Note from J. Garner, Mortgage Consultant

When taxes and insurance cost increase during the year it can cause an escrow shortage. The mortgage company may show this as a shortage.  The shortage can be paid up by the borrower paying a lump sum or it can be paid out with higher mortgage payments.

“I have a fixed rate loan and thought that the payment would stay the same, but in January my payment increased and my statement says I have a shortage in my escrow account.”

Most monthly mortgage payments will change during the term of the loan, either by design, as in the case of adjustable-rate mortgages, or ARMs, or through fluctuations in taxes, tax assessments, insurance premiums and other costs for both ARM and fixed-rate mortgages. Most escrow analyses are done at the end of the year. That’s when tax increases, higher insurance premiums and other fee hikes tend to bump up your monthly payment for the coming year. Generally speaking, it’s a good idea to set aside reserves in November and December to cushion the blow of higher mortgage payments come February.

“What happens if I buy and sell properties in a 1031 tax deferred exchange but end up with cash and ‘unlike property’ in addition to the ‘like kind’ property I identified and purchased to replace the property I sold?”

Receiving cash or other boot in a real estate exchange does not defeat the nontaxable provisions of §1031 for the like-kind property involved. If, in addition to the Replacement Property, you receive money or some other kind of boot, you may have taxable gain. But the good news is you are only taxed on gain that comes from the money and other boot received.

“If I bought a house at a City of Memphis tax sale, when should I purchase homeowner’s insurance since there is a 1 year right of redemption period that the owner of the property could reclaim the property?”

As an investor it is important to secure the right kind of insurance as soon as you take title to the property. Here are 3 scenarios:

a. You are buying the house to live in and will be able to move in “ideally” within 30 days, you would purchase homeowners insurance for yourself.

b. You are buying the property as an investment and it is vacant and may or may not need rehabing, you need a “vacant” home policy. This is usually written in 3-month increments.

c. You are buying the property as an investment and you have a tenant who will be moving “ideally” within the first 30 days. You need a landlord’s policy.

In all 3 cases, if the house is reclaimed by the former owner during the redemption period and you lose title of the property, usually you would get a prorated refund on the insurance you would no longer need. Another thing to keep in mind is that some insurance companies do not want to insure properties where the owner has left the property uninsured for a period of time. The best advice for many reasons is to get the property insured as soon as you get the title.

-Lynn McDonald, Allstate Insurance (901) 372-3500

What is an origination fee and how does it differ from discount points on a mortgage?”

The origination fee on a mortgage is usually one percent of the loan amount. If you are borrowing $100,000 and paying one percent for the origination fee, the $1,000 fee goes to pay for the mortgage company’s lease, utilities office supplies and the loan officer’s commission. If the “wholesale” market interest rate on a mortgage is 3.25%, then the mortgage company will charge 1% origination to pay for their overhead. If you pay a higher rate of 3.5% and this rate is one percent above the “wholesale” rate, then the mortgage company does not have to charge the one percent origination fee because they will receive their profit from the higher interest rate loan. This is an oversimplified way of saying that when the borrower pays points, he pays interest in a lump sum upfront to enjoy a lower rate and payment on his mortgage.

Discount points are the amount you pay in addition to the origination fee in order to get the interest rate below the market rate. Each discount point equals 1% of the mortgage loan amount. If the market rate is 3.5% with one percent origination fee but you want a rate of 3%, then you will need to pay points to get the below market rate. If 3% is one percent below the “wholesale” market price, then you would pay 1% origination fee and 1% discount.

“How can termites continue to infest a home that has been treated with termiticides?”

Basement foundations and concrete slabs are some of the most susceptible types of construction attracting termites. Since termites only need a small crack in the slab floor to gain entrance into your home, high moisture areas like basements and crawl spaces attract them and can serve as starting points for infestation. Once in, termites can infest virtually any part of your home — wood trim, siding, wallboard, even cabinets and books. Synthetic stucco on a house can retain moisture, also providing a place for termites to thrive. 

“What does it mean when the loan officer says, The file has been run through DU?”

“DU” stands for “Desktop Underwriter,” an automated underwriting computer program used to underwrite loans for Fannie Mae. With this program the lender is able to enter the qualifying information about the borrower and the program will provide an approval or it will refer the loan to a manual process. A “refer” status may include suggestions that may make it possible to achieve loan approval.

“What protection is the homebuyer or lender obtaining with the title policy?”

A title policy contains provisions for the payment of the legal fees in defense of a claim against the property, which is covered under the policy. It also contains provisions for indemnification against losses, which result from a covered claim. A premium is paid at the close of a transaction. There are no continuing premiums due, as there are with other types of insurance.

“How long do bankruptcies and foreclosures stay on a credit report?”

Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will consider an borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender’s decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.

“What does it mean to sell on a contract for deed?”

A contract for deed (also known as a land contract or installment contract) is a contract by which the purchase price is paid in two or more installments over two or more years. The purchaser has possession of the property but the seller retains title until the contract terms are completed. If the sale meets certain requirements, a taxpayer can postpone reporting such income by paying tax each year only on the proceeds received in that year.

”Is a term loan the same thing as a mortgage?”

A mortgage is a security instrument pledging real property. But the word “mortgage” is sometimes used in reference to an amortized promissory note. A term loan is a non-amortized loan for a given period. At the end of the term, the entire principal amount is due.