Mortgage Definitions: Servicing

Many times there is confusion when buying a home of whom you will pay in the end. The use of a broker is very common and when we use a broker to help us obtain a mortgage our loan is sold. The broker may obtain the loan for you through Acme wholesale and Acme will promptly sell that debt to an investor. That investor may or may not service the loan. They may have someone else service the loan. So what is Servicing?

Servicing – The collection of mortgage payments from borrowers and related responsibilities of a loan servicer.

If you are like me that leaves me asking the question then what is a servicer?

Servicer – An organization that collects principal and interest payments from borrowers and manages borrowers’ escrow accounts. The servicer often services mortgages that have been purchased by an investor in the secondary mortgage market.

So in the most layman’s term possible servicing and a servicer is the debt collector. This is where you will send your payment and all correspondence about that payment will be made directly through this company.

Don’t Go Assuming Nothing. Or Maybe you Should? Mortgage Definitions: Assumption

As the series on Mortgage Definitions continues we are going to take a look at Assumption. In most cases the root word assume can bring a negative connotation. For Example: “Honey, I assumed you were going to pick up our son from practice.” Another could be “I was under the assumption Michael was going to block the defensive end.” Either case the word is most commonly used in a way that we do not perceive to be a benefit. 

Assumption - The act of taking to or upon oneself – One of many of the definitions in Merriam-Webster pertains to the assumption of a new obligation. 

In the world of Mortgage Government loans are in many cases assumable. Hud defines an Assumable Mortgage in their Mortgage Glossary well. In short a mortgage that may be assumed simply means that the buyer can take over the mortgage of the seller under the same terms and the same balances. The buyer will have to credit qualify for the mortgage and there may be a small fee but this can be very attractive. 

Example: The seller of a property has an FHA loan which can be assumed at the rate of 4.875%. Rates at the time of the sale of the property are around 7.5%. The seller may advertise that they have an assumable first note at 4.875% making the home more affordable for any potential buyers. The buyer will still have to get a second mortgage for the remainder of what he does not have as a down payment. 

Example: Seller is selling the property for 200K and has a first mortgage for 140K at 4.875%. The buyer will either have to put 60K down or get a second mortgage . Since 100% financing is no longer a viable source and seconds are hard to come by the best case is the buyer has the money down. 

The Assumption Clause  is the provision written in the note that allows the assumption to take place. 

If you are wondering whether or not your loan is assumable check for the assumption clause in the note or contact your Mortgage Professional and they can help you. 

Assumption is another reason amongst many that I think that FHA in most cases is better than a conventional loan. It provides a unique selling proposition that the Conventional Mortgage cannot provide.

 

Eliminating Capital Gain on Real Estate Owned by Married Couples: A Simple, Yet Critical Strategy By Brian Qualls, Esq.

 

California Home Strategies is happy to bring you the first in our series of featured business partners. Brian Qualls, Esq. is an attorney who specializes in Estate Planning. What he has brought to California home strategies is invaluable information. Enjoy the first in the series of many great guests to come.

How do you hold title to your home? Odds are, if you are married and purchased real estate with your spouse, you elected to hold the property as Joint Tenants. This has been the common practice recommended by many real estate agents, lenders, and attorneys for quite some time. The advantage to holding property in Joint Tenancy is that when the first spouse passes away, the deceased spouse’s one-half interest in the property automatically passes to the surviving spouse with little to no transfer cost. Provided that such a transfer of ownership was the couples’ objective upon the first spouse’s death, holding property as Joint Tenants seems like a no brainer.

Here’s the downside: If you hold real estate in Joint Tenancy with your spouse, you are missing out on significant tax benefits that are available under another method of holding title (which has all of the benefits of Joint Tenancy discussed above) that we’ll discuss in just a moment. First however, we need to understand the basics of calculating capital gain for tax purposes under the traditional Joint Tenancy method. Here’s how it works … when the first spouse passes away, the surviving spouse receives a “step up” in cost basis equal to 50% of the market value of the property at the time of the first spouse’s death (cost basis is, essentially, what you paid to purchase the property). The remaining 50% of the property retains the surviving spouse’s original basis. This concept is best illustrated through an example:

Max and Marge bought a house and took title as Joint Tenants. They paid $200,000 for the home (their cost basis for the purposes of calculating capital gain is therefore $200,000). Thirty years later, Max passes away. At the time of Max’s death, the property has increased in value to $1,150,000 (this assumes an annual appreciation of 6% over a 30 year period). Since Marge gets a “step up” in cost basis to 50% of that amount ($575,000), her new cost basis is $775,000 (her initial basis of $200,000 + Max’s stepped up basis of $575,000). Assuming that Marge chooses to downsize and sell the family home immediately, she will have capital gain in the amount of $375,000 ($1,150,000 sales price – her new $775,000 cost basis). At best (assuming Marge had lived in the home for 2 out of the last 5 years), she will have $250,000 of that $375,000 exempt from capital gains tax. But she’s still left subject to capital gains tax on $125,000 when she sells. This will result in a pretty hefty tax bill.

Fortunately, there is a better option. Since July 1, 2001, married couples have been able to take title to real estate as Community Property with Right of Survivorship. The “Community Property” designation will entitle the surviving spouse to a “double step up” in cost basis equal to 100% of the market value of the property at the time of the first spouse’s death. Therefore, in the example above, Marge’s new cost basis will be the full market value of $1,150,000, and she will be able to sell the property for zero capital gain. Moreover, if she chooses to remain in the residence (or even rent it out for a few years), she will still be able to rack up an additional $250,000 in appreciation and sell it tax free down the line.

It is important to note the significance adding the of the “with Right of Survivorship” language to the Community Property designation. That is what enables the surviving spouse to automatically inherit the deceased spouse’s one-half interest in the property with little to no transfer cost (the same benefit of Joint Tenancy that is often so appealing to married couples). If the property were only taken as Community Property without the “with Right of Survivorship” language, a court process would be required to transfer the deceased spouse’s one-half interest over to the surviving spouse. Therefore, if the couples’ objective is for the survivor to receive full ownership and control over property, opting for the “with Right of Survivorship” designation makes perfect sense.

If you are buying a new home or refinancing and would like to take advantage of taking title as Community Property with Right of Survivorship, it is as simple as checking the appropriate box in your closing documents. If you already own a home in Joint Tenancy and would like to change how you hold title, no problem. You can simply sign a new deed transferring your property from yourselves as Joint Tenants, to yourselves as Community Property with Right of Survivorship. Ask your title company or a competent attorney to assist you.

 

About the Author:

 

Brian Qualls is an estate planning and trust attorney who assists families throughout California in protecting their loved ones (and their hard earned assets) through well designed estate plans that work. He firmly believes that everyone should at least have a basic plan in place, and therefore guarantees that every client who consults with his firm will walk away equipped with a simple will, power of attorney for finances, and advance health care directive for a nominal consultation fee. The fee itself is refundable at the end of the consultation in the event the client is not fully satisfied with the experience. If more comprehensive planning is requested by the client, the consultation fee is applied accordingly. Brian can be reached by email at

Brian@BrianQualls.net, and his educational blog is available for the public at www.PlanYourEstate.net.

 

Wow that was Easy! FHA Streamline Refinance designed specifically for the consumer.

 

 

 

 

 

 

 

 

 

 

Confused Homeowner

 

Dear Confused Homeowner,

 First of all you are not alone. The FHA Streamline is a terrific loan and it is rather simple. Contrary to the media reports on lending. The FHA Streamline is designed to be simple and low cost. Many times the cost to close is simply the amount of the mortgage payment you would have made. Instead of paying your mortgage to your servicer you make that payment to the Escrow Company at close. Wholesalers have reduced their fees on these transactions and the many escrow companies have compatible rate programs. As is the case with every loan program each wholesaler has their own overlays or qualifications if you will. It is common to see a 620 credit score minimum, some require employment and others do not, no income and no assets are many times the case. Consult your professional to speak directly about your situation.

How the loan is set up and how the loan amount is determined is based on how long you have had your current mortgage. Based on the time that you have had the loan you receive a refund on the last upfront mortgage insurance premium you financed or paid for. For example: If you have had the loan 6 months you will receive 70% of the amount you paid. If you financed $3500 in upfront mortgage insurance premium you will be refunded $2450 applied to the payoff or closing costs. You will then have a new upfront mortgage insurance premium of 1.5% of the new base loan amount. There are a few ways to calculate your new base loan amount based on how long you have been in the current mortgage as well.

Here is a grid of the Upfront Mortgage Insurance Refund:

 

Upfront Mortgage Insurance Premium Refund Percentages
	Month of Year
Year	1	2	3	4	5	6	7	8	9	10	11	12
1	80	78	76	74	72	70	68	66	64	62	60	58
2	56	54	52	50	48	46	44	42	40	38	36	34
3	32	30	28	26	24	22	20	18	16	14	12	10

 

 

The bottom line is if you have an FHA Insured Mortgage currently and your rate is 6% or higher than it would be to your benefit to give your Mortgage Professional a call.

Matt Freeman