Q. DEAR BOB: My mortgage broker recently failed to deliver my refinanced home loan at the quoted 6.375 percent interest rate. I did my part, but they didn't get their paperwork completed by the scheduled closing date. What recourse do I have?--John M.
A. DEAR JOHN: Did you lock in the 6.375 percent interest rate? If you did and can prove it, the lender who promised that low rate is liable to you for breach-of-contract damages because you'll now have to pay a higher interest rate. If the mortgage broker didn't have the closing paperwork prepared on time, the mortgage broker is also liable for breach-of-contract damages.
Mortgage brokers are state-regulated. It is your civic duty to file a complaint against that mortgage broker with the appropriate state government agency. But before doing so, give the mortgage broker one last chance to make things right, such as by eliminating any loan fee and other charges. If the mortgage broker refuses, ask for the mortgage broker's state license number. You don't really need it, but your question might intimidate him and the licensed loan agents in the firm.
Unfortunately, your situation occurs too frequently. As you know, mortgage brokers are a link between the borrower and the lender. They receive a fee for their brokerage services. The few unscrupulous mortgage brokers give the entire industry a bad "bait and switch" reputation.
DEAR BOB: Thank you for your information on reverse mortgages for senior citizen homeowners. I'm having trouble finding a local lender who does reverse mortgages. I don't want to sell my house, but I need extra cash to help with repairs and living expenses. I would be so grateful if you could suggest a local reverse-mortgage lender.--Francis R.
DEAR FRANCIS: As you probably know, the two major nationwide reverse-mortgage lenders (except in Texas) that can pay tax-free lifetime income to senior citizen homeowners are FHA and Fannie Mae. Financial Freedom Plan originates jumbo reverse mortgages up to $700,000 in California, Colorado, Washington and Arizona.
Call Fannie Mae's toll-free phone number (1-800-732-6643) to get the name of a reverse-mortgage originator. Most of these lenders also offer FHA reverse mortgages.
Norwest Mortgage Co. is the nation's largest originator of reverse mortgages; they probably have a branch office near you. GMAC is another major reverse mortgage originator with many local offices.
DEAR BOB: I am interested in buying property with a pending foreclosure sale, but I don't have enough cash to bid at the auction. I've tried to locate the owner of this abandoned property but have been unsuccessful.
If the property doesn't sell at the auction, as you recently suggested in an item about foreclosures, I plan to contact the foreclosing lender to make an offer. How can I protect my earnest-money deposit funds if the lender accepts my purchase offer but doesn't deliver the title?--Todd C.
DEAR TODD: I always make my earnest-money good-faith deposit checks payable to the agent handling the closing settlement, such as a title company, attorney, bank or escrow firm. If the foreclosing lender is a reputable bank or savings and loan association, you don't need to worry about your deposit check not being returned. Ask a local real estate lawyer for further details.
DEAR BOB: We have owned our two-family duplex house about 10 years, living in one unit and renting the other. Can we claim that new $250,000 home-sale tax exemption?--Jim B.
DEAR JIM: Yes, but it only applies to your profit on the sale of your personal residence unit, not on your profit from the sale of the rental unit.
When you sell your duplex, for tax purposes, it is really the sale of two properties. The new Internal Revenue Code 121 $250,000 home-sale tax exemption ($500,000 for a married couple filing jointly) applies only to the residential profit. I'm assuming you've owned and lived in it an "aggregate" of two of the past five years before sale. For more details, consult a tax adviser.
DEAR BOB: For the past seven years, my partner and I have owned and lived in our house. His employer has offered him a fantastic out-of-town job promotion and we have decided to sell our house. The net profit should be at least $400,000 because the house is in a highly desirable area. Can we each claim that new $250,000 home-sale tax exemption or do we have to split it?--Daniel S.
DEAR DANIEL: Each qualified co-owner can claim up to $250,000 principal residence tax-free sale profits. That's presuming you and your partner each have owned and occupied your principal residence an aggregate of two of the past five years before sale. The result is your $200,000 profit share will be tax-free, and your partner's $200,000 profit share also will be tax-free. A tax adviser has complete details.
DEAR BOB: My daughter and son-in-law are selling their house in South Carolina and buying another. The same real estate agent is handling negotiations on both houses. The purchase end has gone smoothly. Their old house was listed at $95,000 and they accepted a buyer's $92,500 purchase offer.
The agent later told them the buyer was having a hard time coming up with the down payment. The agent's solution, which he said is common practice, is for the sellers to pay the buyer's $4,700 closing costs. My daughter and son-in-law reluctantly agreed but were taken aback when the agent told them they must pay his commission on the full $92,500 sales price. That means my daughter and son-in-law will be paying a 6 percent commission--on $4,700 that they'll be paying out, not receiving. The amount the agent would receive on that portion, $282, is not large, but is this legal?--William C.
DEAR WILLIAM: Real estate sales commissions are based on the gross sales price, regardless of the existing mortgage balance and sales expenses or credits the seller agrees to pay. Technically and legally, the real estate agent is correct.
If the agent were smart, however, he would discount his commission by the disputed $282 for the unexpected $4,700 closing-cost credit the sellers agreed to give the buyer, especially since he is earning at least a partial commission on both houses. You can be sure that greedy agent will never get a referral recommendation from those sellers.
DEAR BOB: I'm getting ready to sell my older house, which, frankly, needs some updating. So far, I've interviewed two real estate agents about listing it. The first listed what I should fix to get top dollar--painting, carpeting, landscaping and a new roof.
The second agent recommends that I list my house for sale "as is" at a discounted price to compensate for the work the buyer will probably do to the house. The second alternative sounds better to me because I don't want to go through the hassle of improvements. What do you recommend?--Hattie S.
DEAR HATTIE: If you want to receive top dollar for your house and to make it appeal to the largest number of prospective buyers, get it into tip-top model-home condition. Most buyers just want to turn the key in the front door and move in.
From your viewpoint, however, selling the house at a discount in its present "as is" condition also makes sense. If you've owned the house a long time, you probably have a low adjusted cost basis and are probably not chasing the last profit dollar. However, if you recently purchased the house and don't have much profit, you might want to maximize profit by fixing up the house before listing it for sale.
Be aware an "as is" house appeals to a smaller number of potential buyers. "As is" means you must disclose known defects in the house to prospective buyers, but you aren't going to pay for repairs. Some bargain hunters like to purchase "as is" fix-up houses at substantial discounts to compensate for the necessary upgrades.
There is no right or wrong answer to your question. One alternative is to list the house for sale "as is" for 60 days. If it doesn't sell at an acceptable price, then you can take it off the market and fix it up so it will appeal to more prospective home buyers at a higher asking price.
DEAR BOB: Our tenant wants to buy our rental house. The sale is to be all cash to us at a fair price. We like the idea of saving the real estate sales commission and the hassle of selling to a stranger, but the drawback is our capital gain will be about $140,000.
We know we can't use that new $250,000 principal residence tax exemption you often discuss. Is there any other way to avoid tax on our profit?--Marv L.
DEAR MARV: You can make a Starker delayed tax-deferred exchange for another investment or business property of equal or greater cost without taking out any taxable funds, such as cash or net mortgage relief.
Internal Revenue Code 1031(a)(3) allows tax-deferral if you have the sales proceeds held by a third-party accommodator, such as a bank trust department, designate the replacement property within 45 days after the sale closes and acquire the qualifying replacement property within 180 days.
DEAR BOB: Because of a job transfer, we soon will be buying a house in a new location. We have a choice of either paying all cash, accomplished through a "signing bonus" from my new employer and some stock options from my previous employer, or getting a mortgage for the new house.
With mortgage interest rates now so high, do you think we should pay cash? I think we should pay cash although it will temporarily leave us short of savings for emergencies. But my wife doesn't think we should put all our eggs in one basket. What do you advise?--Marshall C.
DEAR MARSHALL: Your wife is right. Mortgage interest rates are still very cheap. True, they are not as low as they were a few months ago, but they are far from being too expensive.
The primary reason I do not recommend owning your house free and clear, when you can obviously afford monthly mortgage payments, is that a house is not a liquid asset. Also, it's not smart to tie up such a large percentage of your investment money in just one asset.
If you make a 25 percent cash down payment, you can easily get a new 75 percent "easy qualifier" or "low documentation" home mortgage at a reasonable interest rate. Later on, if interest rates plummet, you can refinance to reduce the interest rate.
DEAR BOB: I am a beginner real estate investor without a lot of capital. I've heard about a Florida firm that will use its cash to buy distressed properties an investor locates, which can be bought at bargain prices and then resold. When the property is resold, the profit is split equally with the investor. Have you heard of such a firm and is this a good idea?--Rick R.
DEAR RICK: There are many such companies, though most take unfair advantage of the investor. I'll bet they probably will want you to buy their course, put up a good-faith deposit or make an upfront investment first.
Two people involved in such real estate ventures recently were sentenced to 25 years in federal prison for fraud. They never put up any cash to buy the distress properties they promised to co-invest in with their students, who purchased real estate courses.
I'm not saying the firm you're considering is fraudulent, but most of those firms that promise to buy distress properties located by investors never buy such properties. Be wary--ask for references from the firm and check them carefully. Visit some of the firm's investors to see if they are satisfied. I'm sorry, but I cannot recommend such a program.
DEAR BOB: My father remarried about six years ago. His second wife made sure her name was added to his properties and that the first wife was off the titles. Two years ago, they separated but did not divorce. He died about six months ago. His will leaves his assets equally to his three adult children, including me.
We must sell some of these properties to pay his bills. The second wife refuses to cooperate unless we pay her more than her half of what the properties are worth. She got $10,000 in the will. Is there any way we can force her to sell some of the properties to pay my late father's debts?--David G.
DEAR DAVID: Untangling an estate like that can be quite a mess when the co-owner is uncooperative. The situation you describe sounds like blackmail, but it's probably not illegal. You and your siblings should hire an estate lawyer to straighten out this mess, which could have been avoided if your late father had held his assets in a living trust. Incidentally, one possible method of forcing a property sale is a partition lawsuit. Ask the estate lawyer about this possibility.
DEAR BOB: As avid readers of your articles for years, we could not believe our luck when you recently explained FICO scores for mortgage applicants. We were rated 758 the day before. Is that score high or low? We believe unfair assumptions were made in judging our finances.
We routinely approach our upper limit on credit-card purchases every month for convenience. We also pay those charges immediately and in full. Should we insist on another rating at no charge if we dispute the initial result?--Paul F.
DEAR PAUL: As you probably know, Fair, Isaac and Co. has created a FICO score rating system that the company says predicts whether a mortgage applicant will default. It is based on scoring the applicant's credit report. The exact system is top-secret, but Fannie Mae and Freddie Mac, the major secondary mortgage market buyers of home loans, use FICO scores to rate loan applicants.
Your FICO score of 758 is excellent. When I refinanced my mortgage last year, my score was 700, but I got the mortgage I wanted. My understanding is anything less than 620 requires a "second look" by a human mortgage underwriter.
FICO scores have become important for rating home-loan applicants. This method takes most of the personal guesswork out of evaluating loan applicants, but it is far from perfect. I, too, have run up some big credit-card balances, but pay them off each month to avoid finance charges. Yet if you look at my credit report, the result is substantial credit-card balances. If you come up with a better computerized mortgage underwriting system, you'll make a fortune, as Fair, Isaac and Co. has done.
DEAR BOB: In March 1997, we signed a one-year lease-purchase for our condominium, which we have occupied since then. After one year occupancy, we exercised our option to buy and took title in March 1998.
We have been told the condo should bring $250,000 or more today. We meet the two-year occupancy requirement but have owned the condo only one year. We plan to retire and move to a less-expensive area. Can we qualify for the full $250,000 exemption?--Bonnie S.
DEAR BONNIE: No. Consult a tax adviser for assistance. Internal Revenue Code 121's principal residence sale tax exemption applies to capital gain profit, not sales price.
Since you have less than 24 months "aggregate" ownership and occupancy, you do not yet qualify for the $250,000 per qualified owner principal residence tax exemption. Also, since you did not own the condo as of May 7, 1997, you do not qualify for the partial exemption for home sales before Aug. 7, 1999.
As of this moment, it appears you do not yet qualify. However, if you remain in your condo and don't sell it before March 2000, then you and your husband each can qualify for $250,000 tax-free home-sale profits.
DEAR BOB: I plan to retire at the end of 1999. My wife and I will then have about $5,000 monthly income from pension, Social Security, SEP/IRA and investments. We plan to move to Nevada. Would it be advisable to have a home mortgage there for tax deductions?--Rick R.
DEAR RICK: Although you will have about $60,000 annual retirement income, much of it will be tax-free. It makes no sense to have a home mortgage just for its tax deductions. But there are other major reasons, such as having liquid cash for emergencies and investments. Consult a tax adviser to discuss the best way to pay for your Nevada retirement home.
Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128.
(C) 1999, Tribune Media Services Inc.