What You Should Know About Down Payment Gifts

With an extreme lack of inventory facing so many of my buyers right now, they need all the help they can get. The biggest obstacle for many is the lack of money for a down payment. Thankfully, one solution is to get some help in the form of a gift from a family member, close friend, or a charitable organization. 

As a mortgage professional, I have become very familiar with the IRS code on this topic because there is so much confusion regarding the tax implications of giving a cash gift to help a loved one buy a home. Before I delve deeper into this, a disclosure: I am not a licensed tax preparer and don’t ever want to be one – I have mad respect for tax professionals. This article is not to advise specific tax guidelines but instead give some useful, general information to help lead you in the right direction. Please seek a tax professional for more detail.

The 2021 annual gift exclusion will not change from its current $15,000 that you can give to as many individuals – your kids, grandkids, their spouses – as you’d like, without gift tax consequences. The person receiving the money does not have to report it to the IRS or pay gift or income tax on its value. However, if you give the gift and it’s more than $15,000 per individual, you will want to pay close attention to the following. 

Here is the good news for most of us. Unless you are gifting more than $11.7 million, you will pay no taxes on that gift. Yes, you heard me right. I am talking millions here – Thanks to the lifetime gift tax exemption, you can give away $11.7 million tax-free throughout your entire life and not pay one penny on gift taxes. Of course, this could change as new tax policies get enacted, so be sure to always check with Uncle Sam or your tax professional before writing that check.

When my clients learn about this little nugget, they realize worrying about gifting more than the yearly allotment of $15,000 is a moot point. Most will not pay any taxes on the gift as most of us cannot fathom having $11.7 million to give our loved ones when we pass. According to the Joint Committee on Taxation (2015), only 2 out of 1000 people who die – owe any estate tax. So gift away, my friends! Show your loved ones how much you care now that you have this critical information in your pocket!

Refinance Now or Wait?

Refinance now or wait? With rates coming down as they have, some borrowers may want to delay a refinance, hoping that rates will improve further. Unfortunately, there are no guarantees rates will go even lower, and more critical, borrowers forget about the savings they forgo while they are waiting for rates to move lower potentially.

To make sure I don’t get in trouble with my company marketing policy, I will not talk about specific rates and instead will talk about the difference between your current rate and a new rate. 

Say your current mortgage payment is $1,775 a month. And based on a new rate, you could lower your monthly payment by $350 a month. You are in no rush and think rates will stay where they are or possibly go lower! Let’s assume by waiting another six months, you can score a .25% lower rate than today. The incremental savings you would see from a slightly lower interest rate would take a significant period to recoup the savings you would have been guaranteed by locking in that new rate today.

If you waited six months and could get a 0.25% rate lower than the rate you could get today, you would save $58 a month. But based on the $2,130 in savings you would have guaranteed by refinancing today, it would take over 3.5 years to make up for the forgone savings. If the rate were only better by 0.125%, it would take more than seven years to breakeven. And again, remember there is no guarantee that rates will move lower.

SECRET WEAPON – You Pick the New Term!

Get a tailored mortgage if your lender offers it! If you are managing your monthly payment just fine and have a goal of paying off your mortgage earlier by aggressively paying down your principal balance, this may be your secret weapon. For example, I have a client who purchased their home four years ago and wants to take advantage of a lower rate but does not want to start over with a new 30-year term, which eats into their long term savings. 

We did the math and were able to lock them into a new 22-year mortgage while keeping their monthly mortgage payment roughly right where it is now. In essence, our client was able to shave-off four years of payments without increasing their monthly cash flow. Be creative and take the time to run these numbers with your lender.

MORTGAGE TIPS TO SAVE YOUR DEAL

It’s been almost three months since Governor Newsom’s order that all Californian’s shelter-in-place. It sure feels like more. I feel such empathy for those that live alone, are single parents or have lost their job, It’s simply awful. I am thankful every single day I get up and get ready for work.

Covid-19 has re-ordered virtually every industry in the world to figure out how to adapt,. Not only adapt, but improvise, and overcome this virus or otherwise fail. In California, mortgage lending and real estate are still thriving; all be it, with a whole new subset of issues to we have never faced before. Below are just a few tricks that might help you during your next purchase:

APPRAISAL WAIVER

Did you know that in some cases, your lender will not require you to get an appraisal when buying a home? We have been doing this for years. Now, with Covid-19, and given the fact, sellers don’t want a stranger in their home, the appraisers can be just as uncomfortable entering a home. It’s lovely to know you have this option if you work with the right lender.

Fannie Mae and Freddie Mac traditionally offer an appraisal waiver for low loan-to-value refinance or if you put down at least 20% on a purchase. Also, in conjunction with new Fannie and Freddie Covid-19 updates, our underwriters are permitting exterior only appraisals under certain circumstances. 

However, you may still want to get an appraisal done (~$525) to ensure you are not paying too much for the home. But if you and your agent have taken the time to look at comparables and feel the value is there, not needing an appraisal can not only save you money by not having to pay for the report, it can also help in other ways. 

For example, I had a client facing multiple offers, and the only reason their offer was accepted is that they came in at asking price AND agreed to remove the appraisal contingency. Meaning, if for some reason, the appraisal came in lower, they would have to come out of pocket to make up the difference. These buyers didn’t have much in reserves after the down payment and closing costs, and what they did have left was their cushion for any future emergencies. With this appraisal waiver in place, they would not pay one extra dollar out of pocket – And not needing an appraisal was just what they needed – peace of mind. 

CAN’T GET A JUMBO LOAN?

Jumbo loans have been walloped during this pandemic as mortgage servicers tighten their lending criteria. Many lenders have stopped issuing them altogether. Jumbos are loans that exceed the maximum you can borrow with a Fannie, Freddie, or FHA conforming loan. For example, let’s assume you are buying a home in Sacramento County, where the max Fannie/Freddie loan amount is $569,250. Thus, if your loan amount is higher – you fall in the Jumbo loan category. 

Since Fannie and Freddie do not back jumbo loans, they are considered riskier and require higher credit scores, lower debt-to-income ratios, and may require a few months of cash reserves or even up to a year or more worth of mortgage payments. A little trick is to use a piggyback second mortgage to avoid taking out a Jumbo loan. Jumbo rates can be higher than those on conforming loans, so borrowers buying a high-value home may take out a conforming mortgage, then cover the rest with a piggyback loan and down payment.

Let’s assume you found your dream home for $850,000 in the perfect neighborhood. Now, throw in you were just told by your Jumbo lender that the loan for $680,000 you were qualified for, no longer exists. When the reserves required become higher, your rate just went up too. You could instead go with a conforming loan of $569,250 plus a piggyback loan of $110,750 and save the day.

Every day this pandemic throws new challenges our way. Because of that, we continue to adapt and improvise and overcome. This is why it is essential to work with people you trust. Lenders that have decades of experience will guide you through the steps of home-ownership and finance. Be safe, everyone.

COVID-19 Questions You Should Ask The Lender before Accepting Offer!

“In this COVID-19 world, what questions should I ask the buyer’s lender before accepting an offer on my listings?”

When was the last time credit was pulled? Ideally the last week or so.

If an FHA/VA offer, can you fund with their FICO today? Many lenders have changed the minimum FICO requirements. If the buyer’s credit was pulled prior to that change, do they still qualify?

Are you able to lock loans prior to final approval or appraisal? You want a “yes” – if rates go up after application, it could hurt their pre-approval or scare the buyer away from an increased payment. Many lenders are not allowing this. If that’s the case, can they withstand, and are they prepared for a rate increase?

What happens if the loan program is suspended during the loan process? Once you are locked you are “mostly” safe from program changes or program suspensions.

Could you force a lock date, per the contract, to protect your seller from suspended or canceled loan programs? Write it into additional provisions. Some lenders are not allowing loan to be locked until loan is approved and, in some cases, once all prior to doc conditions are met. Guild can lock day 1

Have you verified the Borrower’s full-time employment within the last 24 hours? Employment is tenuous today. It can change at any moment.

What are your current underwriting turn times? It longer than 3-4 days, a 30-day, or less, COE will be challenging.

Will you be requiring employment verification at the Funding/Closing Table? If they want verification done on or the day before the closing date, it could be a challenge to close on-time if the employer is not responsive or available.

What is your company’s policy on appraisals currently? Do they allow drive-by or desk reviews?

What are your appraisal turn times? If longer than 10 days, a 30-day close will be challenging.

Can the lender honestly close in 30 days? What % of the time do they experience that today?

Does the buyer currently own a home and if so, have they requested payment forbearance? If any mortgage loan is currently in forbearance, the buyer cannot likely get a new loan.

Is the lender allowing e-closings? If not, how long is the current process from CD to funding?

Does the lender allow for early closing if everything is done?

If you have questions on any of these, please do not hesitate to ask.

BE SAFE!

A 2-Minute Guide To Flood Insurance: Do You Really Need it?

The 5-Minute Guide to Flood Insurance: What It Is, How It Works, and Whether You Need ItYou’ve got house insurance, and assume your property is covered for any type of detrimental occurrence that can possibly take place.

However, not all homeowners in Sacramento are aware that home insurance policies don’t necessarily cover damage related to a flood, as the risks are too great. As a result, homeowners must purchase flood insurance through a private company.

Floods are one of the most common hazards in the US, costing billions of dollars in damage to properties every year. And more importantly, if you are in the process of shopping for a new home in Sacramento or anywhere in California for that matter, budgeting that monthly payment, its good to know if flood insurance will be required. Continue reading