Ask the Expert: Home Buyer Tax Credit, Loan Assumptions, Buyer Resources

Q. I am looking for a “take over” payment on a condo. My credit is not good, but I do have steady income. I also want a 30 year fixed mortgage. Is something like this available?

When a homebuyer assumes responsibility for a home seller’s existing mortgage, it is called an “assumption”. The buyer assumes all the obligations under the mortgage, just as if the loan had been made to him/ her. When market rates are low, there are very few assumptions. When market rates are well above previous lows, assumptions become more commonplace.

Remember that a lender-ratified assumption requires all of the same appraisal and buyer approval that a new loan would take. You need to become familiar with the federal lending regulations and qualification requirements if you want to go to a lender and attempt to “take over” a foreclosed property. You may find that the lender is unwilling or unable to make the new loan to you.

The value of an assumption depends on the difference in rate between what you could borrow as a new loan vs. the rate of the old loan, the balance and period remaining on the old loan, and the term of the new loan and on how long you expect to have the mortgage. Remember that on a good assumption, you will often pay a higher price to the seller to make up for what you will save on mortgage cost. After all, the seller expects to benefit as well.

Many lenders have inserted due-on-sale clauses in their notes that prohibit assumption. (An exception is FHA and VA mortgages, which do not contain these clauses. Loans insured by FHA or guaranteed by VA have always been assumable.) These stipulate that if the property is sold, the loan must be repaid. Even with a due-on-sale clause, the lender may allow an assumption, keeping the loan on the books avoids the cost of making a new loan. But the interest rate will be raised to the current market rate.

Raising the interest rate to market removes most of the benefit of the assumption to the buyer and seller. In some cases, they attempt to retain the benefit by agreeing to a sale using a wrap-around mortgage, without the knowledge of the lender. The seller takes a mortgage from the buyer, which may be for a larger amount than the balance of the old loan, and continues to pay the old mortgage out of the proceeds of the new one. The new mortgage “wraps” the old one. This practice has been commonplace during different periods in my career, when loans were scarce or interest rates were into double digits.

This is a dangerous business, particularly to the seller, who has given up ownership of the house but retained liability for the mortgage. If the buyer fails to pay, or if the lender discovers the sale and demands immediate repayment of the original loan, the seller will potentially incur serious damages.

I think it’s always wise for a buyer to look at all options before deciding on the route that’s best for him/ her. I’d like to speak with you about a confidential consultation that will allow you to explore all avenues available to you.

Q. I’m reading that the extension and expansion of the tax credit will have a bigger effect on the market this time. What will the overall impact be?

We think that the extension of the first-time buyer credit will continue to create urgency at the lower end of the market, and by expanding the credit to buyers with higher incomes, we’re finally going to see more move-up buyers, impacting a higher level of the marketplace, up to the $800,000 limit. This will not be helpful at the high-end of the marketplace, due to income limitations. However, the new laws significantly increase the pool of potential buyers in the under $800,000 category. What may ultimately happen is that move up buyers will put pressure upward into the million plus market, allowing some movement there. Remember, though, that the extension/ expansion is very short term, so there won’t be much time to guage the effects until after it’s over. If you are either a home buyer or a home seller, act now to get in the game.

Here’s a brief recap of the highlights of the tax credit:

  • First-time homebuyers are eligible for up to $8,000 on the tax credit, which is the same as the current credit.
  • There is a new credit of up to $6,500 for homeowners who have lived in their homes for at least five consecutive years. That provision starts on Dec. 1, 2009.
  • To qualify, buyers in both groups have to sign a purchase agreement by April 30, 2010, and close by June 30, 2010.
  • The new tax credit applies to homebuyers with incomes up to $125,000 (up from $75,000) for single filers and $225,000 (up from $150,000) for joint filers. Also, buyers must be 18 years of age or older. To help guard against fraud, buyers are required to attach documentation of purchase to their tax return.
  • The tax credit is available for the purchase of principal homes costing $800,000 or less. Vacation homes are ineligible.
  • These credits would be extended an additional year, until June 30, 2011, for members of the military serving outside the United States for at least 90 days.
  • Lawmakers are saying that this is the last extension of the credit.

Q. I’m about to start the homebuying process in LA. What are some resources for me?

A. First of all, congratulations on becoming a Los Angeles homeowner. You could not have chosen a better time; affordability is at an all time high, interest rates are at record lows, and the $8000 tax credit has been extended into the spring.

If I’m understanding you correctly, you want to understand the ins and outs of the financing end of purchasing your first home. Great question, because your financial pre- approval is the underpinning and first step to your home search.

My recommendations are as follows:

1. Get yourself a great, trustworthy mortgage broker. A mortgage broker differs from an institutional banker (such as Wells Fargo or B of A) in that they shop all lenders on your behalf to get the best rate and terms. Sit down with them for a confidential interview and discuss every aspect of your financial situation. A good mortgage broker will tell you what documents you need to have for your first meeting (including salaried or non-salaried income statements, pay stubs, miscellaneous income, assets, and debts) and during your initial interview, will be able to provide you with about five or six scenarios for your home purchase.

How do you find a great mortgage broker? It’s a good idea to ask your Realtor for recommendations, and then interview to see who is the best fit. Find out how long they have been in the business, what their closed ratio is, etc., before you agree to give them any of your financial information.

2. Make sure you understand the options in loans out there, based on your purchase price. Your Realtor and mortgage broker should work hand in hand to help you find a loan program that fits both your financial situation and your home buying needs. Be sure you understand the current rates, what rates are doing (moving up or down) on a week to week basis (this affects affordability) and the overall costs of the loan involved. A great mortgage broker and Realtor will give you an up front good faith estimate of your closing costs. (what it will really cost you at the point of sale.)

What’s the best loan for you? That depends on a number of factors, including:

  • How long you’ll stay in the home;
  • How much money you’ll put down;
  • How you’ll finance the closing costs.

3. Keep these tips in mind as you go through the process:

  • Establish good credit.
  • Raise your credit score
  • Save for a down payment & closing costs.
  • Keep detailed records of money spent and debts repaid.
  • Develop a financial plan.
  • Maintain a working relationship with a Realtor Buyer’s Agent.
  • Learn your area’s market values.

I’d like to offer you several resources to explore:

Here on my website, you’ll find guides and tools expressly for the first time homebuyer.

1: guide to help buyers with the process.
2: is a directory of tools to help first time buyers, including q&a and calculators.
3: is a list of Frequently Asked Questions regarding the mortgage process, which I know you will find useful.
4: are financial calculators that will give you a snapshot of your situation, prior to meeting your mortgage broker.

The state agency created by the legislature in California to offer first time home buyer programs is the California Housing Finance Agency.

The CHDAP offers down payment assistance for first-time homebuyers who meet specified moderate income limits.

How The Program Works:

The CHDAP provides a deferred-payment junior loan – up to 3% of the purchase price, or appraised value, whichever is less – to qualified borrowers to be used for their down payment or closing costs. This junior loan may be combined with a CalHFA or non-CalHFA first mortgage loan. This junior loan can not be combined with the Extra Credit Teacher Program (ECTP) or the Homeownership In Revitalization Areas Program (HIRAP).

For complete details on these first time home buyer programs available to California residents, the contact information is:

CalHFA Homeownership Division
P.O. Box 4034 , Sacramento, CA 95812
Phone: 800.789.2432
Email: [email protected]

You should also visit the California Housing Finance Agency website.

If you need more resources, let me know, and I will be happy to point you in the right direction. After you’ve done your research, please call me for a referral of mortgage brokers in your area. In addition, I specialize as a first time Buyer’s Agent, and I’ve been a Realtor in Los Angeles for 33 years. I’d be happy to assist you in any way that I can.

Have a question you want answered?  Please contact us.

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