DEAR BENNY: My wife and I bought our first home in November of last year. We paid $600,000 for the house and put 20 percent down so the mortgage is for $480,000. I’ve heard that opening a line of credit on the house is a good idea in case of an emergency. Obviously our house hasn’t really appreciated since then, and I think we’ve put less than $1,000 towards the principal. Can we take out a line of credit based on the down payment because it’s technically equity? Or will the mortgage company laugh in our face? Thanks! –Chris
DEAR CHRIS: I certainly hope they won’t laugh in your face, but under your circumstances, I doubt that you will be able to obtain a home equity (HELOC) loan at the present time.
Yes, I absolutely believe that every homeowner should have a HELOC. It’s a line of credit that you use only when you are in need of money. You do not pay any interest or principal until you actually draw down on that line. To me, it’s a checkbook in my desk drawer for that rainy day.
Generally, banks will not give you a HELOC if you have only 20 percent equity in your house. In fact, in recent months, I have heard that some banks — concerned with declining real estate values — have been unilaterally restricting and lowering the amount that homeowners can borrow under their HELOC. While this may be completely legal (depending on the terms of the promissory note that you sign in favor of the bank), it is disturbing to me. Because I want that HELOC available for that rainy day, one such day is when my house starts to decrease in value while at the same time my adjustable-rate mortgage starts to increase and I cannot afford the monthly payments.
If your house did appreciate, however, by all means talk to some local banks and see what they are willing to offer.
DEAR BENNY: What is the tax consequence if a 1031 property (that was turned into a primary residence) is sold after only three years (not five)? Would the capital gains be prorated? –Patti
DEAR PATTI: According to accountants I have talked with, it is a failed exchange and there is no proration.
For many years, there was a loophole in the law. Let’s look at this example: You bought the property for $75,000 and it will now sell for $700,000. You could do a Starker (1031) exchange, rent the replacement property out for a year or two, and then actually move into the house and treat it as your principal residence. At the end of two more years, you sell the property and claim the up-to-$500,000 exclusion of gain.
Congress closed this loophole a few years ago. Now, if you engage in a 1031 exchange, while you can still move into it after a year or two (although I believe that the safe harbor is two years), you cannot claim the exclusion unless you actually owned the property for a full five years. You will have to pay the full capital gains tax, and because you obtained the property by way of an exchange, I suspect that the tax basis of your property is very low.
Discuss your specific situation with your own tax advisors.
DEAR BENNY: Do banks have to get signatures of both husband and wife if a loan is taken out on a primary residence they hold in title as joint tenants in order to secure it as collateral? –Sara
DEAR SARA: Yes, at the very least both husband and wife will have to sign the deed of trust.
Most lenders use deeds of trust, although it is my understanding that in a few states lenders still use mortgages. Although there are differences between a "mortgage" and a "deed of trust," for all practical purposes they accomplish the same purpose — namely to secure the lender.
Oversimplified, when you borrow money to buy a house, your lender will require that you sign two documents: a promissory note and a deed of trust.
The promissory note is the IOU: I (or we) promise to pay the lender according to the terms and conditions spelled out in that document. Depending on your financial situation, a lender may allow only one party to sign the note.
But both husband and wife must sign the trust document. Why? Because when you sign the deed of trust, you are deeding the property — in trust — to a trustee selected by your lender. The trust deed is recorded among the land records where the property is located. When you pay off the loan, the trustee will record a release of that trust.
However, if you become delinquent, the trustee has the power to sell the property at a foreclosure sale. Different states have different procedures as to how a foreclosure is conducted.
But, in order for the trustee to be able to sell the entire property, both husband and wife must give the power to sell to the trustee. If only the husband, for example, signed the deed of trust, the trustee does not have full title to sell.
So the simple answer is that in order to get that loan, all property owners must sign the deed of trust.
DEAR BENNY: My condo is a first-floor flat of a three-unit building, which sits next to a poorly maintained building containing rental units. Paint chips from the neglected rental building fall daily onto my back patio. I have sent letters repeatedly to the owner of the rental building requesting that the building be scraped and repainted but receive no response. The mess is a nuisance for me, but I’m concerned my inquisitive 2-year-old nephew who visits often may try to eat the paint chips, which may contain lead paint. Any advice on how to get a slumlord to fix up his property? –Greg
DEAR GREG: First, because the paint chips are falling onto your back patio — and because that patio is probably a limited common element in your condominium — I suggest that you try to get your condominium association board of directors involved to assist you.
To my knowledge, every city, county and municipality has a license and inspection office. You should take samples of the chips and send them (or better yet hand deliver them) to the head of that office, and file a formal complaint. You should contact your elected officials at the local and state level, and seek their assistance.
If all else fails, you will have to retain an attorney to file a suit against that neighbor for nuisance.
DEAR BENNY: We made our final mortgage payment in August 2007 and have since received a Satisfaction of Security Instrument. Is this all I need should I ever want to sell my home? Shouldn’t I have received a deed for my property? –Jennifer
DEAR JENNIFER: When you first obtained that mortgage, you signed a deed of trust, which technically conveyed your house — in trust — to a third party selected by the lender. This deed of trust was recorded among the land records in the county where the property is located.
Now that you have completely paid off the loan, that deed of trust must be released from the land records. From my experience, some lenders will actually record the release (called a satisfaction in some parts of the country), while others will merely send you the release documents in recordable form, but you have to record it.
I would contact your local Recorder of Deeds to make sure that the certificate of satisfaction has, in fact, been recorded against your property. I tell everyone who pays off their mortgage loan: "Don’t burn the mortgage document until it is released from land records."
You have the deed — or should have received it when you first bought the house. While it’s nice to have, the deed is a relatively unimportant piece of paper. When you go to sell, the person searching title for your buyer (called escrow in some parts of the western United States) will find your deed and hopefully the release document as well among the land records.
DEAR BENNY: My wife and I are gifting our son $15,000 for a down payment on a condominium in our community. This is his first venture in home ownership, and the property was purchased from HUD. The mortgage company is asking for a letter stating that we gave him the money as a gift and do not expect to be repaid. The form letter provided by the mortgage company requests our account numbers from the accounts where the funds originated. I feel uncomfortable providing this information. Is this request mandatory in order to secure the mortgage? –Frank
DEAR FRANK: The bank wants to make sure that you are, in fact, gifting your son the money and that it is not just a loan. The bank also wants to make sure that it is your money — and not from some other source, such as from your son’s credit card, or from an unsecured loan by a third party to your son.
Banks demand a lot of information — much of which I seriously doubt they ever read or review. However, banks are always concerned about getting audited by state and federal regulators, and thus they over-paper each and every transaction, just to cover themselves.
Unfortunately, I often have to tell clients that while I do not like these information requests, "If you (or your son) wants the loan, you have to comply with these requests."
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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