DEAR BOB: We are trying to refinance our house. But I think we made a mistake by going to a mortgage broker. She told us she represents 12 lenders and would have no trouble getting us an 80 percent mortgage. We were charged $250 for the appraisal but, when I asked for a copy, was told "that's confidential information." When I threatened to take her to small claims court, two days later I got a copy of the appraisal. We applied for the new mortgage in late April and still don't have the loan. The mortgage broker won't even tell us the lender's name. We were charged a $300 "loan application fee," which, when we demanded she either get us a loan or refund our $300, she refuses to refund. She says the problem is that my husband is self-employed, so all our income and obligations have to be verified. What should we do? -- Lynn R. DEAR LYNN: Get tough with that mortgage broker. Your situation is, unfortunately, all too typical. Mortgage brokers are middlemen between the borrower and the lender. They should know each lender's loan approval guidelines but, judging from the complaint letters I receive about mortgage brokers, many are doing a very poor job.
Fortunately, verification requirements for income and loan payments have recently been simplified, even by Freddie Mac and stuffy Fannie Mae, so your loan should have been approved (or denied) long ago.
When applying for a mortgage through a mortgage broker, the borrower should be told the name of the lender. Refusal to give the lender's name to the borrower indicates trouble. If the loan isn't ready to close within four weeks (except VA and FHA loans, which often take forever) after the loan package is complete and the appraisal has been obtained, something is wrong.
Insist on talking to the top official at the mortgage brokerage to either get your loan closed quickly or your money refunded. If you don't get 100 percent cooperation, ask to see his or her license and jot down the details.
There is no excuse for the bad service of some mortgage brokers. If you don't get immediate satisfaction, report the matter to the state agency that licenses the mortgage broker. Also, don't hesitate to contact the state attorney general, as well as the local district or city attorney, for possible fraud and misrepresentation prosecution. DEAR BOB: My father is dying of cancer. He has suggested deeding his properties to me now before he dies so the expenses of probate can be avoided. But it seems to me I recall something in your column a long time ago about a similar situation. Do you think this would be a good idea? -- Brent K. DEAR BRENT: No. If the properties have appreciated in market value since your father acquired them, his gift to you before his death could be very costly for you.
The reason is that a donee takes over the donor's basis in the property. But an heir who inherits property receives it at a basis of fair market value on the date of the decedent's death.
To illustrate, suppose your father paid $25,000 for a property now worth $100,000. If he deeds it to you before his death, your basis will be $25,000. Should you decide to sell it, your $75,000 profit will be taxable at a 28 percent tax rate. But if you inherit the same property, your basis will be its $100,000 current market value when your father dies. If you then sell it for $100,000, you have no taxable profit, since $100,000 is your inherited basis. Consult your tax adviser for further details. DEAR BOB: In 1972, I bought a house and financed it with a $44,000 30-year fixed rate mortgage at 7.75 percent interest. Taxes and insurance were included in my monthly payments. Recently, I ran an amortization schedule for my loan and discovered to my dismay the actual amortization as reported by the S&L is running some two years behind schedule. The S&L tells me that in the 1970s it was common to use the "capitalization method" to handle property taxes and insurance instead of placing those in escrow. Effectively, I am financing the excess of the real estate taxes and insurance payments (their forecasts were constantly under target). The S&L claims this is legal, citing the promissory note, which contains unclear and misleading language. Should I pursue this matter further or am I beating a dead horse? As I compute it, my balance after 30 years of payments will still be about $6,450 instead of zero. -- Claude DelF. DEAR CLAUDE: There is no excuse for the lender's improper handling of your escrow impound account for payment of fire insurance and real estate taxes. Each year the lender is to estimate the total payments required and then collect one-twelfth each month from you.
It is not customary for lenders to capitalize unpaid fire insurance and property taxes. The S&L should have notified you of any deficit in the escrow impound account and your monthly payments should have been increased for the following year. Adding the uncollected amounts to your loan principal will cost you substantial extra interest over the remaining years of your mortgage.
Under the terms of most mortgages the lender can elect to pay uncollected property taxes or fire insurance premiums and add the amount to the mortgage. However, the borrower must first be notified and given the opportunity to work out a repayment schedule. If your lender failed to notify you, then you may have legal grounds to cancel any amount added to your loan balance without your approval.
I suggest you consult a real estate attorney. Also notify the Federal Home Loan Bank Board. DEAR BOB: Recently, you said, "In my opinion FHA and VA mortgages are the best home loans available today." But you failed to explain how and where borrowers can obtain these mortgages. -- Earl K.
DEAR EARL: FHA and VA mortgages are available from thousands of banks, S&Ls and mortgage companies. The maximum VA mortgage interest rate is set by the Veteran's Administration. But the FHA rate can "float," although it is usually the same as the VA rate.
However, VA and FHA usually will not make loans on condominiums that have not been preapproved. For this reason, you may have to get a conventional nongovernment mortgage on the condo you are buying. Be sure to shop among at least a half-dozen lenders to see if you can do better than the mortgage terms offered by the developer. DEAR BOB: I am very elderly and confined to a wheelchair. My sister lives with me in my free and clear, paid-for home. As I want to make her co-owner of my home, I have been advised to give her a "gift deed," but that might create unnecessary large taxes for her to pay should I pass away. In my will, I have given everything to my sister, but I want this matter of co-ownership taken care of immediately so that upon my death there will be no probate of my home. -- Beatrice S.
DEAR BEATRICE: Please don't give a gift deed of your home to your sister without consulting an attorney. In your state, as in many others, that deed will cause a property tax reassessment, which will greatly increase the real estate taxes.
Another drawback of making your sister co-owner of your home is that she might die before you do. Presuming you are the only heir in her will, you would receive her half of the house back in probate. That could be costly.
A better alternative is to put your property into a living trust. You can be the trustee and your sister can be the beneficiary. When you die, the property then goes automatically to the beneficiary without having to go through probate. The living trust method was used by the late Bing Crosby to avoid publicity and save a fortune in probate fees on his vast real estate holdings. You can get the same benefits from a living trust.
For further information on living trusts, please read Norman Dacey's excellent book "How to Avoid Probate -- Newly Updated," available at bookstores.
DEAR BOB: I am 53 and plan to retire at 55 and relocate. If I got a good offer on my home, I would sell it now before I retire and move to a rental apartment. I understand I have two years to reinvest in another home to defer tax on my home sale. I am presently looking at mobile homes. If I buy a mobile home, would that satisfy the replacement rule to avoid tax on my home sale? What if the mobile home costs less than my home's sales price? Or would it be advantageous to wait until I am 55 to sell my home? I bought it in 1965 for $18,500 and it is now worth at least $80,000. Your advice please. -- Ronald E. DEAR RONALD: Your letter offers an excellent opportunity to explain the important deadlines that can save or cost tax dollars when selling your personal residence. Yes, a mobile home can qualify for Uncle Sam's residence sale tax benefits, as can houses, condos, co-op apartments, and even houseboats.
Until you become 55, the only tax break available is the Internal Revenue Code section 1034 "rollover residence replacement rule." To qualify for tax deferral, you must buy a replacement principal residence of within two years before or after your home sale. If the replacement costs at least as much as your old home's net or adjusted sales price, then all your profit tax must be deferred. However, if you buy a less expensive replacement home, then your profit is taxable up to the difference in the two prices.
If your home brings an $80,000 net sales price and within two years before or after the sale you buy and occupy a replacement costing at least $80,000, then all your profit tax is deferred. However, let's suppose you buy a mobile home for $50,000. Then $30,000 of your $61,500 profit will be taxed as long-term capital gain at the new 28 percent tax rate.
However, if you wait to sell your home after you become 55, then you can qualify for the "over 55 rule" of IRC 121. As you may know, this once-per-lifetime tax break allows up to $125,000 tax exemption on home sale profits. There is no need to buy any replacement home when using this tax rule. To qualify, you must have owned and occupied your home any three of the five years before the sale. That means you can lease or lease-option your home up to two years before selling it.