But now that the I/O option is back, lenders have a few caveats:

1. The person must be able to qualify at the fully-amortized payment, not the Interest-Only payment, which is generally hundreds of dollars less per month.
2. The Interest-Only payment option is extended to ten years, regardless of the Fixed Term for the ARM.  So whether you choose a 5/1, 7/1 or 10/1 ARM, you have the I/O      option for 10 years.
3. You must have 25% equity in the home (some lenders may allow less, but 25% is common).

ARMs can still be a smart financial tool for the right person, but definitely not for everyone (or many at all, actually).  It depends on your financial profile and risk comfort, but more importantly, that you are going to hold yourself accountable to actually utilize that monthly payment savings through other financial investments that pay you more than the interest rate at which you would be paying your mortgage.

This should also be a part of your financial assessment when you determine to short sell.

If you have been foreclosed upon:

• Conventional: Cannot qualify for a mortgage for 5 years

• FHA: Cannot qualify for a mortgage for 3 years

If you have decided to short sell:

• Conventional: Cannot get a loan for 2 years

• FHA: Cannot get a loan for 3 years

• Conforming loan ONLY (Maximum loan amount: $417,000)
• Purchase only (no refinances)
• Single-family home or detached PUDs only (no condos or attached PUDs)
• Must be your primary residence
• 760 minimum FICO (the middle FICO of all borrowers)
• 41% maximum Debt-to-Income ratio

Please note this is for California real estate.  If you do not fit into these guidelines, then FHA is most likely the way to go, which is more flexible with credit and qualifying requirements, although more expensive than a conventional loan.

I do not know how long this will last, but 5% down has not been available for a year.

• You will not be eligible to e-file your returns
• You must complete and include Form 5405
• You must include supporting documentation along with Form 5405 (this is the reason you cannot e-file).  The documentation is:
  • A copy of your HUD-1 Settlement Statement with both parties’ signatures (yours and the sellers).

If you are eligible to claim the “long time resident” homebuyer tax credit of $6500, you will need to provide the following documentation:

• A copy of your HUD-1 Settlement Statement with both buyer and seller signatures

In addition to the HUD-1, you also will need to prove that you were indeed a homeowner for any 5 consecutive years in the previous 8-year period by providing one of the following:

• Form 1098 (your Mortgage Interest Statement)
• Property Tax Records
• Homeowner’s Insurance Records

I am not a tax advisor, so this information is only intended to guide you.  Please speak with your CPA and/or carefully review IRS instructions for how to properly file for your tax credit.

SFR: Single Family Residence (standing on its own; not a part of a development)

PUD: Planned Unit Development (generally known as a townhouse). It is rare to find a detached PUD, but do speak to your real estate agent about this.

DOWN PAYMENT REQUIREMENTS IN CALIFORNIA:

Up to $417k Loan Amount (Conforming Loan):

SFR/Detached PUD: 10% down minimum

Attached PUD/Condo: 15% down minimum

$417k – $729,750 Loan Amount (High-Balance Loan):

SFR/Detached PUD: 10% down payment

Attached PUD/Condo: 15% down payment

Above $729,750 (Jumbo Loan):

Please call me for this scenario.  The down payment requirement in the Jumbo Loan range tends to fluctuate; in addition, few lenders are participating in this loan level, so it depends on investor involvement and their portfolio at the time.

The Federal Housing Administration has recently announced that there will be upcoming restrictions, so the window of opportunity is tightening. An exact date for implementing these changes has not been set, but they are alluding to late spring/early summer.

I will keep you updated, but some of the highlighted changes include:

• The Upfront Mortgage Insurance Premium will increase from 1.75% to 2.25% (on a $400k loan, this translates to a $2000.00 increase)

• A lower credit score will require more down than a higher credit score

• Allowable seller concessions (which help pay for closing costs, the Upfront Mortgage Insurance Premium and any points to buy down the interest rate) will decrease from 6% down to 3%

All of these mean less opportunity and higher costs for you, so if you’re on the fence about buying, you should consider these changes in your analysis. And as always, please let me know if I can run numbers or help you with a pro/con assessment.

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Loans by Irene is on Facebook – become a “fan”!

If you are a California homeowner and would like an assessment of refinancing, please let me know. Interest rates have trended lower this week in light of the worse-than-expected Initial Jobless Claims report. The long-term opportunity for low interest rates won’t last forever.

By E.J. Hong:

The nature of your assets and how you hold title to those assets (called character of the property) is a critical factor in the estate planning process. Before you take title (or change title) to an asset, you should understand the tax and other consequences of any proposed change. Your estate planning lawyer will be able to advise you.

Keep in mind that transferring title to a trust generally does not necessarily change the character of the asset unless the trust (or related document) changes the character. For example, if you and your spouse own property as joint tenants (which is considered separate property), merely transferring it to the trust does not alone change the character to community property (see below for more information). Moreover, just putting a person’s name on a deed can trigger gift or transfer (sale) consequences, so make sure you seek good legal advice.

• Community property and separate property – In general, separate property is assets 1) owned by a spouse or domestic partner before marriage or registration of domestic partnership; 2) acquired by gift or inheritance; or 3) acquired while separated.  All other property acquired during marriage or domestic partnership (such as earned income) is community property.  (Note: For domestic partnerships, federal laws do not treat community property the same way that CA law does.)
  Separate property can be converted to community property (and vice versa) by a written agreement. However, because taking such a step can have tax and other consequences, make sure that you understand such consequences before taking this step.
• Joint tenancy with right of survivorship – Co-owners of real estate can hold title as joint tenants with right of survivorship. This means that, if one co-tenant dies, the property passes to the surviving joint tenant, no matter what the will says.  The drawback to joint tenancy is that, if you’re married, joint tenancy only allows for a step-up in basis for the deceased joint owner’s half interest. A step-up in basis means that the basis of your house is stepped up to the fair market value at the time that an owner dies.  In joint tenancy, only the deceased person’s half interest gets a step up in basis to the fair market value at time of death.  So, if the surviving joint tenant were to sell the house, there would be a profit, perhaps resulting in having to pay capital gains taxes. Compare this to community property where both halves get stepped up in basis to the fair market value at the time one spouse dies, which will result in reducing profit and therefore capital gains tax. (See my previous post on 2010 on “What’s Going on With Estate Taxes?” for a brief explanation on the modified step up in basis in 2010.)
• Tenants-in-common – This refers to an arrangement in which two or more people own real estate without a “right of survivorship.”  Upon the death of one tenant in common, his or her ownership interest passes to the beneficiary named in a will or trust.  If a co-tenant dies without a will, the heirs will be determined by the probate court according to the probate code. This applies to co-tenants who are married or in a domestic partnership as well as to those who are single.  Note that, generally, a will goes through probate court and a living trust does not.

• Community property with right of survivorship – If you are married or in a registered domestic partnership, you and your spouse or partner could hold title to property as community property with right of survivorship. Like joint tenancy, the property passes to the surviving owner regardless of what the will says.

• Examples (not meant to be exhaustive): First marriage: If you are in your first marriage and hold everything as community property, you should generally hold your property as community property and then do a will or a living trust (a living trust avoids probate but a will does not). Holding your property as joint tenants avoids probate but can have negative capital gains consequences. Community property with right of survivorship avoids probate but the IRS has not specifically ruled on the step up in basis with regard to this type of character. Moreover, community property with right of survivorship or joint tenancy with right of survivorship postpones probate but it does not avoid probate. For example, when the 1st owner dies, the transfer can occur without probate. But when the surviving owner owns it then as a single person, the asset will be probated if the interest has not been put into a living trust. Also, keep in mind that avoiding probate does not mean that you avoid conservatorship, make it hassle-free for your heirs, have adequate tax planning, or protect your children from creditors.

  Married with Separate Property: If you’re married and you have separate property, you can have a joint trust with your spouse and still hold the separate property as a separate property in that joint trust. Or you can have two trusts, one community property trust and another a separate property trust.

  Blended Marriage: If you’re in a second marriage and you have 2 different sets of children, you should carefully consider what is community property and what is separate property and how you want you provide for your current spouse as well as for your children. You do not want to disinherit your children or your spouse and you also do not want to create conflict between your current spouse and your children. You could leave your community property to your current spouse and your separate property to your children. Or you could leave all your property to your surviving spouse to use during his/her lifetime and then have it go to your children. This kind of situation can create conflict between the surviving spouse and your children though, so perhaps you should consider life insurance to give to the kids upon your passing so that they do not have to wait for the inheritance.

  Single: If you’re single, you will hold it as a single person. Unless you transfer your property into a trust, your heirs will have to probate the assets.

  Single with co-owner: If you’re single and someone else has contributed to the down payment, you and the co-owner can own the asset as tenants in common or joint tenancy. If you own it as tenants in common and one tenant dies, that interest will have to probated unless that interest is in a living trust. If you own it as joint tenants, your share will automatically pass on to the surviving joint tenant. This may not have been what you wanted though because you may have wanted to transfer your share to someone other than your joint tenant. Plus, again, you only postpone probate, not avoid it.

• Gifts – I have to explain gifts and gift taxes here. Remember that any amount that you give to anyone is a gift and there are gift tax consequences over $13,000 this year (lifetime exemption of $1,000,000), unless there is an exemption. A commonly used exemption is gifts to a US citizen* spouse, which is unlimited (“unlimited marital deduction”). If you put your U.S. citizen spouse on your deed when that spouse has not contributed financially to the asset, it is exempt from gift taxes because of the unlimited marital deduction. So, when you want to put someone on the deed as a joint tenant because you want to avoid probate, and this person is not your US citizen spouse and has not contributed financially or the amount commensurate to the value of the share that he/she owns, you have a gift issue.

*If you are a non-US citizen, you do not have the unlimited marital deduction and your estate tax exemption is different from US citizens. If you are a non-US citizen, you should seek qualified help.

This all may seem very technical, but this actually just touches the surface of the issues involving title to your house and this cannot substitute good holistic, legal analysis of your entire estate. Your house is most likely your most valuable asset and you should make sure that you 1) own it in the right way; 2) that you have a plan for who will inherit your hard-earned property; 3) that you minimize taxes and costs as much as possible; and 4) that you have a plan for someone to manage your assets if you become disabled or incapacitated.

LAW OFFICES OF E.J. HONG
2225 E. Bayshore Road, Suite 200
Palo Alto, CA 94303
Tel: (650) 320-7680
Fax: (650) 320-7675
E-mail: ej@ejhong.com
Website: www.ejhong.com

Of course, there isn’t anything that anyone can do about the reality of natural disasters, but keep in mind that financing your home isn’t a done deal until it goes on record.

And to those of you that were affected by the severity of the earthquake, here and in Haiti, my thoughts are with you.

If you were my client in 2009, and you either 1) bought your home, or 2) paid any amount of points (or fraction thereof) on your refinance or purchase, then I have already mailed you an additional copy of your HUD. Sometimes it’s hard for us to remember where we put such documentation, so I try to make it easy on my clients. Just a reminder to the rest of you!