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Practical Steps for Co-owning and Co-habitating

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | March 31st, 2017

With more and more young couples buying houses together before committing to each other in marriage, it's paramount for them to understand the way they are seen financially.

For example, co-habitating is not the same as co-borrowing. Neither is co-borrowing the same as co-owning.

Let’s start with that last one, because it trips up lots of people. Borrowing together creates a joint liability. If one of you fails to pay his or her share of the mortgage, the other is responsible for the entire payment. And if the couple eventually splits up, both parties are liable for the full amount of the loan.

But borrowing together has nothing to do with owning together. Ownership is determined by how you take the title -- something most buyers don’t even think about until they get to the closing table.

Probably the best way for unrelated co-borrowers to hold the title is as tenants-in-common, where each borrower owns a specific interest in the property. (Caveat: None of this should be considered legal advice. It is always best to seek counsel with an attorney well-versed in real estate matters.) Typically, each owner would take a 50 percent share. But the shares could be different -- say, 60-40 -- depending on how much each buyer contributes to the down payment or how much of the monthly payment each is responsible for. If the borrowers should eventually marry, they can change their ownership arrangement.

The major advantage of tenants-in-common is that in the event of a breakup, each owner can sell or pass his or her interest to whomever he or she desires, generally without the consent of the other owner. That means, though, that one of you could end up owning the house with a total stranger.

Another drawback: If the split is less than amicable, one owner can file a “partition” lawsuit against the other if that owner is unwilling to sell. The court can then order a sale, with the proceeds split among all owners according to their ownership shares.

When it comes to financing, two unrelated buyers should not assume they have to co-borrow to buy a home. Indeed, each can borrow separately as a single person and pool the proceeds.

“Sometimes two incomes are not better than one,” according to the folks at New American Funding, an independent mortgage company headquartered in Tustin, California.

But many people do choose to co-borrow: combining their finances to qualify for a more expensive house and larger loans. After all, co-borrowing provides a second source of repayment, which is always appealing to your lender.

It also could improve your debt-to-income ratio, which could qualify you for a lower interest rate. But if the extra income comes with extra debt, it could have the opposite effect. In other words, despite the higher overall combined income, the terms offered by your lender could be less attractive.

Co-buyers also should understand that even though their incomes and assets are combined, their credit scores are not. Consequently, if one borrower has a far better score than the other, the lender will evaluate their application based on the lower score, New American Funding explained in a recent blog post.

In that case, the company suggests that the buyers wait to take out a loan until the borrower with the lower score takes steps to improve it. Another possibility is for the borrower with the higher score to seek financing on his or her own. Of course, the first option means a delay of at least a few months, and the second option probably means the couple won’t be able to buy as large a home.

If you are buying with a family member or a friend, neither of whom is going to actually occupy the house, it may make sense for that person to co-sign for the loan rather than serve as a co-borrower. A co-signer agrees to be held responsible for paying the mortgage if the other signer fails to do so.

On the downside, though, having a co-signer could change the all-important debt-to-income ratio for the worse, causing the lender to require a larger down payment. 

The bottom line: Unmarried buyers should take a few extra steps outside the loan process to ensure they are defining and protecting their own legal rights. They should seek legal counsel to draw up a co-habitation agreement that sets out each person’s rights and responsibilities.

Probably most importantly, they should decide, before moving in, how their housing partnership should be dissolved if they split up down the road. It is always better to address that possibility with cool heads and clear thinking, rather than later, when the once-happy duo might be disengaging with anger and animosity.

Don't rely on the notion that you will "always be friends." Rather, take concrete steps: Address how you will dissolve your deal while you still like each other. That way, if you do part ways, you might actually do so as buddies.

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Staving Off Eviction

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | March 24th, 2017

If you’re having a hard time paying your rent, it would be great if an angel came along to help out. But it’s probably wiser to look for more grounded assistance when rental cost burdens become pressing.

The housing angel does occasionally pay a visit. Take the case of Ashanti Taylor, a Chicago mother of three evicted from her apartment after the city declared it uninhabitable. To make things worse, Ashanti was given her eviction notice just four days after the birth of her youngest son.

Even though she has managed to find a temporary job with the U.S. Postal Service, Ashanti was forced to move in with her mother, sleeping on the couch while her kids slept on the floor. After being laid off from her previous job, Ashanti had to sell off possessions like her car and jewelry to make ends meet.

Ashanti’s story -- a tale of frequent setbacks while trying to surmount a history of domestic abuse -- came to prominence after she told it on the “Steve Harvey” show. Harvey not only listened sympathetically, he arranged to have her rent paid for a year through Pangea Real Estate, a local apartment management company, and the nonprofit group Make Room.

That’s an example of the angelic solution -- possible, but rare. For more down-to-earth help, it’s better to turn to nonprofit groups or Uncle Sam.

Back in the day, a rule of thumb was to spend no more than a quarter of your monthly income on housing. But that has gone the way of the 5-cent cigar and the penny parking meter. According to a fact sheet from Make Room, nearly half of all renters spend 30 percent of their earnings on rent. And over a quarter of renters spend more than half their incomes on rent. The groups most affected by housing cost burdens include families with children, seniors, disabled renters and veterans.

Based in Washington, D.C., Make Room is sponsored by the nonprofit Enterprise, and partners with the MacArthur and Ford Foundations and the CohnReznick accounting firm. The group says it “is exposing the human suffering and societal costs of the rental housing crisis and advocating for bold solutions that will end housing insecurity.”

Last fall the group participated in a campaign to send 1 million messages to Congress so lawmakers will focus on affordable housing.

Holding a rent party is a tried-and-true method of getting a little extra cash to pay the landlord, and Make Room offers a version of that kind of event: It recruits high-profile performers to do house parties to benefit hard-pressed renters. Recently, Grammy winner Timothy Bloom set up a guitar, keyboard and amp, and played for the friends and neighbors of the Montgomery family of Paterson, New Jersey.

It’s not a secret that renters have been under stress since the mortgage collapse a decade ago. With home sales in a tailspin, demand for rentals increased, and Econ 101 tells us that increased demand leads to higher prices.

The homeownership rate has dropped dramatically in recent years, and rental vacancies have decreased at the same time. The homeownership rate was 63.7 percent at the end of the fourth quarter of last year. At its peak in the first quarter of 2005, that number was 69.1 percent.

The national rental vacancy rate for the fourth quarter of 2016 was 6.9 percent, according to the Census Bureau. That’s down from 10.6 percent in the first quarter of 2010.

In addition to advocacy groups like Make Room, Uncle Sam occasionally comes to the rescue to ease things a bit for renters.

Recently, Rep. Keith Ellison, D-Minn., introduced a bill to extend a law that provides relief for renters whose landlords are being foreclosed on. Ellison’s legislation would permanently extend the Protecting Tenants at Foreclosure Act (PTFA), which was enacted in 2009.

PTFA was the only federal protection for renters living in foreclosed properties, according to housing advocates. But because foreclosures have abated, Congress allowed the law to lapse at the end of 2014.

The law provided most renters with the right to receive at least a 90-day notice before being required to move after foreclosure. Now, without that legal protection, tenants -- who often have no idea that their landlords are behind on mortgage payments -- can be evicted with just a few days’ notice in most states.

“PTFA provides critical protection to innocent renter families,” says National Housing Law Project executive director Shamus Roller. “PTFA is an important tool, especially now, given the significant national shortage of rental housing.”

PTFA offers critical protection for responsible renters, agrees Maria Foscarinis, executive director of the National Law Center on Homelessness and Poverty.

”Without federal protections in place, many renters in foreclosed properties are vulnerable to summary eviction --and homelessness,” Foscarinis says. “In nearly half the states, these renters can be evicted with five days’ notice or less, through no fault of their own.”

The bill’s fate in Congress has yet to be decided.

-- Freelance writer Mark Fogarty contributed to this report.

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Avoid Choosing Wrong Loan Officer

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | March 17th, 2017

A finding by J.D. Power that 21 percent of homebuyers regret their choice of a lender -- the dismayed first-time buyers were a shocking 27 percent -- is probably misplaced.

It’s far more likely that displeased purchasers were not happy with their particular loan officers, as opposed to the companies they work for. But it shouldn’t really matter who’s to blame for their unhappiness.

What is important, especially to future buyers, is that unhappy borrowers made an average of nine negative comments in the research firm’s annual mortgage satisfaction study.

That in itself is regrettable. But this significant minority might have been able to avoid many of their issues if they had been more careful in picking who they worked with for financing in the first place.

Whether dealing with a loan officer who works for a lender that actually fund its own loans, or a broker who works for himself and deals with more than one lender, you should expect him to be responsive, according to the Consumer Financial Protection Bureau, the federal watchdog agency that grew out of the recent financial crisis.

If he’s not, suggests Sue Woodard of Vantage Productions, a Minnesota sales and marketing firm that supports professional development in the mortgage field, you should have no qualms about jettisoning him and going elsewhere.

If you are wedded to a particular company, ask for the manager and tell him you want to deal with someone else. But if you’re not, than “leave and leave quickly,” Woodard says. “There are too many good people out there willing to do it right, so run and run fast. It just frustrates me to death that on something so important, people don’t pick up and move on.”

Being responsive is a key trait. But according to a recent survey of some 800 companies by Insellerate, a provider of support services for the marketing and sale of mortgages, it took an average of 12 hours for loan officers to answer a client’s query. But that’s just among those who responded. A whopping 57 percent never responded at all, the survey found. And 60 percent of those who did respond failed to follow up with a second call.

Woodard says you should expect prompt responses to your requests for information “right out of the gate.” If there’s some kind of crisis, the reply should be immediate. Otherwise, 24 hours is acceptable.

You also should be provided with a clear analysis of the different loan options that are available, along with an understanding of how they impact you financially, both initially and over time. Even more importantly, you should expect that the choices be explained in a way you can understand.

Choosing a mortgage is possibly the biggest financial decision you will ever make, so if you ask for a simple explanation and you don’t get it, ask again and again until you are certain you understand.

It’s also wise to make sure what you choose is suitable to your lifestyle and financial picture. Many loan officers qualify people for the biggest mortgage they can afford. But while there’s nothing wrong with that, you may not be comfortable forking over that amount every month.

You want to match your monthly payment -- not just principal and interest, but also homeowner’s insurance, taxes and homeowners’ association fees -- to how much you can afford to pay. Stretching a bit, perhaps, but not to the point where you are living hand-to-mouth.

Loan officers can’t predict whether interest rates will rise or fall. But they should be able to tell you where the market has been going in recent weeks. More importantly, you should be given general advice on whether to lock in your rate, and when, or let the rate float with the market.

You also should be given a method to easily and quickly check on the status of your application. That is, where it stands with underwriting, what papers are needed and which ones are still missing. Better yet, says Woodward, your loan officer should update you regularly and routinely during the sometimes-lengthy process.

On the flip side, if you fail to send a piece of requested information, you should expect the officer to hound you for it, or at least be persistent in asking for exactly what the underwriters need to approve your loan.

“They aren’t trying to make your life miserable or harass you,” says Woodard. “But if they ask for six things and just one is missing, your application can’t move on.”

Finally, if you’ve chosen wisely and your loan closes, don’t expect your loan officer to go away. A good one will be in contact during the transaction. But a great one will stay in touch long after, asking for repeat business, referrals and letters of recommendation.

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