My husband and I have been married for 25 years. We do not have children together, but he has children from a previous marriage.
We are retired now, and he bought property in Florida for us to live in. My name is not on the deed of the property, and he has not made a will yet. I keep complaining to him about it.
If he should die without a will, will his adult children and grandchildren be entitled to the property and house? Hopefully, you will be able to answer this question and set my mind at ease.
Your husband appears to have control issues at worst or, at best, problems with being direct and transparent. This is not the way to deal with a family property, especially after 25 years of marriage. If your husband wants his children to inherit his estate when he is gone, he should discuss it with you like a man (or woman), face to face, and you should outline a plan for your future together. But this game of cat and mouse, where he makes unilateral decisions about your future, is not a respectful or helpful way to conduct a 25-year marriage.
Not knowing if you’re going to have a place to live after your husband dies, assuming he predeceases you, creates a constant feeling of unease. The whole point of saving for retirement and being fortunate enough to retire comfortably is that you can see out your final years together with the knowledge that you will both be financially secure. Only one person in this relationship knows what that feels like — and, given that you have raised this issue with him, he is aware that you do not enjoy that same peace of mind.
Florida is an equitable distribution state and, for the most part, divides property 50/50. Here’s the legal interpretation from Schnauss Naugle Law in Jacksonville, Fla.: “If the decedent’s homestead property was titled in the decedent’s name alone, and if the decedent was survived by a spouse and descendants, the surviving spouse will have the use of the homestead property for his or her lifetime only (or a life estate), with the decedent’s descendants to receive the decedents’ homestead property only after the surviving spouse dies.”
You will have the right to live in this property for the remainder of your life. If you divorce, however, anything purchased during your marriage is considered marital property, and even though this home was purchased in your husband’s name only, it would be divided 50/50. In Florida, “equitable distribution” is mostly treated as “equal distribution.” According to this interpretation of family law in Florida by Arwani Law: “Even if he purchases the car with his own money and puts the car title in his wife’s name, it is still considered marital property.”
And as most lawyers will tell you, a lack of communication is one way of buying a ticket to divorce.
With the COVID-19 pandemic still going strong, many city dwellers may be considering a move to the country—and there’s a specific type of mortgage that can help make this a reality, called a USDA loan.
Offered by the U.S. Department of Agriculture and backed by the agency’s Rural Development Guaranteed Housing Loan Program, these mortgages are designed to help buyers with moderate or low income purchase property outside cities.
They accomplish this by offering several key benefits—such as low or no down payments and looser qualifications for income and credit history.
“More people should absolutely consider using USDA loans to finance their homes,” says Jan Hadder, regional vice president of the builder division at Silverton Mortgage in Columbia, SC. “If you’re not living in the city, this can be a great option to finance your home.”
USDA loans could be a boon to the wave of buyers who are currently contemplating fleeing cities right now.
As it happens, searches for homes in rural ZIP codes jumped more than 15% this May, compared with a year ago, according to realtor.com® data.
Yet many Americans aren’t aware of USDA loans, or assume that they don’t qualify. They may also have other assumptions about these mortgages that aren’t true or in step with recent changes in the terms.
If you want to avoid overlooking this hidden financing gem, here are a few things to know about USDA loans today.
You don’t have to buy a house in the boonies
The biggest misconception about USDA loans is that you have to live in the middle of nowhere.
In reality, homes qualify as long as they’re located outside a metropolitan area. In fact, communities with populations of up to 35,000 may be fine. The USDA offers an online map where you can search for properties that are eligible for the loans.
Matt Ronne, a loan originator at Motto Mortgage Preferred Brokers in Athens, TN, says USDA loans are a “vital asset” to home buyers in his area of southeastern Tennessee.
“It has been a high-demand product,” he says. “My county, McMinn, and most of the surrounding counties are 100% eligible for this type of financing, as long as those clients meet the credit, income, and property requirements.”
You don’t have to be destitute—and income limits recently increased
“Many people think that the USDA loans are meant to be subsidized housing, or that they are only intended for use by those with very low income,” says Gwen Chambers, a mortgage loan originator at Motto Mortgage Superior in Germantown, TN.
But that’s not the case. There are actually two types of USDA loans. Direct housing loans are for low-income individuals; guaranteed loans are designed for moderate-income buyers.
The USDA recently increased its income limits for loans, allowing more home buyers to be eligible. In most locations, the income limit for households with one to four people is $90,300, and $119,200 for households of five to eight people.
USDA loans are easier to get than ever
The income limits have been raised, Hadder says, and some elements of the application process for certain USDA loans have been relaxed.
For example, in response to COVID-19, the period for which certificates of eligibility are valid has been extended for some borrowers, and some parts of the application process will be streamlined, including credit reviews and loan processing.
Although the specifications vary by lender, borrowers typically need a minimum credit score of 640, whereas conventional home loans often require a credit score of 700 or higher.
“These new loan changes are designed to make it easier for a borrower to qualify for a USDA loan,” Hadder says.
Because certain parts of the application process will be waived or relaxed, she says, “borrowers will hopefully have a better chance of getting approved.”
“USDA only allows a borrower to own one property at a time, so using the USDA loan program allows for additional purchases in the future, as long as the current home is sold, or will be sold prior to closing on the new one,” he says.
As long as buyers continue to qualify, they can use the USDA program as many times as they want, Chambers says.
USDA loans have great interest rates
Mortgage interest rates for traditional loans have dropped to record lows in recent months, and now hover around 3%. The rates for USDA loans, however, are even lower.
“The rates on USDA loans are often very competitive, and the fees are relatively low,” Chambers says. “In my community, consumers often find USDA loans to be their go-to loan of choice.”
USDA loans carry few added costs
In addition to low interest rates, USDA loans offer families the opportunity to own a home with few out-of-pocket expenses, like closing costs.
In addition, certain USDA loans offer 100% financing with no down payment, welcome news in today’s uncertain economy.
“Now, more than ever, because of the potential instability in the workforce over COVID-19 and possible future furloughs, layoffs, and cutbacks, having money in the bank to fall back on in case of emergencies has never been more important,” Ronne says.
“Personally, as a mortgage broker, I never want to see a buyer exhaust their savings for a down payment when they may not have to, especially a first-time home buyer,” he says.
More investment in rural communities benefits homeowners
When I got my first apartment after college, I needed my mom to co-sign my lease.
The landlord required proof that I made three times the rent, but since I wasn’t making nearly enough, I called Mom to sign on that second dotted line.
Then, in my mid-20s, when I bought my first condo, I needed a co-signer again. Once again, my mom was there for me.
Now I’m almost 30, married, and expecting our first child. Both my husband and I are gainfully employed and have good credit histories, so you’d think we wouldn’t need any parent co-signing for us to rent a home! But alas, we’d recently moved to New York City, where rents were so high, snagging a half-way decent apartment would require Mom to co-sign once again.
What’s going on? Would I need my mother to co-sign forever?
Of course, I feel lucky to have a parent who’s so supportive. But I can’t help but think that there’s something wrong with me, where I was choosing to live, or perhaps the housing system in general.
So, I started looking into why co-signing is so often required, even in cases where it seems unnecessary. Here’s what I learned, and some words of wisdom from experts that could help you get through the inconvenient (and embarrassing) cycle.
Why co-signers are required
What bothered me most about needing a co-signer was that I felt like I wasn’t being taken seriously as a tenant. I had a good job and a college degree, why couldn’t I be trusted to pay my rent?
As it turns out, many people face this problem.
While landlords may have differing requirements, the industry standard is that your take-home income must be three times what you pay in rent. So if you make $3,000 a month, your monthly rent should not exceed $1,000.
But is this realistic with today’s runaway rent prices?
For instance, in 2013, as a fresh college graduate, I paid $1,600 a month for a one-bedroom, third-floor walk-up in Los Angeles. So based on the three-times rule, I should have been earning $4,800 a month, or $57,600 a year.
A salary that size was an unattainable dream for me right out of college. Even though I had a great sales job and a minimum-wage side hustle, I was making only about twice the annual rent, or $40,000.
And I was one of the lucky ones. The minimum wage in California is $12 an hour, but in 2013 it was $8. To afford a monthly rent of $1,600 in 2013, a minimum-wage worker would have needed to put in 150 hours a week.
Is the three-times rent rule realistic?
Because I needed a co-signer, I couldn’t help but wonder about the three-times rent rule, and the reason for it. Did this mean I’d overextended myself?
As it turns out, I had no reason for worry. With a monthly rent of $1,600, I had another $1,600 left for other expenses, and it was more than enough.
So I started wondering: If twice my income worked just fine for my bills, why do landlords want proof that renters make three times their rent?
“The exact origins of the three-times rule is unknown,” says Michael Dinich of Your Money Geek. Nonetheless, this rule has remained the industry standard—for renters and home buyers alike.
“Mortgage lenders have often used the guideline that housing costs should be no more than 30% of income,” Dinich says. “The three-times rule is likely a handy approximation based on those old guidelines.”
This guideline may even contribute to younger generations’ low rates of homeownership.
“The income of many people, particularly younger adults, has not kept up with home prices in many areas,” says Andrew Lantham, managing editor of Super Money. “This is why millennials have lower homeownership rates than previous generations.”
Plus, experts say that most landlords (even the nice ones) don’t necessarily care if people aren’t making as much money as they used to. They care more about finding a renter who will be able to pay their rent on time. And if that means sticking to the tried-and-true method of renting to those who can prove they have plenty of income to spare, or can at least get a co-signer, they’ll do it.
How I pay my rent without a co-signer today
While it’s tough for young renters and home buyers almost everywhere to cover their housing costs, it’s even worse in New York City.
Sure, my mom agreed to co-sign the lease, as always. Yet with a baby on the way, my husband and I decided that, rather than taking my mom up on her kind offer, I’d try to find an apartment with a rent that fell comfortably within the three-times rule.
We started crossing things off our wish list. We moved our search from Manhattan to Brooklyn. We stopped looking at homes near subway stations and cute cafes and started touring apartments that were a bit farther out. In the end, we found a studio we liked, and the low rent didn’t require a co-signer.
These days, things are changing so fast, it’s tough to keep up. That’s especially true in the mortgage industry, where interest rates and the overall home loan landscape are shifting with such head-spinning speed, it’s easy for outdated information to circulate, leading home buyers and homeowners astray.
You may have heard, for instance, that everyone can score a record-low interest rate, or that refinancing is a no-brainer, or that mortgage forbearance means you don’t have to pay back your loan, ever. Sorry, but none of these rumors is true—and falling for them could cost you dearly.
To help home buyers and homeowners separate fact from fiction, we asked experts to highlight some rampant mortgage mistruths out there today. Whether you’re looking to buy or refinance, these are some reality checks you’ll be glad to know.
Myth No. 1: Everyone qualifies for low interest rates
Your credit score isn’t the only factor affecting what interest rate you get. It also depends on the size of your down payment, type of home, type of loan, and much more. So, keep your expectations in check, and make sure to shop around to increase the odds you’ll get a good rate.
Myth No. 2: Getting a mortgage today is easy
Many assume today’s low interest rates mean that getting a mortgage will be a breeze. On the contrary, these low rates mean just about everyone is trying to get a mortgage, or refinance the one they have. This glut of applicants, combined with the uncertain economy, means some lenders may actually tighten loan requirements.
In fact, a realtor.com analysis found that 5% to 20% of potential borrowers may struggle to get a mortgage because of these stricter standards. And getting a mortgage could become even tougher if the recession gets worse.
For example, some lenders may also require higher minimum credit scores and larger down payments. In April, JPMorgan Chase began requiring a 700 minimum credit score and 20% down payment.
Jason Lee, executive vice president and director of capital markets at Flagstar Bank, says some lenders aren’t offering the loans that are considered riskier—such as jumbo loans, which exceed the conforming loan limit (for 2020, that max is $510,400).
“There aren’t as many loan products available,” Lee says.
And even if you do manage to get a loan, it may take longer than you’d typically expect.
“Based on low rates and a high volume of refinances, loans are taking longer to complete from application to closing,” says Staci Titsworth, a regional mortgage manager for PNC Bank.
As such, borrowers should ask their lender how long the process will take to close, and make sure they’re aware of the expiration date on the interest rate they’ve locked in—since with rates this low, they could go up.
“Most lenders are locking in the customer’s interest rate so it’s protected from market fluctuations,” Titsworth adds.
Myth No. 3: Everyone should refinance their mortgage
“With mortgage rates hovering near record lows, a refinance can make sense and can help free up monthly cash flow,” Hale says.
Still, not everyone should refinance. Homeowners should make sure to take a good hard look at their situation to see whether it makes sense for them.
For one, it will depend on your current interest rate. If it’s low already, it may not be worth the trouble—particularly since refinancing comes with fees amounting to around 2% to 6% of your loan amount.
Given these upfront costs, refinancing often makes sense only if you plan to remain in your house for a while.
In general, “refinancing is a good idea for homeowners who plan to live in the same home for several years, because they will reap the monthly savings over a longer time period,” Hale explains.
Myth No. 4: You can apply for a mortgage after you’ve found a home
Many people assume that you can find your dream home first, then apply for the mortgage. But that’s backward—now more than ever. Today, your first stop when shopping for a house should be a mortgage lender or broker, who can get you pre-approved for a home loan.
For “a buyer in a competitive market, it’s typically essential to have pre-approval done in order to submit an offer, so getting it done before you even look at homes is a smart move that will enable a buyer to move fast to put an offer in on the right home,” Hale says.
Mortgage pre-approval is all the more essential in the era of the coronavirus pandemic. Why? Because many home sellers, leery of letting just anyone tour their home, want to know a buyer is serious—and has the cash and financing to make a firm offer. As such, some real estate agents and sellers require a pre-approval letter before a potential buyer can view a home in person.
Nonetheless, according to a realtor.com survey conducted in June of over 2,000 active home shoppers who plan to purchase a home in the next 12 months, only 52% obtained a pre-approval letter before beginning their home search, which means nearly half of home buyers are missing this crucial piece of paperwork.
Aside from getting their foot in the door of homes they want to see, home buyers benefit from pre-approval in other ways. Since pre-approval lets you know exactly how much money a lender will loan you, it also helps you target the right homes within your budget.
After all, as Lee points out, “You don’t want to get your heart set on a home only to find out you can’t afford it.”
Myth No. 5: Mortgage forbearance means you don’t have to pay back your loan
The record unemployment caused by the COVID-19 pandemic means millions of Americans have struggled to pay their mortgages. To get some relief, many have been granted mortgage forbearance.
The problem? Many mistakenly assume that mortgage forbearance means you won’t have to pay your loan, period. But forbearance means different things for different homeowners, depending on the terms of the mortgage and what type of arrangement was worked out with the lender.
“Forbearance is not forgiveness,” Lee says. “Rather, it’s a timeout from having to make a mortgage payment where your servicer—the company you send your mortgage payments to—will ensure that negative impacts to your credit report and late fees will not occur. However, because forbearance is not forgiveness, you will need to reach some sort of resolution with your loan servicer about the missed payments.”
The paused payments may be added to the back end of the loan or repaid over time.
“It does not forgive the payments, meaning the borrower still owes the money,” Hale says. “The specifics of when payments need to be made up will vary from borrower to borrower.”
But mortgage forbearance is only temporary, and set to expire soon, leaving many homeowners who are still struggling perplexed on what to do next.
Enacted in March, the CARES Act initially granted a 180-day forbearance, or pause in payments, to homeowners with mortgages backed by the federal government or a government-sponsored enterprise such as Fannie Mae or Freddie Mac. Furthermore, some private lenders also granted mortgage forbearance of 90 days or more to financially distressed homeowners.
According to the Mortgage Bankers Association, 8.39% of loans were in forbearance as of June 28, representing an estimated 4.2 million homeowners nationwide.
So what are affected homeowners to do when the forbearance goes away? You have options, so it’s well worth contacting your lender to explore what’s best for you.
“If you know you’re going to be unable to meet the terms of your forbearance agreement at its maturity, you should call your loan servicer immediately and see what options they may be able to offer to you,” says Abel Carrasco, mortgage loan originator at Motto Mortgage Advisors in St. Petersburg, FL.
Exactly what’s available depends on the fine print in the terms of your mortgage forbearance agreement. Here’s an overview of some possible avenues to explore if you still can’t pay your mortgage after the forbearance period ends.
Extend your mortgage forbearance
One simple option is to contact your lender to request an extension.
Homeowners granted forbearance under the CARES Act can request a 180-day extension, giving them a total of 360 days of forbearance, according to the Consumer Financial Protection Bureau.
The key is to contact your lender well before your forbearance expires. If you let it expire without an extension, your lender could impose penalties.
“If you just stop making regular, scheduled payments, you could have a late mortgage payment on your credit,” warns Carrasco. “That could severely impact refinancing or purchasing another property in the immediate future and potentially subject you to foreclosure.”
Keep in mind, though, a forbearance simply delays payments, meaning they’ll still need to be made in the future. It doesn’t mean payments are forgiven.
Refinance to lower your mortgage payment
Mortgage interest rates are at all-time lows, hovering around 3%. So if you can swing it, this may be a great time to refinance your home, says Tendayi Kapfidze, chief economist at LendingTree.
Refinancing could come with some hefty fees, however, ranging from 2% to 6% of your loan amount. But it could be worth it.
A lower interest rate will likely lower your monthly payment and save you thousands over the life of your mortgage. Dropping your interest rate from 4.125% to 3% could save more than $40,000 over 30 years, for example, according to the Consumer Financial Protection Bureau.
“Lenders have tightened standards, though, so you will need to show that you are a good candidate for refinancing,” Kapfidze says. You’ll need a good credit score of 620 or higher.
As long as you’ve kept up your end of the forbearance terms, having a mortgage forbearance shouldn’t affect your credit score, or your ability to refinance or qualify for another mortgage.
Ask for a loan modification
Many lenders are offering an assortment of programs to help homeowners under hardship because of the pandemic, says Christopher Sailus, vice president and mortgage product manager at WaFd Bank.
“Lenders quickly recognized the severity of the economic situation due to the pandemic, and put programs into place to defer payments or help reduce them,” he says.
A loan modification is one such option. This enables homeowners at risk of default to change the terms of their original mortgage—such as payment amount, interest rate, or length of the loan—to reduce monthly payments and clear up any delinquencies.
Loan modifications may affect your credit score, but not as much as a foreclosure. Some lenders charge fees for loan modifications, but others, like WaFd, provide them at no cost.
Put your home on the market
It may seem like a strange time to sell your home, with COVID-19 cases growing, unemployment rising, and the economy on shaky ground. But, it’s actually a great time to sell a house.
Pending home sales jumped 44.3% in May, according to the National Association of Realtors®’ Pending Home Sales Index, the largest month-over-month growth since the index began in 2001.
Home inventory remains low, and buyer demand is up with many hoping to jump on the low interest rates. Prices are up, too. The national median home price increased 7.7% in the first quarter of 2020, to $274,600, according to NAR.
So if you can no longer afford your home and have plenty of equity built up, listing your home may be a smart move. (Home equity is the market value of your home minus how much you still owe on your mortgage.)
Consider foreclosure as a last resort
Foreclosure may be the only option for many homeowners, especially if you fall too behind on your mortgage payments and can’t afford to sell or refinance. In May, more than 7% of mortgages were delinquent, a 20% increase from April, according to mortgage data and analytics firm Black Knight.
“When to begin a foreclosure process will vary from lender to lender and client to client,” Sailus says. “Current and future state and federal legislation, statutes, or regulations will impact the process, as will the individual homeowner’s situation and their ability to repay.”
Foreclosures won’t begin until after a forbearance period ends, he adds.
The CARES Act prohibited lenders from foreclosing on mortgages backed by the government or government-sponsored enterprise until at least Aug. 31. Several states, including California and Connecticut, also issued temporary foreclosure moratoriums and stays.
Once these grace periods (and forbearance timelines) end, and homeowners miss payments, they could face foreclosure, Carrasco says. When a loan is flagged as being in foreclosure, the balance is due and legal fees accumulate, requiring homeowners to pay off the loan (usually by selling) and vacating the property.
“Absent participation in an agreed-upon forbearance, deferment, repayment plan, or loan modification, loan servicers historically may begin the foreclosure process after as few as three months of missed mortgage payments,” he explains. “This is unfortunately often the point of no return.”
Granted, this year, the coronavirus pandemic prompted the Internal Revenue Service to extend the usual April 15 deadline to July 15. That might have seemed like plenty of time—and yet here we are, with a mere two weeks to go and a filing window that’s closing fast.
We get it. Maybe you’re a procrastinator. Or maybe you’re a homeowner who, rather than taking the easy-peasy standard deduction, generally tries to save a bundle by itemizing your deductions instead.
Whatever your reason, if you’ve put off filing your taxes until now, don’t panic! You still have options.
Here are three last-minute tax tips for homeowners that could save you plenty of money, headaches, and more.
Tip No. 1: Grab Form 1098
Form 1098, or the Mortgage Interest Statement, is sort of like your home’s W-2: a one-stop shop for your possibly two biggest tax breaks.
Mortgage interest: “The biggest real estate tax deduction for most people will be the interest on their home loan,” according to Patrick O’Connor of O’Connor and Associates. Single people can deduct the full interest up to $500,000; for married couples filing jointly, the limit is $1 million if you purchased a house before Dec. 15, 2017. If you bought a home after that date, you will be allowed to deduct the interest on no more than $750,000 of acquisition debt—that’s a loan used to buy, build, or improve a main or secondary home. (Here’s more on how your mortgage interest deduction can help you save on taxes.)
Property taxes: This is the second-biggest deduction for most homeowners. Just remember the total amount you can deduct is $10,000, even if you pay way more—and that includes state and local income tax, property tax, and sales tax. (Here’s how to calculate your property taxes.)
You might be eligible for other real estate–related deductions and tax credits, but these are the biggies for most people. If you’re down to the wire on filing, you might just deduct these two and call it a day.
Just remember to make it worth your while. These numbers need to add up to more than the current standard deduction, which jumped to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly.
Tip No. 2: File an extension
If you still need more time to get your taxes together, it’s totally simple and penalty-free to file for an extension until Oct. 15. But don’t get too excited; the IRS still requires you to pay your estimated tax bill by July 15, or else you’ll pay interest on what you owe down the road.
The IRS makes it easy to file for an extension, either online or by mail. On the form, just estimate how much tax you owe. If you’re filing an extension because you need more time to figure out your itemized deductions, one easy shortcut is to just take the standard deduction now—or the same amount you claimed last year. All in all, it’s better to overestimate what you owe, because then you won’t pay any interest. Once you file for real, anything you’ve overpaid will come back to you.
But what if you need an extension because you can’t pay your tax bill? It’s still better to file for an extension with fuzzy numbers than to not file at all.
The IRS has payment plans that can help if you are short on cash. Just file something—blowing the deadline entirely will open you up to penalties as well as interest on your bill. And maybe an audit, too.
Tip No. 3: Hire some help
If you make less than $69,000 a year, you qualify to use free tax prep software from the IRS. Even if you make more than that, there are lots of free or low-cost online tax prep options that should work for anyone with relatively straightforward taxes.
Of course, another option is to find yourself a good accountant.
If paying for a tax preparer sounds extravagant, keep in mind that, according to the U.S. Tax Center, the average cost of getting your taxes done is only $225. This, generally speaking, is money well-spent.
A good accountant can actually save you money by spotting deductions you might not have found on your own, and helping you plan to minimize the next year’s taxes. All in all, that may add up to the best few hundred bucks you’ve ever spent!
Another timesaver: Rather than snail-mailing your accountant your tax forms, snap pictures of them on your smartphone; some apps like CamScanner can do so with scanner-style quality. Accountants don’t need the originals to file.
For next year, remember to prepare
OK, so this year you waited too long and stressed yourself out. If you don’t want a repeat ordeal next year, now is also the time to mend your ways and start tax prep early. Nobody wants to be thinking about taxes all year, of course. But as a homeowner, you can do some things to be better prepared.
So before you do any home maintenance, upgrades, or renovations, research whether there are any tax deductions you could be eligible for.
Start now, and you’ll be sitting pretty to collect on all the various tax perks that come with owning a home rather than pulling out your hair at the last minute.
When interest rates dropped to record lows in March, I decided to refinance the mortgage on my house. Yet after applying for a refi with my lender, it sent me an email that left me scratching my head.
“Great news,” it announced. “We got you an appraisal waiver!”
Nice. So what is an appraisal waiver?
Mystified, I dove in to Google to figure out exactly what this meant for me. For one, my lender assured me, it meant keeping $625 in my pocket that I would have otherwise spent on an in-person appraisal.
But why would my lender offer to waive the appraisal? Was it just benevolence, or was something else going on here? I wondered if there was a catch.
So I did some digging, and learned more about this option, the pros and cons, and whether it’s a good idea for me. Here’s the scoop on this confusing home financing concept, broken down into plain English.
What is an appraisal waiver?
An “appraisal waiver,” also known as a property inspection waiver, is a real estate term that simply means you’re not required to have an appraiser assess the value of your home.
When you’re buying or refinancing property, your lender typically appoints an independent appraiser to assess how much the place is worth. An appraiser visits your home, studies it inside and out, analyzes your neighborhood, and reviews nearby home sales among other factors before deciding on your home’s market value.
By having an appraiser estimate how much a home is worth, this helps your lender better understand the transaction’s risk. After all, your home serves as the loan’s collateral, meaning that if you stop paying your mortgage, your lender can foreclose on your property, take it over, and then sell the place to recoup its losses. To your lender, a home appraisal is a safeguard.
With an appraisal waiver, however, your lender calculates your home’s value instead—and rather than an in-person visit, it uses software and algorithms that take into account market conditions, recent nearby home sales, appraisal reports, and other data.
Lender appraisals are typically offered for free, whereas independent home appraisals range in price from $200 to $750, depending on where you live. And since the home buyer or homeowner typically pays the appraisal fee, an appraisal waiver can save them that money.
Why lenders offer appraisal waivers
Appraisal waivers were once rare, but the coronavirus pandemic has made them more popular.
After all, offering an appraisal waiver means lenders can skip sending an appraiser—a living, breathing human being—into a home. In the era of COVID-19, an appraisal waiver is a safer, healthier option that helps limit the potential spread of the virus.
Fannie Mae, one of the government-backed companies that support the mortgage lending industry, even began recommending that lenders offer appraisal waivers whenever appropriate during the pandemic.
How to apply for an appraisal waiver
The guidelines for appraisal waivers are set by Fannie Mae and Freddie Mac, institutions that buy mortgages from banks and lenders. While there are pages and pages of rules and regulations for allowing appraisal waivers, generally speaking, you’re eligible for one if you’re buying or refinancing a single-family home or condo (even if it’s a second home or investment property).
Manufactured homes, co-ops, multiunit properties, and new construction homes generally aren’t eligible.
Want to find out if you qualify for an appraisal waiver? Just ask your lender.
Fannie Mae and Freddie Mac offer special underwriting software that helps lenders ensure they’re meeting these two institutions’ loan requirements. This software evaluates properties by using data from millions of home sales, including appraisal reports. It analyzes your loan, then produces a simple yes or no recommendation for an appraisal waiver.
From there, your lender can choose to offer you the appraisal waiver or require an in-person appraisal.
“Fannie or Freddie might not require one, but the lender will require it to protect themselves based on the loan’s profile,” says Kevin Leibowitz, mortgage broker and founder of Grayton Mortgage.
You also get a say in the matter: Since it’s your home and you’re spending hundreds of thousands of dollars, you can choose to accept the waiver or ask your lender to order an appraisal.
Who should get an appraisal waiver?
While appraisal waivers are growing in popularity, they’re rarely used during the home-buying process and are almost exclusively used with refinancing. This makes sense from the lender’s perspective. During a refinance, you already own the property and are (hopefully) making regular mortgage payments on time, which makes you a safe bet.
Home buyers, on the other hand, are more of a gamble to lenders, and may be less likely to have an appraisal waived. However, if you have a stellar credit score, plenty of money in the bank, rock-solid employment history, and other elements of a strong borrower profile, lenders may offer you the waiver. If you’re a less than ideal borrower or you’re pursuing a riskier financing option (like a cash-out refinance), they may choose to require an appraisal.
Pros and cons of an appraisal waiver
Beyond preventing the spread of coronavirus, appraisal waivers have other perks. Ditching the in-person appraisal means ditching the appraisal fee, which can save homeowners several hundred dollars.
A traditional appraisal also takes time to schedule and perform, which means it takes longer for a loan to close. Closing more quickly means that you can start taking advantage of your refinanced mortgage sooner.
So can a home’s value be accurately calculated without an independent, in-person appraisal? Experts are divided on this issue, although some point out that it’s within a lender’s interests to pinpoint the right price.
“They are lending to you based on what they believe that asset is worth, so they’re going to do everything in their power to get it right,” says Jeremy Sopko, CEO of Nations Lending.
Plus, these days, appraisal software has gotten fairly sophisticated.
“In a waiver situation, lenders truly have it down to a science,” Sopko adds.
An appraisal waiver could also result in a higher estimated home value than a traditional appraisal, which is a good thing for owners who are refinancing. The reason: A traditional appraisal in a volatile housing market creates a lot of uncertainty. As such, there’s a chance the new appraised value of your home will come back lower than you want or, worse, lower than what you paid for your home.
On the flip side, however, there’s certainly a chance a lender’s estimate may come in low. If this happens, though, you can simply request an in-person appraisal with your current lender, or shop around for other lenders who might appraise your home at a higher price.
Plus, your home’s appraised value today may have no bearing on what a potential buyer is willing to pay for it in the future. This value is simply a tool used by lenders to help give context to your loan and help them decide whether it’s a smart choice to loan you money.
As for whether an appraisal waiver is right for you, check out a refinance calculator to get started.
The coronavirus pandemic has led to record-high unemployment rates not seen since the Great Depression. And this is particularly worrisome for would-be home buyers.
If you were among the 23.1 million Americans who were laid off or furloughed, you might be worried about your financial future. And if you were hoping to buy a house—either now or in the next few years—you might also wonder how your current jobless status might affect those plans.
While the situation might seem dire, unemployment does not mean that home-buying plans have to be put on hold for long. Here’s how to navigate a period of unemployment so that it doesn’t derail your hopes to buy a home.
Can you buy a home if you’re unemployed?
For starters: If you lose your job while in the midst of home shopping or after you’ve even made an offer, you might have to put the purchase on hold.
The reason: Given your reduced income, the odds of lenders loaning you money for a property purchase are slim, unless your spouse or partner has a sizable income that can carry the mortgage alone.
And even if you’re getting unemployment checks every week, that money is considered temporary income, so it can’t be used to qualify for a mortgage, says Jackie Boies, senior director of housing and bankruptcy services at Money Management International, a nonprofit providing financial education and counseling.
In short, “unemployment could have an effect on your ability to purchase a home in the short term,” Boies says.
But the good news is that once you find a new job, you can likely resume home shopping without trouble, Boies adds. “Unemployment shouldn’t have a long-term effect on being able to buy a home.”
How long after unemployment can you buy a home?
But even once you do find a new job, that doesn’t mean you can easily buy a house just yet. That’s because lenders like to see a steady history of employment before loaning someone money.
“Regular employment must be reestablished as stable, reliable, and dependable,” says Karma Herzfeld, mortgage loan originator at Motto Mortgage Alliance in Little Rock, AR.
So how long is enough? Lenders typically require borrowers to have six months of employment at their current job, and two years of continuous employment. Breaks in employment older than two years shouldn’t affect getting a mortgage.
How unemployment affects your credit score
While unemployment doesn’t jeopardize future home-buying hopes per se, financial experts warn that what can put those plans at risk is how you handle your finances while jobless. Unemployment, after all, can stress your budget in ways that can damage your credit history and credit score.
Lenders check your credit score to assess how well you’ve managed past debts. Scores between 650 and 700 range from fair to good; scores below 650 are considered subpar, which could limit which lenders are willing to loan you money for a house. (You can check your score for free on sites like Credit Karma.)
Credit scores can be damaged in a variety of ways during unemployment. For one, if you get behind on paying bills, this will put some blemishes on your credit history and drag your score down.
Unemployment can also lower your credit score by negatively affecting your debt-to-income ratio, a calculation used by mortgage lenders to compare how much you make against how much you owe.
If you’re unemployed, you may face a double whammy as your income is lower and you’re charging more to your credit cards, thus increasing your debt. Both moves can negatively affect your debt-to-income ratio, which may make lenders leery of loaning you money.
“Any factor that affects income or debt may affect the debt-to-income ratio,” Herzfeld explains.
In sum, hopeful home buyers should be careful not to take on too much debt, even while unemployed. You need to preserve cash as best you can.
“I recommend, if on unemployment, [you] cut back on all discretionary spending and make every effort to keep bills current so that the credit score may not get negatively impacted,” Herzfeld says.
Debt-to-income ratio will likely rebalance once you return to work, as long as you haven’t racked up too much debt during the period of unemployment, Boies says.
How to handle your finances while unemployed
“My recommendation is to always try as best as you can to pay at least the minimum required payment on all monthly debt obligations, otherwise credit may be negatively affected,” Herzfeld says.
Boies suggests reaching out to landlords, credit card companies, utilities, auto lenders, and others to find out what options you have, such as payment plans, deferments, or forbearance. You might also be able to reduce some bills, such as insurance, by reviewing your policy.
“Don’t think that if you can’t pay that bill, you just can’t do anything about it,” Boies says. “You need to reach out to see what options they have available to you.”
How to bounce back from unemployment
If your credit score is negatively affected while you’re unemployed, it’s not the end of the world—but it will take time to repair.
Six months to a year or more of positive credit rebuilding could get you on track to buy a home, Herzfeld says.
“The sooner past-due debts can be remedied, the sooner the score may begin to improve,” she says.
Economic fallout from the COVID-19 crisis and civil unrest could cause many rental real estate properties to run up tax losses in 2020 and maybe beyond. This column covers the most important federal income tax questions and answers for rental property owners. Here goes.
What can I write off?
Nothing new here. You can deduct mortgage interest and real estate taxes on rental properties. You can also write off all standard operating expenses that go along with owning rental property: utilities, insurance, repairs and maintenance, care and maintenance of outdoor areas, and so forth.
What about depreciation write-offs?
For many rental property owners, the tax-saving bonus is the fact that you can depreciate the cost of residential buildings over 27.5 years, even while they are (you hope) increasing in value. You can generally depreciate the cost of commercial buildings over 39 years.
Example: You own a small apartment building that cost $1.5 million not including the land. The annual depreciation deduction is $54,545 ($1.5 million/27.5). The deduction can shelter that much annual positive cashflow from income taxes. So, depreciation write-offs are nice tax-savers, especially if you own an expensive property or several properties.
Variation: As stated earlier, commercial buildings must be depreciated over a much-longer 39-year period. Even so, the annual depreciation write-off for a $1.5 million commercial building is $38,462. The deduction can shelter that much annual cash flow from income taxes.
Can I claim 100% first-year bonus depreciation?
Yes, for qualified improvement property (QIP) expenditures on a nonresidential building. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) included a retroactive correction to the statutory language of the Tax Cuts and Jobs Act (TCJA). The correction allows much faster depreciation for commercial real estate qualified improvement property (QIP) that’s placed in service in 2018-2022. QIP is defined as an improvement to an interior portion of a nonresidential building that’s placed in service after the building was placed in service. However, QIP doesn’t include any expenditures attributable to: (1) enlarging the building, (2) any elevator or escalator, or (3) the internal structural framework of the building. Thanks to the CARES Act correction, you can write off the entire cost of QIP in Year 1, because it qualifies for 100% first-year bonus depreciation.
Alternatively, you can choose to depreciate QIP over 15 years using the straight-line method. That alternative might make sense if you expect higher tax rates in future years. Discuss your QIP depreciation options with your tax pro.
What else do I need to know about depreciation write-offs?
You ask such good questions. There’s more. The TCJA increased the maximum Section 179 first-year depreciation deduction for qualifying real property expenditures to $1 million, with annual inflation adjustments. The inflation-adjusted maximum for tax years beginning in 2020 is $1.04 million. The Section 179 deduction privilege potentially allows you to deduct the entire cost of qualifying real property expenditures in Year 1. I say potentially, because Section 179 deductions are subject to several limitations. Ask your tax pro for details.
The TCJA also expanded the definition of qualifying property to include expenditures for nonresidential building roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Finally, the TCJA further expanded the definition of qualifying property to include depreciable tangible personal property used predominantly to furnish lodging. Examples of such property include beds, other furniture, and appliances used in the living quarters of an apartment house.
Can I claim the qualified business income (QBI) deduction base on my net rental income?
Maybe. For 2018-2025, the TCJA established a new personal deduction based on qualified business income (QBI) passed through to your personal Form 1040 from a pass-through business entity (meaning a sole proprietorship, LLC treated as a sole proprietorship for tax purposes, partnership, LLC treated as a partnership for tax purposes, or S corporation). The deduction can be up to 20% of QBI, subject to restrictions that kick in at higher income levels. For a while, it was unclear if you could claim QBI deductions based on net rental income passed through to you from one of the aforementioned pass-through entities. The IRS eventually issued taxpayer-friendly guidance that allows QBI deductions in most such cases, but you must follow complicated rules to collect the tax-saving benefit. As your tax pro for details.
What about the passive loss rules?
Ugh. If your rental property throws off tax losses (most properties do, at least during the early years and during years when the economy is suffering — like now), things can get complicated. The so-called passive activity loss (PAL) rules may come into play. Losses from rental properties will usually be classified as passive losses.
In general, the PAL rules only allow you to currently deduct passive losses to the extent you have current passive income from other sources, like positive income from other rental properties or gains from selling them. Passive losses in excess of passive income are suspended until you either have enough passive income or you sell the property that produced the losses. Bottom line: the PAL rules can postpone any tax-saving benefit from rental property losses, sometimes for years. Fortunately, there are several exceptions to the PAL rules that can allow you to deduct rental property losses sooner rather than later. Your tax pro can explain the exceptions and help you plan to become eligible, if possible.
Is that the end of the bad news?
Not exactly. Say you manage to successfully clear the hurdles imposed by the PAL rules for your rental property losses. So far, so good. But the TCJA established another hurdle that you must also clear to currently deduct those losses. For tax years beginning in 2018-2025, you cannot deduct an excess business loss in the current year. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. Any excess business loss is carried over to the following tax year and can be deducted under the rules for net operating loss (NOL) carry-forwards. This loss disallowance rule applies after applying the PAL rules. So, if the PAL rules disallow your rental losses, this rule is a nonfactor.
COVID-19 Relief: Thankfully, the CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018-2020. That’s good news.
What’s the deal with net operation losses (NOLs)?
Say you manage to successfully clear both of the preceding hurdles for your rental property losses. Now we are talking, because you can generally use those losses currently to offset taxable income from other sources. If losses for the year exceed income from other sources, you may have a net operating loss (NOL) for the year.
COVID-19 Relief: The CARES Act allows a five-year carryback privilege for an NOL that arises in a tax year beginning in 2018-2020. So, you can carry an NOL from one of those years back to an earlier year, deduct it, and recover some or all of the federal income tax paid for the carryback year. Because federal income tax rates were generally higher in years before the TCJA took effect, NOLs carried back to those years can be especially beneficial. The TCJA kicked in starting with tax years beginning in 2018.
What if I have positive taxable income?
Eventually your rental property should start throwing off positive taxable income instead of losses, because escalating rents will surpass your deductible expenses. Of course, you must pay income taxes on those profits. But if you piled up suspended passive losses in earlier years, you can now use them to offset your passive profits.
Another nice thing: positive taxable income from rental real estate is not hit with the dreaded self-employment (SE) tax, which applies to most other unincorporated profit-making ventures. The SE tax rate can be up to 15.3%. Something to avoid when possible.
One bad thing: positive passive income from rental real estate owned by a higher-income individual can get socked with the 3.8% net investment income tax (NIIT), and gains from selling properties can also get hit with the NIIT. Ask your tax pro for details.
The bottom line
There you have it: most of what you need to know about the federal income tax issues that can come into play for rental property owners. The economic fallout from the COVID-19 crisis and recent civil unrest increase the odds that rental properties will suffer losses in 2020, but tax relief provisions may soften the blow.
Getting a mortgage, paying your mortgage, refinancing your mortgage: These are all major undertakings, but during a pandemic, all of it becomes more complicated. Sometimes a lot more complicated.
But make no mistake, home buyers are still taking out and paying down mortgages during the current global health crisis. There have, in fact, been some silver linings amid the economic uncertainty—hello, record-low interest rates—but also plenty of changes to keep up with. Mortgage lending looks much different now than at the start of the year.
Whether you’re applying for a new mortgage, struggling to pay your current mortgage, or curious about refinancing, here’s what mortgage lenders from around the country want you to know.
1. Rates have dropped, but getting a mortgage has gotten more complicated
First, the good news about mortgage interest rates: “Rates have been very low in recent weeks, and have come back down to their absolute lowest levels in a long time,” says Yuri Umanski, senior mortgage consultant at Premia Relocation Mortgage in Troy, MI.
That means this could be a great time to take out a mortgage and lock in a low rate. But getting a mortgage is more difficult during a pandemic.
“Across the industry, underwriting a mortgage has become an even more complex process,” says Steve Kaminski, head of U.S. residential lending at TD Bank. “Many of the third-party partners that lenders rely on—county offices, appraisal firms, and title companies—have closed or taken steps to mitigate their exposure to COVID-19.”
Even if you can file your mortgage application online, Kaminski says many steps in the process traditionally happen in person, like getting notarization, conducting a home appraisal, and signing closing documents.
As social distancing makes these steps more difficult, you might have to settle for a “drive-by appraisal” instead of a thorough, more traditional appraisal inside the home.
“And curbside closings with masks and gloves started to pop up all over the country,” Umanski adds.
2. Be ready to prove (many times) that you can pay a mortgage
If you’ve lost your job or been furloughed, you might not be able to buy your dream house (or any house) right now.
“Whether you are buying a home or refinancing your current mortgage, you must be employed and on the job,” says Tim Ross, CEO of Ross Mortgage Corp. in Troy, MI. “If someone has a loan in process and becomes unemployed, their mortgage closing would have to wait until they have returned to work and received their first paycheck.”
Lenders are also taking extra steps to verify each borrower’s employment status, which means more red tape before you can get a loan.
Normally, lenders run two or three employment verifications before approving a new loan or refinancing, but “I am now seeing employment verification needed seven to 10 times—sometimes even every three days,” says Tiffany Wolf, regional director and senior loan officer at Cabrillo Mortgage in Palm Springs, CA. “Today’s borrowers need to be patient and readily available with additional documents during this difficult and uncharted time in history.”
3. Your credit score might not make the cut anymore
Economic uncertainty means lenders are just as nervous as borrowers, and some lenders are raising their requirements for borrowers’ credit scores.
“Many lenders who were previously able to approve FHA loans with credit scores as low as 580 are now requiring at least a 620 score to qualify,” says Randall Yates, founder and CEO of The Lenders Network.
Even if you aren’t in the market for a new home today, now is a good time to work on improving your credit score if you plan to buy in the future.
“These changes are temporary, but I would expect them to stay in place until the entire country is opened back up and the unemployment numbers drop considerably,” Yates says.
4. Forbearance isn’t forgiveness—you’ll eventually need to pay up
“The CARES Act is not designed to create a freedom from the obligation, and the forbearance is not forgiveness,” Ross says. “Missed payments will have to be made up.”
You’ll still be on the hook for the payments you missed after your forbearance period ends, so if you can afford to keep paying your mortgage now, you should.
To determine if you’re eligible for forbearance, call your loan servicer—don’t just stop making payments.
If your deferment period is ending and you’re still unable to make payments, you can request delaying payments for additional months, says Mark O’ Donovan, CEO of Chase Home Lending at JPMorgan Chase.
After you resume making your payments, you may be able to defer your missed payments to the end of your mortgage, O’Donovan says. Check with your loan servicer to be sure.
5. Don’t be too fast to refinance
Current homeowners might be eager to refinance and score a lower interest rate. It’s not a bad idea, but it’s not the best move for everyone.
“Homeowners should consider how long they expect to reside in their home,” Kaminski says. “They should also account for closing costs such as appraisal and title insurance policy fees, which vary by lender and market.”
If you plan to stay in your house for only the next two years, for example, refinancing might not be worth it—hefty closing costs could offset the savings you would gain from a lower interest rate.
“It’s also important to remember that refinancing is essentially underwriting a brand-new mortgage, so lenders will conduct income verification and may require the similar documentation as the first time around,” Kaminski adds.
6. Now could be a good time to take out a home equity loan
Right now, homeowners can also score low rates on a home equity line of credit, or HELOC, to finance major home improvements like a new roof or addition.
“This may be a great time to take out a home equity line to consolidate debt,” Umanski says. “This process will help reduce the total obligations on a monthly basis and allow for the balance to be refinanced into a much lower rate.”