“Mise en Place” for Homebuying

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In cooking, “mise en place” describes having all your ingredients measured, cut, peeled, sliced, grated, as well as bowls, utensils and pans ready to use before you begin cooking. The advantage is to inventory the ingredients and recognize if you have everything you need. You are less likely to leave out an ingredient or step because it is “set up” and ready to use.

The same technique works well in the homebuying process, especially in today’s highly competitive environment where multiple offers are normal and bidding wars are commonplace.

Check your credit … not only does credit determine if you will get a mortgage, but it will also determine the interest rate you’ll pay. The best rates are for the borrowers with the best credit; lower credit scores mean higher rates because of additional risk to the lender. Free copies are available from all three major credit bureaus at www.AnnualCreditReport.com.

Determine your budget … knowing your income and immediate living expenses will give you a feel for what you can afford but you also need to know what big-ticket expenses are in the future and how much you should be saving for them. Lenders use debt to income ratios to qualify borrowers, but it may be more than the buyers feel comfortable with. This is good information to discuss with your mortgage professional.

Meet with a mortgage banker … their job is to get borrowers approved and instead of using calculators on a website, a trusted, experienced mortgage professional can look at your credit, make suggestions if it can be improved, run verifications on income, assets and liabilities and suggest loan programs to benefit your specific situation. They can even provide a pre-approval letter and phone verification that may be the tipping point to negotiating a successful contract with a seller.

Initial investment … The down payment and closing costs are related to the type of mortgage, which is generally, dependent of how much of the buyer’s savings is available. The down payment can range between zero and 20%. Mortgage insurance is necessary on most loans if the down payment is less than 20%. Buyer’s normal closing costs range between two to five percent of the mortgage.

Costs of homeownership – Most mortgage payments include the principal and interest plus 1/12 the annual property taxes and insurance plus mortgage insurance if required. Other expenses that will be incurred by the homeowner include maintenance, HOA dues, utilities, upkeep and replacement of equipment and appliances.

Process and timeline … people tend to feel more comfortable when they understand the process of buying a home and the length of time it takes for the different steps. Your real estate agent will be able to provide this information to you based on the type of mortgage and local market conditions.

Know the numbers … being familiar with the basic statistics makes planning and even, negotiation easier to predict. Important data, relative to the type of property you are buying, includes the current supply of homes for sale, days on market, sales price to list price ratio, and percent of cash sales in your price range. This is another area that your real estate professional can be very helpful.

Must-have features … the concept of a “dream home” is more myth than reality. People rarely get everything they want even when they are building a home. Especially, in a highly competitive market with rapidly increasing prices, buyers should create a list of their “must have” and “nice to have” features and amenities. This can be helpful when you are determining whether to write a contract on a home.

Build your team … buying a home is like an athletic team. By selecting the best “players” for each position, you will have a much better chance for a successful sale and a satisfactory transaction. Your real estate agent is in a unique position to guide you through the entire process and recommend trusted professionals for each job that needs to be done.

An excellent meal includes fresh, good food, the right ingredients, superb preparation, and execution. Whether you are following a recipe or doing it from memory, each step is important and affects the outcome. The same is true for buying a home. Get everything together before you start looking at homes.

For more information on buying a home, download our Buyers Guide.

It’s Not too Late to Refinance

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With mortgage rates below 4% since May 2019, you would think that most people would have already refinanced but according to a recent Lending Tree survey, 49% of homeowners say they are considering a mortgage refinance in the next year. The report estimated that over a third of homeowners are have mortgages above 4% and 11% didn’t know what their rate was.

Slightly more than a third of the people surveyed regretted missing the opportunity to refinance in 2020 when rates did hit their historical low. Homeowners should not beat themselves up on this issue because the only way to know to tell that it hit bottom is after it has started going up again.

The current rates are very favorable to borrowers and some economists believe that when inflation is factored in, the rates are close to zero effectively.

While there are nine specific reasons people choose to refinance their homes, two are among the most prevalent: to lower the payment or take cash out of the equity. Most reasons include:

  1. Lower the payment
  2. Lower the rate to pay less interest
  3. Shorten the term to pay off the loan sooner
  4. Take cash out of equity to pay off higher cost debt
  5. Take cash out of equity to improve their liquidity
  6. To remove a person from the loan as in a divorce
  7. To combine a first and second mortgage
  8. To replace an adjustable-rate mortgage
  9. To consolidate debt

There are some commonly held myths about refinancing among homeowners such as:

  • You can only refinance your home once.
  • You must refinance through your current lender.
  • There should be two-percent difference in the rate to justify it
  • You need 20% equity to refinance
  • Applications require a lot of documents
  • You need cash to cover closing costs
  • You won’t save that much by refinancing
  • It’s free to refinance

If your current mortgage is a FHA, there is limited borrower credit documentation and underwriting program. The mortgage must be current and not delinquent, and the refinance must result in a net tangible benefit to the borrower such as a lower rate, lower payment or better terms. For more information, see Streamline or contact an FHA approved lender.

VA has a similar program if your existing mortgage is a VA-backed home loan. The purpose is for a borrower to reduce their payments or make their payment more stable. They must certify they are currently living in or did live in the home covered by the loan. The Interest Rate Reduction Refinance Loan, IRRRL, may be available.

USDA also has a program for current USDA direct and guaranteed rural homebuyers who have been current on their payments for 12 months prior to requesting the loan refinance. No appraisal or credit review is required. There must be a minimum of 40% net reduction to the PITI payment. More information is available.

Before refinancing your home, determine how long you plan to keep the home. If the reason for refinancing is to save interest by getting a lower rate, you may accomplish that immediately. However, if you plan on selling soon, you may not be able to recapture the cost of refinancing.

There are costs associated with refinancing regardless of whether you pay for them in cash, or they are rolled into the cost of the mortgage. These costs can range from two to five percent of the mortgage.

Check out the Refinance Analysis to determine your breakeven point and savings. Call if you have questions or want the recommendation of a trusted mortgage professional.

Writing a Successful Offer in a Low Inventory Market

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With at least 40% less homes on the market currently than there were a year ago, serious buyers have probably experienced the disappointment of losing a home they wanted to buy from increased competition. Today’s buyers are looking for ways to improve their odds of being the best contract without having to use the purchase price as their only tool.

Buyers should reconsider, rethink, and re-evaluate their “must have” features and amenities. It is probably unrealistic in a normal market to think you can have the perfect home at the price you want but in today’s market it is less possible. List the things you must have and the things you would like to have and prioritize them. Try to identify the critical from the convenient.

The next step is to put together your “home” team. You are the captain of this process, but it is essential to have a strong first officer and that is your real estate agent. This professional will oversee the process, advise you on current market conditions and normal procedures. Your agent will even help you assemble the rest of the team like mortgage officer, title, insurance, warranty, inspectors and can recommend service providers.

Your agent can advocate your cause personally to the listing agent by personally delivering the offer and expounding on your strong points to lobby your position. Obviously, your agent will not share anything that you do not expressly give them permission to.

Even before you write the offer, your agent can inquire with the listing agent about any preferences of the seller not mentioned in the listing agreement as well as to use the proper contract forms and addendums.

The following list of suggestions are provided for your consideration realizing that some may not be appropriate for your individual financial situation or comfort level.

  • Get pre-approved from a local lender and include documentation with offer to purchase.
  • Have lender phone and email listing agent to expound on pre-approval.
  • Increase the amount of earnest money.
  • Acknowledge flexibility on closing and occupancy dates.
  • Eliminate unnecessary contingencies.
  • Waive the appraisal and have proof of funds to meet the difference in the purchase price.
  • Avoid concessions like asking the seller to pay the buyer’s closing costs or points.
  • Avoid including personal property to go with the sale unless specified in listing agreement.
  • Purchase “as is” with right of quick inspection to cancel contract if condition is unacceptable.
  • Shorten time frames on necessary contingencies.
  • Attach proof of funds for down payment or full purchase price if cash.
  • Arrange bridge financing to be able to pay cash.
  • Buyer should pay their own normal closing costs.
  • Write a personal note to the seller explaining why you like and want their home. Some listing agents are advising sellers to not accept them due to potential discrimination liability.
  • Escalation clause … offer to pay $X,000 more than highest acceptable offer up to a limit.
  • If you physically sign the offer, use a contrasting color ink to add a personal touch. If using a digital contract, change the font and color to distinguish the signature.
  • Make your best offer first because they may not make a counteroffer.

When a new listing hits the market, it is commonplace for there to be a rush of interested buyers that result in multiple offers. It is prudent for you to research and consider which of these ideas you can implement before you find the home; it is much better to have more time to make these decisions, especially, if it involves a mortgage officer or an attorney.

Your real estate professional will be able to tell you if these suggestions are viable and may be able to offer additional recommendations. If you do not have an agent, contact me at or territo discuss a plan to craft your offer in the most favorable way possible.

How long do I have to keep this stuff?

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“How long do I have to keep this stuff?” is the usual question you ask yourself when feeling that you are running out of room for all this “paper” that may never be needed.

The paper receipt you get from your fast-food lunch may go directly into the trash. The prudent consumer may keep it to reconcile it with their monthly statement and then, trash it. The natural hierarchy with receipts and documents associated with purchases is that as the price or value goes up, the more important it is to keep them. The question becomes “but for how long?”

The following table will give you an indication on how long certain documents related to your home need to be kept according to best practices of tax professionals. IRS recommends that records are kept for three years from the date the taxpayer files their original return or two years from the date the tax was paid, whichever is later. There is no time limit in the case of fraud or failure to file a tax return.

Document Length of time to keep
Home Purchase/Sale Documents
Home purchase documents Duration of ownership + 3 years
Closing documents & statements Duration of ownership + 3 years
Deed to property Duration of ownership
Home warranty or service contract Until expiration
Community/Condo Association Covenants Duration of ownership
Receipts for capital improvements Duration of ownership + 3 years
Mortgage Payoff statements or Release of Lien Forever, in case proof is needed
Annual Tax Deductions
Property tax statement & cancelled check 3 years after IRS due date for return
Year-end mortgage statements 3 years after IRS due date for return
Federal tax returns 3 years after filing return or
2 years after paying tax, whichever is later
Insurance and Warranties
Home Inventory Keep current
Homeowners insurance policy Until the replacement is received
Service contracts and warranties Until warranty/service contract expiration
Home repair receipts Until warranty/service contract expiration

Going digital with your records can make them easy to keep as well as to find when you need them. Create a folder on your computer that automatically backs up to the cloud like Dropbox, Google Docs or OneDrive so that if something happens to your computer, you have them safely tucked away.

The main folder could be the address of your home with subfolders for purchase documents, capital improvements, warranties, etc.

When you receive statements that are already in digital format, simply move them to the correct folder and subfolder. If it is a paper format, scan it and save it in the proper folder so you will have it when you need it.

Rent your home tax free

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There is a little-known provision in the tax code that allows homeowners to rent their principal residence or second home for up to 14 days a year without having to recognize the income. In this situation, the taxpayer does not deduct the rental expenses associated with the income.

There is no restriction on how much you earn. If your first or second home is in a desirable area where people are looking for short-term rentals, it could provide a windfall to the homeowner.

In cities where any big sports championships are played, there could be a market for a temporary rental of a home. Events like PGA tournaments, college basketball tournaments, Bowl games, NFL playoffs and others can create a demand for this type of rental.

For instance, there are people in Augusta, Georgia who rent their homes during the Master’s Golf Tournament each year. There are not a lot of hotel rooms in the area relative to the number of people who usually attend in non-pandemic years and the homes can fetch a nice daily rate.

There can be confusion about the different types of properties and what constitutes a home. The intended use coupled with actual experience will usually determine the type of property.

There are four types of property. A principal residence is the home you live in. There is income property that you rent and do not live in. There is investment property that is primarily held for an increase in value. And, there is inventory, which is related to your business like homes that are built or purchased to be flipped.

A second home is one that is used for the primary enjoyment of the owner in addition to their principal residence. Taxpayers are allowed to deduct the mortgage interest and property taxes on a first and second home up to specific limits. A vacation home could be another name for a second home but more accurately, it is a rental property that has more than 14 days of personal use during the year. It becomes a hybrid.

You might want to check with your insurance agent to see if your current policy covers temporary rentals, including liability in case of an accident involving personal injury. This could affect your decision as to whether you want to consider the rental.

For more information, see IRS facts about renting out a residential property or consult your tax professional.

Before you pay cash for a home

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Before you pay cash for a home, ask yourself if there is a possibility, at some point in the future, you might put a mortgage on the home and would want to deduct the mortgage interest on your federal tax return.

Current federal tax law allows homeowners to deduct the interest on up to $750,000 in acquisition debt used to buy, build or improve a property. When a person pays cash for a home, the acquisition debt is zero. The only way to increase the acquisition debt is to make and finance the improvements to the home.

As with many IRS regulations, there are exceptions to this rule. If a mortgage is secured on the first or second home within 90 days of the purchase closing, the debt is considered acquisition debt. The interest on the funds used to purchase the home can be deducted on up to $750,000 of the mortgage balance.

Assuming a borrower has good credit, the ability to repay the loan and the home justifies the loan, lenders are willing to make mortgages for homeowners. It does not mean that the interest on the mortgage will be deductible.

Additional information can be found in Publication 936, Home Mortgage Interest Deduction, of the Internal Revenue Service at IRS.gov.

To deduct home mortgage interest, you must file Form 1040 or 1040-SR and itemize deductions on Schedule A. The mortgage must be secured debt on a qualified home in which you have an ownership interest. Interest on home equity loans is only deductible if the borrowed funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

If you answered yes or even maybe to the question first posed in this article, contact your tax professional to determine the best way to approach your individual situation. For more information, download the Homeowners Tax Guide.

Homeowner Equity and Wealth Accumulation

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National homeowner equity grew in the fourth quarter of 2020 by $1.5 Trillion or 16.2% year-over-year based on a CoreLogic analysis. The study was done on the six out of ten homeowners who have mortgages on their home.

The fourth quarter of 2020 also saw the number of mortgaged residential homes with negative equity decrease by 8% from the third quarter. Compared to the same quarter in 2019, negative equity decreased by 21%.

Equity is defined as the value of the home less the mortgage owed. Negative equity means that the homeowner’s debt is more than the value of the home. Appreciation is the dynamic that is moving homeowner’s equity to the positive position.

On a national basis, according to National Association of REALTORS®, annual price growth for the last ten years has been 6.4%. In the last five years, it has grown at 7.3% annually. According to the CoreLogic Home Price Index, home prices in December 2020 were up 9.2% from the year before.

Frank Nothaft, Chief Economist for CoreLogic, is quoted as saying “the amount of home equity for the average homeowner with a mortgage is more than $200,000.”

Equity in a home is a significant component of net worth. The latest Survey of Consumer Finances reports the median homeowner has 40 times the household wealth of a renter: $254,000 compared to $6,270. According to the 2019 Survey of Consumer Finances by First American, housing wealth was the single biggest contributor to the increase in net worth across all income groups.

The study also concluded that housing wealth represented nearly 75% of total assets of the lowest income households. For homeowners in the mid-range of income, it represented 50-65% of total assets and 34% of total assets for the highest income households.

Renters do not benefit from the appreciation of housing or the amortization of the mortgage which are significant contributors to home equity that results in net worth. Examine what a down payment can grow to in seven years with a Rent vs. Own.

Skip the Starter Home

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For generations, people have begun their homeowner experience with a “starter” home. Part of the logic may be that by beginning with a smaller home, they can learn what it takes to run the home and discover some of the unexpected costs that come along with it. A slightly longer view into the future could suggest a different strategy.

As of March 4, 2021, the average 30-year mortgage rate according to Freddie Mac was 3.02%; up .37% from the week of January 7th this year. At the same time, in 2020, the rate was 3.29% and in 2019, it was 4.41%. That is a difference of 28 and 139 basis points.

The principal and interest payment on a $300,000 mortgage would have been $236 higher two-years ago and $44 more one-year ago. Today’s low mortgage rates are saving buyers lots of interest especially when you factor in the median tenure for sellers is approximately ten years. Even though prices have increased over the last two years, some people may be able to afford more now with the lower rates.

Anticipating the future wants and needs now may present some opportunities for preparing for the inevitable. By purchasing a larger home today, a buyer can lock in today’s low rates and prices to allow themselves room to grow without the expenses of moving.

Each time you sell and purchase a home, there are expenses associated with each side of the transaction. Purchase costs could be 1.5 to 3% while sales expenses could easily be 2.5 times that much. These expenses lower the value of your equity.

Instead of looking at the low mortgage rates as generating a savings from the payment you might normally have to make, consider it an opportunity to purchase more home that will possibly meet your needs for a longer time while eliminating the cost of selling and purchasing in the transition.

Your Refund Could Open the Door

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One of the silver linings to filing your income tax return is finding out that you are going to receive a refund that could literally open the door to owning a home. If you happen to be one of these fortunate taxpayers, your next decision is what to do with it.

With the average tax refund near $3,000, it could be the ticket to buying a home sooner rather than later. Regardless of the size of your refund, it can be used toward the down payment or closing costs of the home.

Most people think it takes 10% or more down payment to purchase a home, but actually, it is much less because of several low down payment mortgages . There are VA and USDA mortgages that allow for no down payment for qualified buyers. FHA has a 3.5% down payment program and FNMA and Freddie Mac have 3% down payment mortgages for qualified creditors as well as 5% down programs.

Closing costs for originating new mortgages can easily range from two to three percent of the purchase price but most lenders will allow the seller to pay part or all of them based on the agreement in the sales contract. If you are using a VA or USDA loan, your refund could go toward paying the closing costs.

On a practical matter, if you are due a refund, have it deposited directly into your account. It is necessary to trace the source of the funds. Cashing a refund check and depositing the cash adds an unnecessary aging requirement.

Maybe you have the money saved for your down payment and closing costs but you have other debt that is keeping you from qualifying for a mortgage. The IRS refund could be used to pay down that debt. However, you need solid advice from a trusted mortgage professional before you do that.

While the average tax refund might not cover the down payment on the median price home, it certainly helps. Your refund could make it a simple as 1-2-3 to get into a home.

  1. Get the hard, cold facts for the homes and mortgages in your area and price range.
  2. Get pre-approved with a trusted mortgage professional.
  3. Start looking at homes.

Download the territo get started.

Transferring Property Prior to Death

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Sometimes, as people approach the inevitable, they start trying to get their things “in order”. They may even have a will, but they decide to transfer title to real estate prior to their death which could be an unnecessary expense for the would-be heir.

Generally, when property is passed through direction of a will, the heir will receive a stepped-up basis which means that the fair market value of the property at the time of death becomes the cost basis for the heir. If the property were sold for that fair market value, there would be no gain and no capital gains tax due.

However, if the property is gifted prior to death of the donor, along with the title to the property comes the cost basis of the property. The transfer of title does not trigger the capital gains tax but when the property is sold, the gain is calculated by subtracting the basis from the sales price leaving a capital gain subject to tax. In other words, the person receiving the gift does not get the stepped-up basis.

There certainly can be advantages to transferring the property prior to death. It completes the transfer without having to wait for the death and bypasses the probate process that might be required to settle the will. Another advantage to the donor may be to remove the property from the owner’s name which could lower the taxable estate.

Some owners may transfer title prior to death to qualify for Medicaid. The value of the asset may make them ineligible. It may trigger a Medicaid Transfer Penalty when the gift is made within five years and the basis of the property is less than fair market value.

Once a property is deeded to someone, the donor loses control of the asset and it cannot be reversed. Depending on the value of the estate, there could be gift or estate tax implications. As mentioned earlier, it may have capital gain tax consequences for the donor when they dispose of the property.

If the person receiving the gift has creditors or judgements, the gift becomes an asset subject to those creditors or judgements.

Even though the mechanics of transferring title to a property is simple, there are many things to consider for both the person giving the property and the one receiving it. Consult an attorney and tax professional to determine the best informed decision available. There could be other alternatives that would better serve your situation.