Q: In your book, "100 Questions Every First-Time Home Buyer Should Ask," you mention that a lender will want to see all your current debts, including credit cards.

My wife and I are currently using one credit card to make most of our day-to-day purchases, so that we don't have to constantly balance our checkbook. Prior to using this card (which has zero percent interest for balances), we would only charge around $200-$400 a month on our other credit cards, and pay off the balance in full each month.

Now, we generally charge around $2,000 a month to it. We then use our checking account to make the one payment each month. We are running a $1,000 to $1,500 balance (again, at zero percent interest) and could very easily pay the card in full at any time.

We want to buy a house and are wondering if we should pay off the balance in full before we should pay off the balance in full before talking to a lender. Since we regularly use this card, does this look like we will always have an outstanding balance on it based on its payment history? Will this affect us in a negative way?

Should we go back to using a checking account instead, and leave a zero balance on the card? Thank you for your time and sorry about the long-winded question.

A: Most of the time when people write in with this question, they've got a nice-sized balance in their checking account, but are paying anywhere from 3 percent to 30 percent interest on their credit card debt.

Clearly, you've got great credit. You have been offered a card with zero percent interest on it, so you are paying for your purchases over time and carrying a small balance on the account. And, you've got cash in your checking account, which may or may not be earning interest.

If the cash in your checking account is earning interest, you're coming out somewhat ahead of the game.

I say "somewhat" because carrying a balance can hurt your credit history and credit score, depending on who issued the card that you're using. Some credit card companies report your balance as if you had maxed out your credit limit.

That probably hasn't happened to you, but you'd be wise to pull a copy of your credit history from each of the three credit-reporting bureaus (you're entitled to do this once each year for free from www.annualcreditreport.com) and then pay for a copy of your credit score ($5 to $7 at the same Web site depending on which credit score you choose).

Lenders are used to seeing credit card balances, and they can adjust for them. What happens is that the lender adds up how much you can afford to spend each month on your mortgage, interest and taxes. Conventional lenders allow you to spend up to 28 percent of your gross monthly income on these three items and up to 36 percent on your total debt.

If you carry a credit card balance, the lender subtracts your minimum monthly payment from the total amount of debt you can carry. The result is that you'll qualify to get a smaller mortgage.

In your case, the lender might see that you have enough cash on hand to pay off the debt. And, you might not get "docked" for the way you're handling your finances.

But my general feeling is that you're talking about a thousand bucks. If you have the cash on hand, you should pay off your credit card debt and keep that slate clean.

Paying off your debts in full has obviously given you a high credit score. Carrying a balance, even at zero percent, can only hurt you.

By Ilyce R. Glink

Inman News

Do you have to pay tax on the profits you generate from the sale of your house?

If you have owned and lived in your primary residence for two years, that residence can be sold without incurring capital gains tax on the equity. The IRS Code 121 now allows a tax exemption up to $250,000 per seller ($500,000 for a married couple) when that home is sold.

With this in mind, this tax law can be used to create wealth through investment homes. This could be used as an alternate to investing in the stock market. Consider the possibility of purchasing a house that needs some fixing up, living in that house while doing the renovations, and then selling it after the work is completed. As long as you live in the house as your primary residence for two years during the five years before the sale, you can use this tax exemption repeatedly—without limit—but not more frequently than once every 24 months. Homeowners can therefore buy a home, live in it for two years while they make profitable improvements, then sell it for a hefty tax-free profit. Even buyers who swear they will never move again may change their minds if there’s a big profit to be made.

Contact me about fixer-upper homes for sale and I will show you how to employ this technique.

  The above content is for informational purposes only and should not be considered as legal, tax, or financial advice. For information about your personal investing, you should consult your financial or legal advisor.

What's the deal with Polybutylene Pipe?

First of all, what is Polybutylene pipe? It is a form of plastic resin that was used extensively in the manufacture of water supply piping from 1978 until 1995. Due to the low cost of the material and ease of installation, polybutylene piping systems were viewed as "the pipe of the future" and were used as a substitute for traditional copper piping. It is most commonly found in the "Sun Belt" where residential construction was heavy through the 1980's and early-to-mid 90's, but it is also very common in the Mid Atlantic States, including Maryland. The piping systems were used for underground water mains and as interior water distribution piping. Industry experts believe it was installed in at least 6 million homes, and some experts indicate it may have been used in as many as 10 million homes. Most probably, the piping was installed in about one in every four or five homes built during the years in which the pipe was manufactured.

Polybutylene underground water mains are usually blue, but may be gray or black (do not confuse black poly with polyethelene pipe). It is usually 1/2" or 1" in diameter, and it may be found entering your home through the basement wall or floor, concrete slab or coming up through your crawlspace. Polybutylene used inside your home can be found near the water heater, running across the ceiling in unfinished basements, and coming out of the walls to feed sinks and toilets. Warning: In some regions of the country plumbers used copper "stub outs" where the pipe exits a wall to feed a fixture, so seeing copper here does not mean that you do not have poly.

What is the problem?

While scientific evidence is scarce, it is believed that oxidants in the public water supplies, such as chlorine, react with the polybutylene piping and acetal fittings causing them to scale and flake and become brittle. Micro-fractures result, and the basic structural integrity of the system is reduced. Thus, the system becomes weak and may fail without warning causing damage to the building structure and personal property. It is believed that other factors may also contribute to the failure of polybutylene systems, such as improper installation, but it is virtually impossible to detect installation problems throughout an entire system. There have been hundreds of thousands of Poly Leaks, and there is potential for catastrophic damage from a single leak. Once the leak occurs, and there is water damage reported to the insurance company, a whole new set of problems can begin for the homeowner. (See the article in the April Monthly Column) 

A home inspector should be able to recognize that polybutylene pipe is installed, but cannot determine if it is about to leak simply by looking at the outside of the pipe. Pipes deteriorate from the inside, and they can split under pressure. Polybutylene pipes can leak anytime without warning - destroying furniture, family heirlooms, and may cause structural damage. If you are considering purchasing a home that is found to have polybutylene piping, you should be prepared to have it replaced, either before you move in, or shortly after. Homes with polybutylene piping will decrease in value over time compared to those with copper plumbing.

If you are considering purchasing a home, be sure to have a home inspection and be aware that there could be polybutylene piping. If you are selling a house that has Polybutylene pipe, be sure to disclose it to your agent and the prospective buyer or you may be liable for future damage.

How Can We Lower Our Homeowners Insurance Costs?

1. Raise your deductible. If you can afford to pay more toward a loss that occurs, your premiums will be lower.

2. Buy your homeowners and auto policies from the same company and you'll usually qualify for a discount. But make sure that the savings really yields the lowest price.

3. Make your home less susceptible to damage. Keep roofs and drains in good repair. Retrofit your house to protect against natural disasters common to your area.

4. Keep your home safer. Install smoke detectors, burglar alarms, and dead-bolt locks. All of these will usually qualify for a discount.

5. Be sure you insure your house for the correct amount. Remember, you're covering replacement cost, not market value.

6. Ask about other discounts. For example, retirees who are home more than working people may qualify for a discount on theft insurance.

7. Stay with the same insurer. Especially in today's tight insurance market, your current vendor is more likely to give you a good price.

8. See if you belong to any groups—associations, alumni groups—that offer lower insurance rates.

9. Review your policy limits and the value of your home and possessions annually. Some items depreciate and may not need as much coverage.

10. See if there's a government-backed insurance plan. In some high-risk areas, such as coasts, federal or state government may back plans to lower rates. Ask your agent.

Is Home Buying Influenced by Interest Rate Changes?

Whenever mortgage rates make a move, they get a lot of media attention. But according to a recent Harris Interactive survey, potential homebuyers revealed that for the most part, interest rates play only a minor role in the decision to purchase a home. In fact, low rates were the primary motivator in home purchases for a mere 4% of the respondents who were planning to buy a home within two years.

Instead of rates, the driving force for homebuyers tend to be major life-changing events. Twenty-five percent said retirement, relocation, new baby or divorce were the catalysts for buying a home. Eighteen percent said they wanted a bigger house or more property, 12% did not want to rent any longer, and 16% cited investment value as the reason for their purchase. Only 7% cited the tax benefits of homeownership as a motivating force to buy.

While low mortgage rates make a new home more affordable for first time buyers, they are more likely to have a major impact on refinancing activity rather than new purchase business. Mortgage rates will always rise and fall, but the life events that create the need for homeownership are the steady engines that motivate home shoppers to become buyers.

What day of the month Should I close?

The reason that some people like to close at the end of the month is that they will need less money out of pocket at the closing. This is because they will need less “prepaid interest” on the mortgage.

Interest on the mortgage begins accruing on the date you close on your house. Since most mortgage payments are usually due on the first of the month, if you close early in the month, you will have to pay the interest on the mortgage from that date, until the end of the month. This interest will be paid in advance at closing.

On the other hand, if you close at the end of the month, say on the 29th, you will only pay a day or two of prepaid interest at closing. Interest will then begin accruing and will be due a month later. It doesn’t really cost any more to close early in the month, you just have to pay interest sooner.

If closing costs are an issue, then it is probably better to try to arrange a closing for late in the month. Keep in mind also what the seller’s needs are. The seller may not be willing to wait until the end of the month to close the transaction. In a market where houses are in great demand ( a seller’s market ), you may have to close earlier in the month to make your offer more attractive to the seller.

 

What Should Your Home Inspection Cover?

Siding: Look for dents or buckling.
Foundations: Look for cracks or water seepage.
Exterior Brick: Look for cracked bricks or mortar pulling away from bricks.
Insulation: Look for condition, adequate rating for climate (the higher the R value, the more effective the insulation is).
Doors and Windows: Look for loose or tight fits, condition of locks, condition of weatherstripping.
Roof: Look for age, conditions of flashing, pooling water, buckled shingles, or loose gutters and downspouts.
Ceilings, walls, and moldings: Look for loose pieces, dry wall that is pulling away.
Porch/Deck: Loose railings or step, rot.
Electrical: Look for condition of fuse box/circuit breakers, number of outlets in each room.
Plumbing: Look for poor water pressure, banging pipes, rust spots or corrosion that indicate leaks, sufficient insulation, pipe types.
Water Heater: Look for age, size adequate for house, speed of recovery, energy rating.
Furnace/Air Conditioning: Look for age, energy rating. Furnaces are rated by annual fuel utilization efficiency; the higher the rating, the lower your fuel costs. However, oth.er factors such as payback period and other operating costs, such as electricity to operate motors.
Garage: Look for exterior in good repair; condition of floor—cracks, stains, etc.; condition of door mechanism.
Basement: Look for water leakage, musty smell.
Attic: Look for adequate ventilation, water leaks from roof, bathroom vents vented to outside.
Septic Tanks (if applicable): Adequate absorption field capacity for the percolation rate in your area and the size of your family.
Driveways/Sidewalks: Look for cracks, heaving pavement, crumbling near edges, stains.
 

What are the differences between a condominium, a townhouse, and a co-op?

A townhouse is a style of construction, whereas condominium and co-op are types of ownership. A townhouse is basically a building or unit that shares a common wall with the building or unit next door. The walls are usually straight and entry is usually from the ground floor. Townhouses usually have two or more stories. A townhouse can be a style of condominium.

A condo is where you own the actual structure of the building jointly with the other members of the association, along with common areas such as swimming pools, tennis courts or other common areas. Individually, you own the airspace and interior of the structure, but not the building itself. You and the other members of the association own the structure together.

A co-op is where you own shares of a corporation or organization that owns the larger structure, and ownership of those shares gives you the right to occupy a specific unit or apartment.

Can a Buyer on a Real Estate Contract Be Held Liable
Beyond His Earnest Money Deposit?
by William Bronchick, Esq.

The "standard" real estate contract usually has a provision spelling out the legal remedy of the buyer or seller upon default of the agreement. In most cases, the buyer wants to limit his risk of loss by offering a small earnest money deposit and inserting a "liquidated damages" provision.

A liquidated damages provision states that if the buyer breaches the agreement by failing to close title, the seller's sole legal remedy is to keep the buyer's earnest money. Without a liquidated damages provision, the seller could sue the buyer for his actual, provable damages or force the buyer to purchase the property (called "specific performance"). The liquidated damages provision is thus an agreed-upon, estimated guess of the actual damages the seller would sustain if the buyer breached the agreement by failing to close.

Many court battles have been fought over the validity or enforceability of liquidated damages clauses, since they often result in unfair consequences to the buyer. For example, if the buyer placed 10% or more of the purchase price in escrow with the seller or his agent, the seller would get a windfall if the buyer did not close. The seller could resell the property for full price, even more, and still legally keep the buyer's earnest money. The buyer's legal argument in challenging the clause is that it result in a civil penalty which is against public policy.

In determining whether a liquidated damages clause is unenforceable as a penalty, the courts generally look at whether the amount settled upon is a "genuine pre-estimate of damages" in the case of breach. C. McCormick, Damages, §149. In most cases, the issue in litigation is whether the amount is too large and thus penalizes the buyer. However, McCormick further states that if the stipulated amount is unreasonably small in relation to the actual damages sustained, the Court will disregard it and permit the injured party to recover actual damages.

The Federal Bankruptcy Court in In Re Ilana Realty, Inc., 154 B.R. 21 (S.D.N.Y. 1993) applied this rationale in awarding damages to the plaintiff upon breach of a real estate contract. In Ilana Realty, the purchasers wrongfully refused to close and then sued for return of their earnest money deposit held in escrow. The earnest money was only 5% of the purchase price. The Court used its equitable powers to award damages beyond the amount of the liquidated damages. The Court did so because it found that the amount stipulated was disproportionately lower than damages actually sustained by the sellers. The Court further reasoned that the buyer's breach and failure to release the earnest money upon breach resulted in further consequential damages to the sellers.

This case brings up another point: what if the buyer is in breach of contract, yet refuses to let the escrow agent release the earnest money to the seller? Courts have sometimes ruled that the liquidated damages provision may not apply and the seller could sue for further damages. The rationale is that the release of the earnest money is a condition of the limitation of liability afforded to the buyer under the liquidated damages clause

This exact issue was presented in Fuels Research Company v. Roberts, 458 P.2d 751 (1969). In Fuels Research, the defendant agreed to purchase a business from the plaintiff, which involved holding certain papers in escrow (stock certificates, formulae, trademarks, etc.). The defendant defaulted on the payment of purchase money after making total payments of $1,000 and refused to return the escrow items to the plaintiff. Plaintiff then sued for breach of contract, and the trial Court awarded the Plaintiff a judgment for $15,000. On appeal, the defendant argued that the liquidated damages clause limited plaintiffs' recovery to the purchase money paid, that is, $1,000. The Court rejected this argument:
"We consider the return of the escrowed items as a condition subsequent to the effectiveness of the liquidated damages provision . . . The condition subsequent not having occurred, the provision limiting plaintiff's recovery to liquidated damages is not operative."

The liquidated damages clause is for the benefit of the buyer, to limit their liability in the case of breach. If the buyer has breached a real estate contract by failing to close and have refused to forfeit the escrow money, the seller is not bound by the liquidated damages clause.

There is little case law on this subject, so the result of a court trial would be unpredictable. The moral of the story? If you fail to close on a contract, don't play games. Do the right thing and release the earnest money from escrow to the seller.
www.legalwiz.com

The above content is for informational purposes only and should not be considered as legal, tax, or financial advice.