Unmarried? Buying a Home Together? Read This!!!

Buying a home means making a number of decisions with your money, investment planning (remember, your home is an investment), and we must consider how to accept title in our new home as part of our estate planning. Generally,  California is a community property state. In California, a 50/50 division of community property between a married couple is strictly mandated by statute, meaning that the focus then shifts to whether particular items are to be classified as community or separate property. If one owned property prior to the marriage, that property can be vested as “Sole and Separate Property,” meaning that it belongs entirely to one party in the marriage.

Typically, in the absence of a Living Trust, married couples in California take title to property as joint tenants or as community property. But what if you are not married? What if you are cohabitating with someone and you decide to buy a house together?

Unmarried couples have many of the same decisions to make as married couples when it comes down to home purchasing. One of the most important is how to take title of the home. This can determine what can happen in the case of a dissolution of the relationship or a death of one of the parties to the home’s purchase. Let’s take a look at the different vestings available to unmarried couples and some of the details involved with each particular vesting.

To be sure, I am not an attorney. The information I provide here is rather basic so for additional details, please consider consulting with a Realtor, a lawyer or an investment adviser who can help you with some estate planning.

Individual vesting: In this case, only one individual of the unmarried couple owns the property and owns 100% of it. The other individual has no ownership involvement or rights. If the owner dies, the surviving member of the couple is out of a home unless the beneficiaries selected by the decedent (dead) owner allow him or her to continue living in the home with a rental agreement. The owner can bequeath the property to their unmarried partner in a will but that opens up a can of inheritance taxes and Legal issues.

Tenants-in-Common: This vesting is most common for investment properties with multiple owners. In the case of unmarried couples, some people like to retain what is theirs or at least have a dividing line to say this part is mine and that is yours. This is particularly acute when one party to the transaction provides a larger portion of the down payment of a new home. Tenants-in-common allows each borrower to delineate their ownership percentage of the home. If two people have equal down payments and will share 50/50 in the mortgage, the percentage could be set at each owning 50%. If the down payments are unequal or one party will be paying a significantly larger portion of the mortgage, the couple must work out who owns what percentage; 40/60? 30/70? Also, in Tenants-in-common each can leave their portion of the home to their own selected heirs. Their ownership does not automatically revert to the surviving tenant or tenants. You can leave your ownership interest to the dog if you want! This creates some sticky situations if the decedent tenant leaves their portion of the home to someone with whom the surviving tenant does not get along.

Joint Tenants: In Joint Tenancy, the owners own 100% of the property together. There is no delineation of who owns what percentage of the home. Joint Tenants must both sign documents when transferring the property or using it as a security for a loan. Joint Tenancy is often written on title documents as “Joint Tenants with right of survivorship,” meaning that when one tenant dies, the other tenant inherits the property and owns 100% of it. That tenant now owns the entire home and has the right to select his or her own beneficiaries for the home in the case of their own death.

Community Property (with right of survivorship): This vesting is intended for married persons or domestic partners. Similar to Joint Tenants, the tenants own 100% together. There is no delineation of ownership percentages. Since all such property is owned equally, both parties must sign all agreements and documents transferring the property or using it as security for a loan. Adding the “with right of survivorship” may add some tax advantages. On the death of an owner, the decedent’s interest ends and the survivor owns all interests in the property.  

Trusts: Unmarried people may also take ownership in the form of a trust. The trust documents will determine each parties’ (trustees) ownership percentage and will determine what takes place upon the death of a trustee. In this case, funds could be left to the surviving trustee or decided in advance who will inherit the ownership. They can also designate who would manage the trust (successor Trustee) in the case both owners perish at the same time.

If you are unmarried and thinking of buying a house, this is a great time to do it. Despite the lack of inventory in some areas, interest rates remain historically low. There is a lot to take into consideration when purchasing a home such as the neighborhood, schools, transportation availability, shopping,  down payments, loan terms, and how you will take ownership; your vesting.

When the time comes to purchase your new home, don’t forget to check your credit union’s mortgage rates. Judging from the volume of home purchase loans we are doing today, our interest rates and loan terms must be very competitive!

Link for additional information: http://www.clta.org/for-consumers/consumer-holdingtitle.html

This link is to the California Land Title Association's website for vesting information.

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Free Financial Education Class:
Credit Myths & Credit Repair
Wednesday, May 28, 2014 - 6:30-7:30 p.m.
Chesbro Financial Center

5615 Chesbro Ave, San Jose, CA

Your credit is one of the most important things you need to know the FACTS about. Protect your credit by learning about credit Myths vs. Facts.

Helping your Kids buy a Home

It is nice to help our kids buy a house. But it is equally important that we keep it “business.” If you loan them part of the downpayment or provide a loan to cover a gap in the financing, i.e. the kids come in with 20% down, take a 70% first mortgage and need 10% lent to them by the parents because the payments on an 80% first would be too much for their budget. The “Parental Second” can be creative. You can have the interest paid monthly or accrued to be paid annually. If you don’t have a payment plan and are letting the interest accrue, you can also compound the interest monthly or annually to increase your yield on the loan. Just remember that any interest earned, whether deferred or paid regularly, is regular income and subject to IRS taxation.

There is some bookkeeping to be done by Mom and Dad. The parents are required to provide their kids with a 1098 to document their interest paid so the kids may deduct the interest from their taxes.

For some parents, earning 3% or a bit more on your money is a pretty good deal considering how poor savings rates are today. Of course, your loan is in second position and, historically, loans in secondary positions usually have a greater interest rate than the first mortgage due to the greater risk accepted by the lender in second position. If a borrower defaults on the first mortgage, the holder of the second mortgage must make up the financial shortfalls on the first mortgage to make good his claim on the property. So asking for >4% is not unusual for a second mortgage. Many financial institutions are asking for prime plus one point on business loans. Wall Street Journal prime is 3.25% so, prime plus one is 4.25%. That might be a very satisfactory rate for a family loan. Let’s keep in mind, historic rates for home mortgages are up in the 5’s. Thus, 4.5% is still a pretty good deal.

Hmmmm, could a loan like this become part of your retirement income? If you are retired, this sort of thing can be helpful to your income. $40,000 at 4.5% generates about $150 a month in interest income. That's a nice supplement to someone's Social Security.

Of course, I suppose that each of us knows our kids and whether or not they would be a responsible adult and repay their loans; particularly loans from their parents! Let’s keep in mind that we need to go all the way and file a deed of trust and have your kids sign a promissory note that details how the loan is to be repaid. If you don’t do that, you deserve all that you are not repaid! The deed of trust protects your loan interest and your interest in the property. Without it, should you kids fail to pay, your ability to get repaid thru the trustee sale or foreclosure sale of the home will be compromised.

Emotional? Yes, there are a variety of ways for this to become an emotional mess. Is the parent depending on the interest from this loan to help with their retirement income? A missed payment in this case could be very critical. Suppose the son or daughter is involved in a large lay off? Even worse, their job is in low demand and finding a new job will take a lot of time. During this lay off, they stop paying their first mortgage. It is then the responsibility of the second mortgagor to make good the first mortgage to keep the first lender from filing foreclosure. Can all parents afford to pay this for their kids? That is a lot of stress and demonstrates for us the emotional issues that can come with lending to our kids. 

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Our next financial education workshops will be presented at our main office on Chesbro Ave in San Jose. This month we are offering "Establishing Credit" on May 15th which is a good course for high school and college students, but really works well for anyone interested in how credit gets established. 

On the 22nd we will be offering "Preventing Identity Theft" at our main office. This workshop provides you with all you need to know to prevent identity thieves and protect your good name from those who would use it for criminal acts. Get ready for summer vacation with our preventing identity theft class. 

May 15th - Establishing Credit - 6:30pm 
Meriwest Credit Union Main Office at 5615 Chesbro Ave, San Jose CA 95123
RSVP with Greg Meyer at gmeyer@meriwest.com or call at 408-365-6328

May 22nd - Preventing Identity Theft -6:30pm

Meriwest Credit Union Main Office at 5615 Chesbro Ave, San Jose CA 95123
RSVP with Greg Meyer at gmeyer@meriwest.com or call at 408-365-6328
 

Qualifying for a Home Loan - Jumping through the Hoops

As a recovering banker and branch manager who has processed hundreds of home and consumer loans over 30 years, I would like to provide my readers some insights into loan qualifying for a standard conforming home loan of $417,000 or less. If you have not checked lately, the approval bar for loan qualifying has been raised over the past few years. The first adjustment to the bar was on credit qualifying. The credit score required for a typical home loan five years ago was 680. That was the score everyone was shooting for. Today, that can be 720, 740, or even higher depending on the underwriting standards to which the borrower is being held. Each financial institution sets its own criteria based upon their risk tolerance.

The next criteria we will look at is the borrower’s income. Do they have enough to make their loan payments and other obligations? Lenders use a debt to income ratio to determine someone’s ability to make their monthly payments. The ratio usually varies between 30% and 40% of monthly income; meaning that the borrower’s loan payments and other credit obligations should be no more than 30%-40% of their total gross monthly income. If someone is at or below this ratio, they are in good shape for an approval. If they are over, they may need to consider a smaller house, paying off other debt, or adding a second job to improve their debt to income ratio.

We have looked into credit and income. There is a third rail in this mortgage process and that is the value of the home. Today, for the best interest rates, lenders are looking for borrowers to put down 20% of the appraised value or sales price of the home. What this gives the borrower is equity. In this case, equity is the amount of the value of the home that is not encumbered by a loan. So, if we are buying a $200,000 home, we would need to put down $40,000 as a down payment. This would mean you would be financing $160,000 and your payments would be based on that amount. Making a down payment can help with your debt to income ratio as well.

Why do lenders require so much equity? There are many reasons. There may be a downturn in the market and the lenders want to protect their loan and prevent the home from being “under-water” should a real estate market downturn take place again. If the lender needs to foreclose on the property, there is a cushion of equity to cover costs of the foreclosure process. But the main reason lenders require equity is that now the borrower has some skin in the game! In the case of the $200,000 home, the borrower has $40K invested in the home. Anyone with that sort of personal investment is not likely to walk away from the home should they have some hard financial times.

Qualifying for a conforming mortgage loan is no different today than it was ten years ago before the residential real estate bubble started. A borrower has to meet credit standards, income requirements, and the home must qualify under the loan to value ratio which is generally 80%, requiring a 20% downpayment for a standard conforming home loan of $417,000 or less.

Final Word to the Wise: This Spring, I refinanced my home with a new lender. It took less than thirty days to process my loan. Why? I provided all the documentation that was asked for up front with the application. If a borrower provides all the statements, taxes, paystubs, and other documents that the lender asks for to process the loan, their loan approval answer can be had very quickly. The thing that holds most loan approvals up is a lack of documentation. I have waited weeks for some clients to provide the required documents. If a person waits too long they may miss their window of opportunity for the interest rate. A rate “lock in” is where your interest rate is reserved for a fee paid to the lender. If a borrower is not forthcoming with the required documents in a timely fashion, the borrower may lose their preferred rate and the fee they paid for the interest rate lock in. Best advice, do your homework, research the rates, and have your documents prepared before you start getting serious.

Also, consider getting “pre-qualified” or “Pre-Approved” by your lender. Pre-Qualification will help you determine how much home you can afford, and what type of home you should be looking at. Pre-Approval will do the same, but will include a review of your personal credit. Lender’s often charge a small fee for Pre-Approvals.

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If you are interested in purchasing a home and wish to get Pre-Qualified or Pre-Approved, please see Meriwest Mortgage’s website  or contact them at 1-800-364-6636. Today’s rates are available here.

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For all of you out there looking for our next financial education workshops, your summer wait is over. Our next workshop will be "Reality Based Budgets for Teens" at our Milpitas Financial Center at 6PM on Aug. 22nd. 

Our next "Credit Myths and Repair Workshop" will take place at our Milpitas Financial Center on Aug. 29th at 6PM. 

I hope I will meet you at one of our seminars! Have a great week!

Adustable vs. Fixed Rate Home Loans

Are you thinking of diving into the market and buying a new home? Home Loan Rates are at a historic low point. Fixed 30 year rates have just gone below 4.00% and could go lower if the real estate market stays slow for now. Interest rates are not effected by gravity so when they go down, they will not stay down. They will go up when the economy heats up. That could be by the end of 2012 or it could be a year or two away. The economic situation is very fluid right now.

This brings me to my point; rates don’t have very far to fall but they have a lot of headroom to rise. On a loan taken out today, an adjustable rate can go down a little bit over the near term, but those who have a new adjustable rate mortgage need to be conscious of the movements of the market and be prepared to refinance to a fixed rate loan quickly. The best bet is to grab a fixed rate mortgage now. At 4% a borrower is borrowing at one of the most significantly low rates in recent U.S. history!

The Fed says that rates will remain low for a while. If there is a fix to the EU Debt Crises and our economy heats up, rates can go up fast. We have seen it repeatedly since 1978. Each time a recession has ended, lending rates went up quickly. Those with adjustable loans were hit the hardest as their loans are tied to the Fed rate, LIBOR, or the prime rate. Those rates can be very volatile in a heated economy. The Fed controls the money supply with interest rates. If the Fed governors feel there is too much easy money or because of the easy money they are seeing inflation, they can put the brakes on the economy and slow it down with a rate increase.

One last thing to keep in mind is a lender’s spread; the amount of interest he makes on money he lends vs. what he is paying for savings accounts. Typically, the spread should be about 2% or greater between the average interest rate being paid on savings vs. the average overall loan rate. Right now, financial institutions are paying less than 1% on savings accounts. There is room for rates to go down a little bit so that may make an adjustable loan more attractive. Many adjustable loans can go up 2% in one year. Thus, one can go from 3% to 5% on a mortgage loan in about a year. That would cause the payment to increase pretty dramatically. I think this is a good argument for a fixed rate loan. 

Our next financial education workshop is:
 Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA