funds may not be used to meet the 3.5% minimum down payment, but may be used as additional down payment, buying down the interest rate, or other closing costs.

Under this option, the homebuyer must still come up with the required minimum 3.5% down payment using their own funds, a gift from a family member, or a combination of the two. Unfortunately, as stated above, as of the typing of this blog post there is no agency or non-profit organization purchasing the tax credit for California. I will notify you via another blog post if I hear of any agency or non-profit purchasing the tax credit.

By the way, non-profits that receive fees from sellers cannot provide down payment assistance under this program.

I hope this blog post brings a little clarity to the circumstances in which the First-Time Homebuyer Tax Credit can be utilized to aid in the purchase of a home versus waiting to receive the tax credit months after purchasing a home.