Filed under: Mortgage Question
Question: My partners and I just established an LLC partnership company. I’m hearing mixed information from banks regarding the types of mortgage loans available to us under the LLC for the purchase of non-owner occupied rental property (1-4 family).
My questin is this…
Do we have the same 30 year, fixed interest rate mortgage options available to us under the LLC as we did as private, individual purchasers or have the rules changed under the umbrella of the LLC? If they’ve changed, how so (i.e. what are the standard lending option/terms under an LLC)?
Answer: For purposes of liability protection could you do the following: 1. Buy the property as and Individual 2. Lease the property to you own LLC for managment and actually use? – Guarantee that your LLC will pay the expenses incurred personally for ownership of the property? Most securitized/conduit loans ($3,000,000+) MUST BE in single purpose/asset entity and the LLC is the entity of choice. Therefor, every asset/property is in an LLC and there is absolutely no difference in the rate or term of the loan because of the entity/borrower. Carry the mortgage in your name. The LLC pays the bills. Quitclaim the deed to a land trust. Make the LLC the beneficiary of the land trust. Make yourself (for some definition of “self”) the trustee. Do the paperwork with the mortgage company if you wish.
Re-quitclaim the deed back to yourself to refinance, if necessary.
Obtain a banker who understands your needs and is willing to work with you. Mine is quite up-front with me that as long as 75% of the rent covers the PITI, I can write as many mortgages as I want at not much more interest rate than owner-occupied.
I don’t buy properties that don’t meet those criteria during year one.
January 1, 1970
Question: If I hold a 2nd mortgage and bank has first mortgage, and if the borrower fails to my 2nd mortgage but may still pays first mortgage, what recourse can I do?? Thanks in advance.
Answer: You foreclose the mortgage. Once you have a judgment, the clerk of the court will schedule the property to be sold to pay the judgment. Keep in mind that it will be sold subject to the first mortgage. In other words, whoever is the successful bidder will still be responsible to pay the first mortgage. However, if the first mortgage is for $100K and the second is for $25K, and it sells on the courthouse steps for $15K, you just took a $10K beating. Hopefully the property is worth in excess of the two mortgages. the house is sold with the first mortgage for $15K. In other words the buyer is paying $115K for the house, $100K payable to the owner of the first mortgage (payable in monthly payments as it was before the transaction) and $15K to the owner of the second mortgage.
January 1, 1970
Question: My wife and I have excellent credit though we ran up too much early in our marriage. We were “tricked” into a 2nd mortgage loan to pay those credit cards. Now, we have two loans. We’ve been in our house for 4 years and now, with the interest rates low, we want to look into a newer home.
My question is: can we move if we have a 2nd mortgage loan? Can’t it be “transferred” to the new home? Suggestions?!?!
Thanks,
Answer: If you buy a new home, you will most likely be contingent on selling your current home. When you sell your current home, you will go to a closing meeting where everything is settled. The money that the buyer pays goes into your “pot”. Then the 1st mortgage is payed off from the pot. Then the 2nd mortgage is payed off. Then the closing costs are payed off. You get what is left.
This all works great as long as you sell your house for an ammount that is greater than the sum of the first and second mortgage plus closing costs. That is why it is best to put 20% down, to ensure that you will be right side up if you are forced to sell early.
I bet you have this problem…did you take out a 125% LTV loan? Or borrow up to the full value of your house? If so, you are screwed. You likely would not even be able to refinance to a better rate until you are down under 90% loan to value on the house. The solution is to work hard, cut your spending, and pay down that 2nd before it sucks you dry. Wife inherits the house and the mortgage that goes with it. As long as she makes the payment, the bank is happy. If she cannot make the payment, the loan would likely go into default and the bank would “strongly suggest” that she refinance it with a new lender; or sell the house, pay off the mortgage, and pocket whatever might be left. Now you know why people buy life insurance; otherwise their widow is stuck with a huge house payment she can’t manage.
January 1, 1970
Question: I need to learn more about the matter of “releasing” an appraisal. I’m in the process of re-financing my condo. I started with one mortgage broker, and paid an appraiser directly to prepare an appraisal. Then I found a new mortgage broker with a better deal, and had my appraiser prepare a copy of the appraisal for the new broker. Now I’ve found a third (and final) loan provider for whom I’d like to get a copy of the appraisal. My appraiser says he will not prepare one until I get a “release” from each of the two earlier mortgage brokers. I’m trying to work with all three loan brokers simultaneously to improve my chances of actually getting a loan. I’m a difficult borrower and previous loans have had all sorts of last-minute problems – this time I’m trying to avoid that situation by keeping my options open. Is what I’m doing illegal (as advised by my appraiser)?
Answer: How much of a difference is there between these loans? Do all your loan brokers know that you are dealing with three brokers at once? Besides the obvious, what do you mean by “I’m a difficult borrower.”
If you are willing to pay for the appraisal to be redrafted, the broker should have no problem signing the release, however you are putting him in a situation of liability should that appraisal be used for purposes other than obtaining a mortgage loan i.e. solicitors etc.
What type of loan are you looking for, and what are the three offers? Are any of them in writing? It shouldn’t be that hard to get you a “stated income” loan with good credit at 80% loan to value…..you should be around 7.5% and no points with an APR around 7.8% fixed.
I cannot understand why you would need three brokers at the same time. Do you feel compelled to get three bids on any service that you buy? Remember, rates are a moving target like the stock market. You eventually have to “lock” a rate, and take what you get at that point. It is highly unlikely you will get the absolute rock bottom of the market no matter how hard you try, just like stock purchases.
As for the appraiser, he came to you on the recommendation of the broker, and although you paid for it, the broker has to release it. You have a right to a copy of it. There are numerous reasons for this, liability is one.
Let me know if I can be of further assistance.
January 1, 1970
Question: I am planning to buy a home for my parents to live in. I have no intentions of living there nor do I intend to collect any rent on the property. Will I be able to get a home mortgage for this or will it be considered investment real-estate?
I live in MA and the future home is in Ohio. What kind of taxes am I setting myself up for? Will MA charge me property taxes on something in Ohio?
I have read several tax books but nothing obvious addressed this issue. The property is not rental property nor is it commercial property. Apparantly no one buys a house that they do not intend to live in nor rent. If it is not a second home then I believe that it must be residential property.
Are there any special tax deductions with this sort of arrangement? For me it will be a net loss— if it were not for my parents, I would not even consider such a purchase.
Would I be ahead tax wise to consider it as rental property and take a net loss because I did not rent it?
Answer: 1) It can be treated as a second residence as long as it is not rented or used for other business purposes during the year. It sounds like you could deduct the interest as home mortgage interest.
2) If it is not rental property, you cannot take a rental loss. This happens a lot here in Florida: children purchasing homes in which their parents will live. We are able to routinely secure loans for these properties as second homes. You wouldn’t even need to state that anyone is going to live in the house. Find a good mortgage broker in Ohio and hash it out. I assume that you are asking the tax question, “Does this qualify for the home mortgage interest deduction?” and not the banking question “Will I qualify for a residential mortgage _rate_?” As to the tax question, if you own any dwelling and do not rent it out at any time during the year, it is generally considered to be a “residence” for purposes of the qualified residence interest deduction. In any given tax year, you can choose one such residence, in addition to your principal residence, to treat as a “qualified residence” eligible for the deduction (though there is a glitch if you are married filing separately). Massachusetts itself does not levy any property taxes on individuals — you pay your property taxes to your locality. In any event, neither the commonwealth nor your city or town will charge you property taxes on out-of-state realty. You will be liable for whatever real property taxes are charged wherever the house is in Ohio.
If you charged rent on the property, and had a net income from it, both Ohio and Massachusetts would tax you on that income, although you would get a credit on your Massachusetts return for some or all of the Ohio income tax paid.
Finally, if and when you _sell_ the property, both Ohio and Massachusetts (if you still live in Massachusetts) may want to tax you on the capital gain. Again, though, you get a credit to your Massachusetts taxes that should prevent double taxation.
January 1, 1970
Question: Here is a simple question, which does necessarily have a simple answer. Let’s say I plan to buy a house in a year and I know (ok, I speculate ) the interest rate will rise. Is there anything I can do to get a mortgage rate of the current level a year later?
There are probably more ways to bet on interest rates than I care to know about. What I am hoping for is something similar to sell short against the box to lock in profit at year’s end, which simple to do and understand.
Your help is appreciated.
Answer: that is theoretically possible but potentially expensive. You can do T-bond or 10-year note futures in increments of 50K, if you count the Mid-Am “mini” – 100K on the CBOT more typical. You would go short, and use any money you made as bond prices dropped (rates rose) to pay discount points on your mortgage, if the lender is willing to take enough points cash to get you to the rate you want (there may be a limit to how low a rate they would extend, I don’t know).
Problem is if rates DROP, you have to pony up LOTS of cash, like say $10,000, for the privilege of your hedge, unless you use some kind of system to trade in and out, using a hedge only when you think rates are really rising. But that’s the whole game, isn’t it.
You can use futures options, pay a fixed amount (and no more) to create a similar hedge, but the option seller will want a lot of premium for taking a full year of risk at prevailing rates or even slightly higher rates. You’d buy a Dec. ‘95 or Mar. ‘96 put for each 100K, assuming the pit will do an option at that duration. Strike price maybe 96? 94? 92 would be cheaper but you’re talking more like a “cap” rate about 50 or so basis points up (someone help me out here on the math).
Wish it were easier–you’re better off just crossing your fingers, if you have 10K to risk you can use that to increase your down payment, and plan to refi next rate cycle (probably will be a recession or worse in 96/97, right?).
January 1, 1970
Question: I need some advice on purchasing a multi-family home in NY with an associate, sharing equal title ownership.
What I would like is for my share to be paying the down payment, about 30%, and have the other party pay the remaining 70% (mostly with a mortgage).
To balance this, the other party would be responsible for collecting and handling all the rental income.
Once the home is paid off, I would like the rental income to be shared 50/50.
Is this done, is it common, is it even possible? Is a contract necessary?
Answer: Definitely necessary. You need to specify such things as:
- one person wants to buy the other out. How is this handled? Be careful with ’shotgun’ clauses!
- one person wants out. What if the mortgage is still too large for the remaining person to assume alone?
- one person dies, or is otherwise unable to perform his contracted tasks. What happens then?
- one person declares bankruptcy. Can the other be held in some way financially liable?
I’m sure there are other possible scenarios. A brief chat with a laywer might be in order… 1) what happens if it becomes necessary to sell the property *before* the mortgage is paid off — how do you determine how much equity each owner has? Don’t think this is possible? Look up the government’s power of “eminent domain” — you don’t necessarily have any choice. 2) What happens if one party *dies*? The ‘estate’ has different priorities than the living person did. 3) Who is responsible if expenses are higher than income? Suppose tenants move out, and you can’t replace them _immediately_. 4) suppose there are _large_ unexpected expenses, who pays? A “normal wear-and-tear issue” that is not covered by insurance. Like the furnace dies in the middle of the winter. Or lead-based paint is discovered on the walls. Or the electrical wiring is discovered to be ‘deficient’ to code requirements. Or a termite infestation is discovered. Or, or, or..
What if a tornado, or similar ‘natural disaster’, renders the place ‘unlivable’, until it is rebuilt. Yes, you have “insurance” that covers the cost of the re-building, but _what_about_ the expenses (like the mortgage) that are *still* running, even though there is no income to pay them?
January 1, 1970
Question: Hey all, was wondering if someone could share some advice for a first time buyer. I am getting a house with a 80/15/5 loan. The 15% loan has a very high interest rate. I’m thinking about getting a loan from another bank for the amount of the 15%, paying off the first lender, and thereby reducing my monthly payments due to the smaller interest rate. The lender’s rate for the 15% is 8.45 on a 15 yr balloon payment. Could I go to another bank and borrow the amount for the 15% at 6.3% and pay the first lender off? Is there some sort of catch I’m missing?
Answer: What makes you think you can get a better deal on a second mortgage from another bank? If you’re talking about a loan secured by something other than the home then maybe, but you’re probably not going to save much in any case. Also, beware of the prepayment penalty — your second (and possibly first) mortgage may have penalties for early payment. I may be missing something because a rate of 6.3% as of 28 June 06 is between 7.5% and 17% for either a HELOC or cash out 2nd mortgage AND the rate does depend on credit, loan to value and assets. For someone to get 6.3% on a 2nd or HELOC would mean paying a high discount rate of at least 5% or thereabouts.
It sounds like you have not purchased yet, to go to another bank and get funds to close will put in possibly, a perilous position as to your debt ratio. 8.45% for a 2nd mortgage is NOT high at all, then again pending on ones perspective. Being a first time home buyer I can understand the reason you believe it is high. Yet the days of 5.75% first mortgages are gone, for now at least, and comprable 2nds at 6.25% are as well.
Good luck
January 1, 1970
Question: A friend has a question — Does mortgage reports your mortgage application info to tax department?
Answer: It’s an interesting question. Even if they didn’t “report” it, the tax people could watch for liens filed on property and toss it all into one big database bucket. I dunno what they would get from that, though. I don’t know the answer, but I can think of a another questions 
Is the mortgage issuer *required* by law to get your SIN number on the application? If so, then it’s probably being reported. I don’t think the tax man looks at mortgages but he does look at real estate transactions. Those must be reported, the city must know who owns property so it can collect property taxes. Federal and provincial tax auditors look at real estate transactions. If you declare earnings of $30k per year and buy a property of $2M, you should expect the tax man to open a file with your name on it.
January 1, 1970
Question: I can’t get the same answer on this, maybe someone here can help?
We have a second property (cabin) that we purchased for $175,000. There is no mortgage, it is free & clear.
We sold it for $370,000 in California. Our net will be about $345,000. We plan on purchasing a home as a rental for $150,000. If we do a 1021 Exchange, how do we calculate the capital gains tax.
We actually do owe $100,000 on it to my mother, but it is unsecured, i.e. the property was deeded to us.
Answer: The answer is quite simple. You sold it. There can be no 1031 exchange now. Even had you not sold the property your description (cabin deeded from your mother) implies the property is a vacation or second home, in which case it is personal use property and therefore not eligible for 1031 exchange treatment. In order to satisfy the IRS rules, you must declare a 1031 before a sale contract is in force, either in a MLS listing or at the very least in the contract itself. But unless the property was a rental, you can’t do an exchange anyway. First, if the sale has already happened, no need to look further — any potential 1031 exchange is blown. For a 1031 to be a possibility, the “sale” has to take place via a qualified intermediary. Once the funds get in your hands, it’s over.
Second, you have to exchange business/rental property for same. If the house you sold was just a 2nd house that wasn’t in business/rental use, you can’t do the exchange — 1031 doesn’t apply to personal property.
January 1, 1970
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