FHA Mortgages
Published on Sunday, 26 June 2011 04:13 Written by Lawrence D. Brudy & Associates, Inc.
Over the past few years, FHA loans (loans insured by the Federal Housing Authority) have become more attractive to those looking to purchase a home, or refinance their existing home. Not only is an FHA insured lender more likely to offer a lower interest rate, but down payment requirements are much more lax than on standard conventional loans (i.e, 100% can be given in the form of a gift).
This article was originally published in the April 2009 Lawrence D. Brudy & Associates, Inc. print newsletter edition. Some of the information contained in this article may be dated. Use the contact information provided at the end of the article, if you have any questions.
The main advantage of an FHA insured loan, of course, is the relaxed credit qualifying criteria for the borrower or buyer, which allows individuals with less than perfect credit to obtain financing. Although there are advantages to obtaining an FHA loan, there are disadvantages as well. Not only is the necessary documentation increased, but most documents are confusing to the borrower and need to be signed as soon as the purchase agreement is signed.
The most overlooked disadvantage to an FHA loan, by far, is the fact that the non-borrowing spouse is now required to relinquish all ownership, including marital rights, to the property.
Typically when only one spouse is on the Promissory Note, the non-borrowing spouse will sign the deed, mortgage, and a few other miscellaneous bank documents. This is still the case with conventional loans, and it allows the non-borrowing spouse to retain an ownership interest in the property. Should something happen to the “on title” spouse, the non-borrowing spouse is protected because he or she is on the deed. Recently, however, FHA regulations have changed and state that a non-borrowing spouse cannot be on title. He or she will not sign any of the mortgage documents, including the deed. (Theoretically, married individuals can buy property in Pennsylvania with or without their spouse.
It is not a legal requirement that the spouse who is not on title signs off on the deed upon the sale of the property. However, because in our state a party to a divorce action can make a claim that marital property was used to purchase, improve or even maintain the property, potential marital rights must be dealt with. Therefore, most title companies and all law firms will have the “off title” spouse sign off on the sale.) Many believe that this does not affect the non-borrowing spouse’s interest in the property, because the couple is married and the property will simply transfer to the non-borrowing spouse upon the death of the “on title” spouse. In Pennsylvania, this is not necessarily the case.
Pennsylvania is not a community property state, rather an “equitable distribution” state. This means that one spouse is not necessarily entitled to the property of the other spouse. The spouse whose name appears on an ownership document, such as a deed, owns the property.
Each spouse is entitled to receive a fair and equitable share of the property of the other spouse, but depending on the value of the estate, this will not necessarily mean that the non-borrowing spouse is automatically entitled to receive the real property.
Pursuant to the laws of intestate succession in Pennsylvania, a surviving spouse’s share depends upon many different circumstances. For instance, the surviving spouse will only receive the entire estate of the deceased spouse (including the family home, when the surviving spouse is not on title) if there are no children, grandchildren, or parents surviving the deceased spouse. Should the decedent be survived by a child, a grandchild, or even just one parent, however, the surviving spouse now only receives the first $30,000.00 of the estate plus ½ of the remaining estate balance.
The surviving spouse’s share changes again if the deceased spouse has children or grandchildren that are not the issue of the surviving spouse. Should this circumstance occur, the surviving spouse receives only ½ of the deceased spouse’s estate, and the family home is included if the surviving spouse is not on title. Keep in mind that the decedents home (which is also the home of the surviving spouse) is included in the calculation of the estate. The intestate laws coupled with FHA regulations impose a very real danger that a surviving, non-borrowing spouse will lose their home. A properly prepared estate plan is all it takes to protect someone from this unfortunate situation.
By preparing a Last Will and Testament, and bequeathing the residence to a spouse who is not on title, individuals can be sure that their loved ones will not be left behind and unprotected because of a simple FHA formality. Additionally, the preparation of a Power of Attorney will allow the “off title” spouse to manage certain affairs and transfer title to the property over to themselves, if necessary (of course this can only be done with approval from the lender, and may require a refinance of the existing mortgage). By having these documents drafted before the signing of the FHA purchase or refinance loan documents, non-borrowing spouses can be assured that their most important asset will not be included in calculating the value of the estate of their “on title” spouse, and subject to inheritance taxes and probate.
The new law raises the current maximum $7,500 first-time homebuyer tax credit to $8,000 and is extended to a purchase of a home or vacant land (with occupancy of the dwelling) before December 1, 2009. The original payback on the $7,500 credit was fifteen years, prorated, the required repayment is eliminated under the new law after three (3) years. Eligible homebuyers who make their purchase after December 31, 2008 and before December 1, 2009 can claim the credit on their 2008 or 2009 federal income tax return. A first-time homebuyer includes a married couple where neither individual owned any other “main” home (the one you live in most of the time) during the past three (3) years.
The main home must be owner-occupied and includes single family homes, condominiums, cooperatives, townhouses, manufactured homes, and vacant land. On existing housing, a purchase takes place at the time of settlement, as opposed to when the agreement of sale was executed. For vacant land intended to be used for the construction of a primary residence, the qualifying date is the date of occupancy instead of the time of settlement. The full amount of the credit is the lesser of 10% of the cost of a home or $8,000. Therefore, all homes purchased for $80,000 or more qualify for the full $8,000 amount.
With adjusted gross income of no more than $75,000for single filers and for a married couple filing jointly the amount is $150,000. This first-time homebuyer credit is a “refundable credit” which means it is not based upon what the taxpayer had paid in. By completing the “First-Time Homebuyer Credit Form 5405” the taxpayer can claim the credit on the original 2008 tax return due by April 15, 2009 or by filing an amended return, attaching Form 5405 thus receiving the benefit (money) NOW rather than waiting until 2010.
Contact any associate at (724) 935-1400 for more information or use our contact form to send us a message.