Workarounds for seller financing pitfalls

DEAR BENNY: I purchased a condo in California in January 2009 and was able to get a second mortgage through the seller to help me purchase. Dealing with the sellers has been a bit of a hassle.

When I contacted the sellers in order to assure that I received a statement of the interest paid on my loan about two months ago, they informed me they were unable to deposit two payments I sent them through my online banking system. One of these payments was in April 2010 and the other in September.

How long does the lender have to inform me of a missed or late payment? Since it has been so long it has been somewhat difficult for the bank to figure out what exactly occurred with the April payment. I am planning on refinancing in order to avoid dealing with this lender. --Brandy

DEAR BRANDY: That's an interesting question that has never come up before. And I must confess that I really don't know the answer. I do know, however, that commercial mortgage lenders who receive more than $600 a year in interest must send their borrowers a Form 1098 by the end of each January. However, if your lender (the seller) is not in the business of lending money, he has no legal obligation to send that form to you.

My suggestion: Figure out how much mortgage interest you paid. You can get some assistance from the calculators at www.mtgprofessor.com/calculators.htm.

To protect yourself, however, you should check with your bank to see if those checks were, in fact, cashed. Most banks allow their customers to research their account online, and this may be helpful to you.

One additional suggestion: Especially when you are not dealing with a commercial financial institution (such as a seller take-back mortgage), check with your bank monthly to see if your payment was negotiated and cashed.

DEAR BENNY: Regarding a recent column, sorry but you are wrong about the capital gains tax on the gifted million-dollar house. The tax would be 28 percent of the capital gain, not 15 percent. The alternative minimum tax (AMT) applies to capital gains, not just income. That million-dollar gain on sale of the house would push your reader way into AMT territory.

I received assets from my father's bypass trust when my mother died. I sold the assets expecting to pay 15 percent on the capital gains. The capital gains pushed me into the AMT and I had to pay 28 percent tax on the appreciation of the assets since my father's death in 1996. Look at page 2, line 53 of the AMT form for the calculation. No one mentions this little trap when they talk about the so-called Bush tax cuts. The bypass trust turned out not to be a great thing tax-wise. --William

DEAR WILLIAM: I don't profess to be a tax accountant, and learn a little every day. I believe you are correct (I did look at Internal Revenue Service Form 6251). However, I cannot provide specific legal or tax advice and accordingly urge readers to consult with their own tax and legal advisers.

DEAR BENNY: I hope you can help me. I am a 78-year-old single woman living alone. Some weeks ago, my next-door neighbor fenced in his backyard with Gothic picket fencing. There was an old wire fence about 4 feet tall on my property separating our backyards. Before he started, he called me over and said he would do whatever I wanted: put the fence on the property line or take down my fence and put his in its place. Knowing he wanted an answer right away (as the installer was there with him), and thinking the fence was probably a foot or two at the most inside the line, I told him he could put it in place of mine.

I now believe the fence may be further into my yard than I first thought. Do you think it would be a good idea for me to ask him to purchase the strip of land, the entire length of which is 139.28 feet from front to back? I'm concerned there may be a problem (especially for him) if and when I sell my property. --June

DEAR JUNE: The first thing you should do is to obtain a survey of your property. A surveyor can quickly determine whether the fence is on your land or not. You can find surveyors in the Yellow Pages (or online) and the cost should not exceed $300-$400.

If the fence is really on your property line, you have three choices. First, demand that he remove it, since he is trespassing on your property. Second, ask him to buy that strip of land, although he may not want to do that. Third, you can just leave the situation as is.

However, the last alternative can cause problems for you if and when you ever want to sell your house. Mortgage lenders usually require that their potential borrowers (the homebuyers) obtain a survey, and if the fence is on your land, your buyer may be concerned about this.

Why? Many states have laws called "adverse possession." This means that if your neighbor openly, notoriously and hostilely puts his fence on your property, and the requisite statutory period of time has elapsed, your neighbor can claim the land as his own. This does require court action, but generally, when a person puts up a fence, the courts don't have to spend a lot of time deciding the case.

If you opt for the third alternative, at the very least you should send your neighbor a polite letter, advising him that you are consenting to his encroachment for the time being, but nevertheless reserve all rights in the future to demand he take it down.

Why this letter? Remember that one of the tests for adverse possession is "hostility." That means that the fence was put up against your wishes. If you consent (and keep the letter in your files), you have removed this defense.

DEAR BENNY: I own a manufactured home and recently paid off my chattel loan. However, in order to clear the lien, our secretary of state requires that I pay an additional cost. The bank stated we might not have to do this. Will this impact selling the home in the near future? --Phil

DEAR PHIL: That's a good question, and I first have to explain what a chattel loan is. Oversimplified, it means "personal property" -- whether that be a car, a refrigerator or a mobile home. It is something that is not real estate. A mobile home can be moved from place to place.

When you get a loan on a house, you give a deed of trust (also called a mortgage) to your lender, who records that document on the land records in the jurisdiction where the property is located. Recording puts the world on notice that there is a lien (a cloud) on your title.

However, when you get a loan for a mobile home, technically there is no mortgage document to be recorded. But the lender still wants to make sure that if you are in default, there is security against your property. Accordingly, many years ago, a system of recording such personal property was developed and was called "chattel loans"; this recording system put the world on notice of your financial obligation to the lender.

In recent years, most states (except Louisiana) have enacted the Uniform Commercial Code (UCC), and chattel loans are now recorded in the UCC filing in each state.

Since I suspect that your mobile home loan was, in fact, recorded in the UCC filing, you have to have it released from the records. Otherwise, when you go to sell your home, that obligation will show up in a search.

Accordingly, I strongly suggest that you pay the nominal fee to the secretary of state and have that loan released from the records.

DEAR BENNY: We have recently paid off our mortgage loan and received two documents from the bank that state the loan was "paid and canceled." We also received a "disbursement check voucher" that states the mortgage was paid in full. Are these two documents all we need or are there more that we need to prove that we own the house outright? --Luis

DEAR LUIS: That is not all you need. As discussed above, your mortgage (called a deed of trust) was recorded in the county where your property is located, and you have to have it released from land records. You can either have your attorney do this, or you can go to the recorder of deeds in your county and they should be able to assist you.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.

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Mortgages: Financing a Vacation Home

There is loan money available for second-home purchases, but expect bigger down payments, higher interest rates and other standards tighter than on a principal residence — and those standards are tight already. In addition, there are quirks specific to vacation markets.

Vacation-home purchases accounted for 10 percent of home sales last year, according to a National Association of Realtors survey released this spring. Investment purchases accounted for 17 percent — but sometimes the line between the two is a bit blurry. That’s down sharply from the height of the real estate boom in 2005, when vacation and investment sales accounted for 40 percent combined.

Then, “there was virtually no difference in underwriting for vacation homes versus owner-occupied homes,” said Guy Cecala, the publisher of Inside Mortgage Finance. “That’s something that’s changed dramatically. The days of being able to buy a vacation home with little or no money down are over.”

Loans insured by the Federal Housing Administration with down payments of as little as 3.5 percent aren’t available to vacation-home buyers. That means 20 percent for deals that meet stringent requirements of Fannie Mae and Freddie Mac. For loans that don’t fit — for instance, that are bigger than the government ceilings, which vary by county — down payments can be higher. Kevin Santacroce, an executive vice president and the chief lending officer of Bridgehampton National Bank on Long Island, said that for the jumbo loans his bank writes, down payments are “closer to 25 percent, maybe 30 percent.” In Suffolk County, a jumbo loan is more than $729,750, among the nation’s highest. (As Mr. Santacroce points out, that’s the loan amount, not the purchase amount; still, it’s a rare house in the Hamptons that would fall into the non-jumbo category.)

Thirty percent also seems to be the “comfort zone” this year for down payments in the Jersey Shore towns where Michael Loundy, a broker at Seaside Realty, works. “You can get 20 percent down,” he said, “but the buyer has to look very strong with income-debt ratios.”

Pinning down the details of a loan is challenging, Mr. Loundy said. For instance, during the loan approval process, exact terms may shift — a rate can go up one-eighth or one-quarter of a percentage point for any deal that isn’t exactly “pristine,” he says — and pristine means a free-standing single-family house instead of a condo, a credit score of 725 or more, and full documentation of income.

Even when all else is equal, a vacation-home loan is pricier. Mr. Cecala just refinanced his own primary and secondary homes on the same day, and the interest on the vacation place was one-quarter percentage point higher.

Some vacation areas offer distinct challenges. David Knudsen of Catskills Buyer Agency in Sullivan County says appraisals can be dicey in an area like his, because big banks may, for instance, require that sales be in the same school district to be comparable — which is not so easy with tiny school districts and spread-out sales. Local banks, he said, are better able to assess the worth of, say, a house on one lake versus one on another.

Banks aren’t the only places to get financing. Some sellers will carry loans. “That’s a question some buyers forget to ask sellers,” Mr. Loundy said. “Not everybody is in trouble.”

And what about cash, after all? Vacation-home buyers tend to be older and more affluent than other buyers, so all-cash deals are common. According to the Realtors’ survey, 36 percent paid cash, as did 59 percent of investment buyers.

Mr. Knudsen said that half his sales in the last year were all cash. These buyers don’t need to have appraisals; they can close in 30 days instead of 60 or more; and they can consider houses in less-than-perfect physical condition, like foreclosures.

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