Kenneth R. Harney

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Lending Policy
Hosted by Kenneth R. Harney
Thursday, Oct. 26, 2000; 1 p.m. EDT

Lenders are forever saying how easy it is for anyone -- regardless of credit history -- to borrow and buy a home these days. But are the claims really true? And are the loans fair and affordable? What should consumers look for in a lender as they buy real estate?

Kenneth R. Harney is the author of the nationally syndicated column "The Nation's Housing," and understands the ins and outs of loans, mortgages, tax laws and legislation important to both buyers and sellers.

Harney is the managing director of The National Real Estate Development Center, which sponsors professional education conferences for public agencies, developers, mortgage executives and real estate attorneys. He also runs his own consulting firm based in Chevy Chase, Md., and is co-founder of the Housing and Development Reporter, published by Warren, Gorham & Lamont, Inc. An honors graduate of Princeton University, Harney did graduate work at the University of Pennsylvania. He has written two books: "Beating Inflation With Real Estate" (Random House, 1979) and "Exchange Your Real Estate: Why Pay Taxes?" (National Real Estate Development Center, 1993).

The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

Crystal City, Va.: How can I get a loan for a home with bad credit? Is there a place that will pay off my debt and allow me to finance toward buying a home? At this time my income is $33,000 per year.

Ken Harney: A number of major lenders, such as Countrywide, are willing to try and work with applicants who have less-than-perfect credit. Often they will charge you a higher than market rate for the first two years, and reduce the rate by 1 to 2 percentage points if you pay on time. Most of these lenders, however, will not advance you money to pay off other debts.

Arlington, Va.: Here's a question that effects a number of your readers who live and work in the D.C. area. Anyone connected with State Dept., all branches of the military, Dept. of Commerce, Agriculture, other government agencies that send their employees overseas to work can be caught with capital gains when selling a home if they have spent a large part of their career outside of the U.S. Although the home in the area is the family's primary residence, the owner can't be there if the government asks him/her to take an overseas posting. Excuse the rambling intro to the question -- recently I saw that IRS may make exceptions to the capital gains ruling for "work relocation" and "unusual circumstances." Can the numbers of us in the situation described now sell our homes -- in which we may have lived well over two years since buying, interspersed with long stints overseas at the government's request -- without paying capital gains?

Ken Harney: This is a problem some in Congress have tried to address with corrective tax legislation, but the sad fact remains that there is no current exception for federal employees to the standard capital gains exclusion rules. You must either own and use the house for two out of the prior five years or qualify for an employment change or health change exception. Perhaps you can argue that your employment transfer qualifies you for a pro-rata portion of the usual $250,000/$500,000 exclusion.

Washington, D.C.: Thanks for the opportunity to post this question. My 70-year-old aunt wants to remove her name from her mortgage without having to refinance. Is this possible, she appears to be having a tough time. FYI -- She and her two children are on the loan. She wants to keep them on. The loan is unassumable. What are some options?

Ken Harney: Without the written permission of the lender, I don't see how your aunt can remove herself from the obligation of the loan. But it's worth exploring by contacting the lender and explaining the situation. Good luck.

Bowie, Md.: Hi--

I just want to thank you for your wonderful columns that are so informative!

Specifically, a few months ago I completed a real estate trade of one rental property for another.

Your columns provided the inspiration and initial information on this type of transaction allowed by the IRS.

I saved so much money on capital gains taxes, it was amazing.

I cannot thank you enough.
Keep up the good work!

Ken Harney: Thanks for your kind words and good luck on future transactions.

Washington, D.C.: If I get a mortgage, pay it back on time, but did not use the money for a home, is it fraud?

Ken Harney: Any misstatements in connection with a mortgage application could be viewed by the lender as fraud.

Bethesda, Md.: Hi. I'll be purchasing a resale townhouse within the next year. I'm going with a low down payment mortgage (2.25 percent). Can closing costs be added to the borrowed amount? I really don't feel like tossing in however many more thousands the closing costs will be up front. What would be an estimate for closing on a $150K townhouse in Montgomery county? Thanks.

Ken Harney: Closing costs in general run about 4-5% in Montgomery Co., Md. Your lender may allow certain of the closing costs to be rolled into the loan amount but may well charge you a slightly higher interest rate.

Largo, Md.: Like many others, I would like to own my own home, but have never attempted to because of my credit. How easy or difficult is it to buy a home with less than perfect credit, and little or no money. I have been working with Consumer Credit Counseling of Maryland for about the last three years to pay off my debt and have succeeded in doing so for most of my bills. There is however a charged-off accounting belonging to my daughter (I never cosigned the credit card account, but she listed me as an authorized user) listed on my report. I have had, however, an excellent payment rental history. Do I have a chance?

Ken Harney: The good news is that mortgage money is more available for people with blemished credit today than at any time in American history. Obviously, before most lenders will talk to you about an application, they will want to see most or all of your past credit problems resolved. Your on-time rent history is extremely important and can be used with many lenders to demonstrate your reliability as a borrower.Good luck.

Maryland: I have a house and I want to buy a condo and rent it out. I thought I'll just buy it cash, but my agent says it's not a good idea. Can you tell me why? I figured if I buy it cash, I'll get the rent as pure income without the burden of a mortgage. Am I missing something? Thanks.

Ken Harney: I think your instincts are very good. However, if you want to maximize your investment return, you should consider placing some debt on the property and perhaps taking a slightly lower monthly profit.

Gaithersburg, Md.: Dear Mr. Harney:

I have a 30/7 balloon mortgage on my house which is due 11/1. I just made my last payment with the full amount last week. What will the lender do next? Would the lender send me some documents stating my mortgage has been paid off? Thanks!

Ken Harney: If you have paid off the loan in full, it's legally required and very important that you get formal documentation that the publicly recorded lien on your property has been paid in full. If you don't receive such documentation, get in touch with the lender as soon as possible.

Chevy Chase, Md.: We are looking at buying a home for the first time. Can you tell us what the pros and cons are of a no-money-down mortgage?
Thank you!

Ken Harney: 100 percent mortgage loans are increasingly available from large lenders. The upside is obvious -- you don't have to come to the table with bundles of cash. The down sides are: 1. your monthly payments will be higher, 2. you will have to pay private mortgage insurance premiums every month for a lengthy period, and 3. In the event of an economic downturn that depresses property values, you may be left "underwater" -- i.e., you'll own a house with a mortgage larger than its market value.

Bethesda, Md.: A couple of questions:

What are the pros/cons of placing adult children on the title of a house in which only the parents (retired) will live in?

If you only need to borrow $70,000 for a house, is it best to get a mortgage or to get a personal loan?

Thanks!

Ken Harney: The main plus of putting adult children on the title of a house for retired parents is that the house is not part of the parents' estate. If the parents purchase the home, simply putting the children on the title may be construed as a gift. Another down side is that if the parents own the house in their own names, then when they pass away, the children could inherit the house at the full market value at the time of their demise. In this area definitely consult both a tax and estate planning advisor familiar with your particular situations.

Fairfax, Va.: Ken,

I am planning to buy a new home. Could you please tell me while going for the mortgage what should I look for mainly. Is it good to pay points or NO points?. Does it depend on the interest rate, time of closing (like end of the year), OR planning to re-finance. Somebody say don't pay points if you are planning not to stay for long time. Please give me your expert advice. If I want to go for three-year arm or five-year arm, in what circumstances I should go for that. Each one is saying differently. Please give me your expert advice. Thanks for your help.

Ken Harney: If you expect to be in the house for a long period, paying some points in exchange for the lowest possible interest rate is the way to go. On the other hand, if you expect to move within several years, then a slightly higher rate with no points is the way to go. As to a three or five year ARM loan, you're going to get your lowest rate on the three-year, but you will be exposed to prevailing market rates after year three.

Arlington, Va.: Why is it so difficult to finance or refinance a coop in Virginia?

Ken Harney: Probably because cooperatives are relatively rare in Virginia and most lenders are unfamiliar with them. For help you might consider contacting The National Cooperative Housing Association based in Washington, D.C. Good luck.

Washington, D.C.: I am a young first-time home buyer, who is interested in loan programs for first time buyers. I make a decent income and have about $4,000 in savings. My problems are student loans and car loans which throw off my debt ratios. The proposed allowable monthly payment I have been given is much lower than I would have to spend to rent. I wondered I am better off to rent and try to save more or find some kind of first-time buyer program that would at least let me buy a small condo. Do you know anything about the Acorn program through Bank of America?

Ken Harney: Bank of America and a handful of other large national lenders have recently begun programs for first time buyers with good credit but debt ratio problems such as yours. You might contact Bank of America and talk to a mortgage broker who could connect you with other first time buyer programs. I would also try to pay off my loans, perhaps using some of the $4000 in savings.

Fairfax, Va.: Ken Harney,

Thanks for answering my question. Do you think the interest rates will do down with the current economic conditions?

Thanks

Ken Harney: Predicting interest rates is best left to people with crystal balls. However, at the moment, conditions in the global capital markets are relatively favorable for the American bond market, and mortgage rates have actually fallen so far this year.

Arlington: How much is typically required for a down payment? In addition to mortgage payments and real estate, what other costs are associated with buying a home?

Ken Harney: Downpayments range from 0 to whatever you can invest. Closing costs are your other major expense -- anywhere from 3 to 5 percent of the loan amount -- and should be disclosed to you by your lender shortly after application.

Alexandria, Va.: This may sound like a ridiculous question, but I'm currently a renter who's just beginning to think about buying a house, so bear with me. Until now, my biggest purchase has been a car, and when I went for financing I saw that I could get different rates on loans depending on whether the car was new or used, and how old it was. Does the same principle apply for mortgages -- new homes or homes that you build vs. older homes?

Ken Harney: Interest rates on mortgages for new or existing homes are generally in the same ball park. One exception might be that a developer selling a new home might "buy down" the interest rate on the loan to make the deal more attractive.

Arlington, Va.: This is rather specific, but, well, I'll phrase it so it's general. What multiple of income can one expect to borrow through a mortgage? I make $80-$90k, and have about $60k of student and card debt (mostly the former). Small misunderstanding that went on my credit record, but for a miniscule amount and easily explained.

Thanks.

Ken Harney: Your maximum loan amount is going to be limited by your current high debt ratio. Any chance of devoting some of your current income to paying down those consumer debts? That, more than anything else, will make you a more attractive mortgage applicant and probably get you not only a larger loan but a lower rate.

Alexandria: We will be staying in our new home for awhile, but may refinance some time down the road. We paid a few points. Does it matter when we refinance as to when we will recoup the cost of the points?

Ken Harney: Yes, absolutely. You should only refinance when the savings on the new rate are substantial enough to pay down the cost you incurred in getting into your current loan within a two year period.

D.C.: Hello,
Thank you so much for such informative discussions. We are buying our first home and I have a question: Can you explain points? How do they work?
Thank you.

Ken Harney: Think of points as interest paid in advance, in a lump sum. Lenders charge points quite simply to increase their yield on the loan. The choice borrowers always have is to pay more points -- future interest up front -- or less points and a higher interest rate.

Rockville, Md.: Over the years, I have read reports stating that blacks were disproportionately turned down for mortgage loans with the implication that this was due to racism. As a former lender (commercial), this implication did not, in general, make sense to me since lenders make $ and the bank makes $ by making loans. A good credit is a good credit regardless of the ethnicity of the applicant.

I suspected the turndowns were more likely due to credit problems and lack of understanding of the mortgage loan process. Do you have any thoughts on this?

Ken Harney: You raise a serious legal issue. Obviously it is a violation of the Fair Housing Act and other civil rights statutes to discriminate on the basis of race in making or pricing a loan. It makes no business sense that I can think of for a lender to turn down an applicant with acceptable credit on racial grounds. A more common situation, however, may be discriminatory pricing of mortgages, where a lender may think that it can get away with charging minority borrowers higher interest rates. Happily the Justice Department, HUD, and state attorneys general are focusing strongly on this problem in cases around the country.

washingtonpost.com: That was our last question today for Kenneth R. Harney. Thanks so much to Ken, and to everyone who joined us.

This week, washingtonpost.com is featuring a series of discussions with real estate columnists homes as part of the Online Home Buyers Conference. Tune in each day to talk to the experts: