Dear Michael: My lender is requiring me to have my property taxes in an impound account. What is an impound account and would I benefit from it?
Answer: An impound account is simply an account maintained by the mortgage company to collect property insurance and property tax payments from the buyer which are necessary in order to keep title free of any liens. To set up an impound account the lender divides the annual cost of insurance and property taxes into a monthly amount and adds it to your mortgage payment. Since low down payment borrowers are considered to be a higher risk due to their lower personal stake in the property, lenders will sometimes want some level of assurance that the assessor will not seize the property because of non-payment of property taxes and that borrowers won’t be without homeowners insurance in the event that the property is damaged. An impound account ensures that the only person who will become owner of the house in case of default will be the lender. Even if an impound account is not required, one can be elected by the buyer. Some buyers feel that impound accounts are a bad idea and therefore would rather set money aside in a high-interest account. The only risk with an impound account is that if the mortgage company does not pay the property taxes for whatever reasons, the homeowner is still liable. For this reason homeowners should be aware of the due dates for these payments and monitor their impound accounts carefully. Although the impound account is designed to protect the lender, it can also be beneficial for some borrowers. By paying for big-ticket housing expenses gradually throughout the year, borrowers avoid the sticker shock of paying large tax bills, and are assured that the money to pay those bills is there when they need it.
Dear Michael: I am purchasing a new home and my Realtor states that it is time to remove my loan contingency. I am not comfortable doing so. Why must I remove my loan contingency? I plan on purchasing this home no matter what.
Answer: You obviously hired your Realtor because you trusted him to handle the purchase of your new home. If you appraisal came in at full value and all the lenders condition have been met for your loan approval, then there is no reason why you should not remove your loan contingency. The seller needs a guarantee that you the buyer, is in fact committed to purchasing his home and mean business. The fact that you plan on “purchase this home no matter what” bares little guarantee to a seller that vested his lifetime retirement in his home. If there is minimal doubt that you may not be approved for the loan: hold off on removing your contingency. Be upfront with the seller and explain the situation. Lenders requirements for loan approval can advance beyond reasonable time. If this is the case the seller must understand that you are not ready to remove your loan contingency because of factors beyond your control. If your seller cannot wait any longer he will submit a notice to perform asking for removal of contingency. You can than opt to either cancel the agreement or remove your contingency. If you remove all your contingencies including your loan and decide to cancel the purchase, you could lose your earnest deposit.
Dear Michael: I was wondering if you would know of any tax issues regarding a short sale. A friend of mine stated I may have to pay taxes on the forgiven amount associated with my potential short sale. Are you familiar with this? Can you please provide assistance?
Answer: Congress passed the “Mortgage Forgiveness Debt Relief Act of 2007”. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. Normally in US law when a lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed. However, after the signing of the Mortgage Forgiveness Act, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residence. Consultation with a tax advisor is necessary to ensure that a borrower qualifies. The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year and expires at the end of 2012.
Michael Kayem is a Realtor with Re/max /Execs serving Culver City and the Westside since 2001. You can contact Michael with your questions at 310-390-3337 or e-mail them to him at: homes@agentmichael.com