By Ilyce R. Glink with Samuel J. Tamkin
Saturday, August 16, 2008
Q: I don't want to continue renting, but I make only $30,000 annually and don't have a lot of money for a down payment. My credit score is over 800, and I'm self-employed. I know there are many programs for first-timers, and the local government here in Miami also has some programs to help first-timers and low-income people, but I don't know where to start.
A: Your question is quite timely. Congress recently passed a housing bill that could help some first-timers buy a home. But first you need to take a close look at your finances and make sure you can afford to buy.
In the last several years, people making $50,000 bought homes worth $500,000. Those purchases never made sense and still don't make sense. You need to determine how much money you can afford to spend on housing and then figure out if there are homes available in your price range.
Historically, lenders told buyers that they could not afford to buy a home if the price of the home exceeded about 2 1/2 times their annual income. In your case, that would mean you would have to look for homes that would cost $75,000 or less. But with lower interest rates, a lender may allow you to buy a home that costs three to 3 1/2 times your income, or up to about $100,000.
In addition, lenders usually told buyers that their housing expenses and other debts should never exceed 36 percent of their pay. In your case, you shouldn't want to pay more than $10,800 per year for all of your housing expenses, property taxes, insurance and other debts.
After reviewing your financial information, if you decide to buy a house, you may find a little help with the housing bill.
The bill allows first-time buyers (classified as individuals who have not owned a home in the last three years) to take up to a $7,500 tax credit in the year they close on their first home. A tax credit is a dollar-for-dollar reduction in the amount of taxes you pay to the IRS.
While you'll reduce your taxes in the first year, you'll have to pay back the $7,500 to Uncle Sam over 15 years. So what you're really getting is an interest-free loan with generous repayment terms.
The other bit of good news is that Federal Housing Administration loans require only a 3 percent down payment. They may cost more, but a person with little money to put down can still buy a home.
Although there are extra costs when you don't have at least 20 percent to put down, housing prices have fallen substantially in most areas, some more than others. There are great deals to be had these days, especially in places with a large inventory of unsold condos, such as Miami.
Find a real estate agent you can trust. Then start looking at neighborhoods with good school districts, plenty of shopping, and transportation networks that are close to friends, family and house of worship. You'll also want to find an excellent mortgage lender who can help you with your planning. You need to make sure that you can live comfortably with the costs involved in owning a new home, which increase over the years.
As recent history shows, it can be easy to buy a home, but it can also be difficult to sell it if the market turns.
The housing bill also provides some extra funds for cities and states to encourage housing. Contact your local housing authority to see if it is going to offer below-market loans or start other housing programs to aid local residents of modest means.
My father recently died, and my siblings and I sold his house and split the profits according to his will. What would be the best way to keep from paying taxes on this gain? It's approximately $14,000. If I put it in a Roth IRA or regular IRA, would that shield me from the tax burden? Please give me some advice on what to do with this money so it's not so devastating when tax time comes.
Here's some good news: It's likely that you don't owe any taxes on this inheritance. When you inherit property, you inherit the property at its value at the time the person died. Generally, if you sell it within a year of the owner's death, the IRS views the property's value at the time of the sale as the same as it was on the day of death. Thus, there is no capital gain taxable to the heirs, even if the property gained significantly in value during the years your father owned it.
Finally, if there is tax to be paid when you sell real estate, you can't avoid paying it by putting the proceeds into a retirement account.
My neighbor is on the verge of losing his home because he can't keep up with the payments. He is not behind in the payments yet, but it's going to happen. I would like to buy the house, but I need time to clear up some credit issues. Can the neighbor quitclaim deed the house to us? We would make the mortgage payments so that his credit won't be compromised until we can buy it. Or is there another way to do this?
Your neighbor certainly has the right to quitclaim his interest in his home to you and to have you make the payments on the mortgage. But the real question is why he would want to lose control over his house and lose any equity he may have when you have your own credit problems to deal with.
If your neighbor has equity in his home -- that is to say, the value of the home exceeds the amount he owes to his lender -- he would want you to pay him at least that before he would be willing to transfer the keys to you.
Many people sell their homes to strangers when the strangers say that they will keep up the payments on the old mortgage. The buyer would acquire the home subject to the old loan. But if the new buyer stops making payments to the lender, the only thing that buyer loses is the home. That new buyer's credit does not get hurt. If the lender found out about the sale, the lender could exercise its rights under just about all mortgages to accelerate the debt. That would mean the lender is calling the loan and it would have to be repaid.
Frankly, this is one of the biggest scams going on right now, and savvy homeowners would do well to steer clear of strangers promising to make all their financial problems go away if they simply sign over title to their home.
Your neighbor would be taking a huge risk if you could fail to make the mortgage payments. If that happened, his credit would be shot, the home would be lost and he might be worse off than if he just let the lender foreclose.
Ilyce R. Glink is an author and nationally syndicated columnist. Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink's Web sites, http://www.thinkglink.com and http://www.expertrealestatetips.net.
© 2008 Ilyce R. Glink and Samuel J. Tamkin
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