Loan contingency should not be removed until lender gives green light

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Dear Michael: My lender is requiring me to have my property taxes in an impound account. What is an impound account and would I benefit from it?

Answer: An impound account is simply an account maintained by the mortgage company to collect property insurance and property tax payments from the buyer, which are necessary in order to keep title free of any liens.

To set up an impound account, the lender divides the annual cost of insurance and property taxes into a monthly amount and adds it to your mortgage payment. Since low down-payment borrowers are considered to be a higher risk due to their lower personal stake in the property, lenders will sometimes want some level of assurance that the assessor will not seize the property because of non-payment of property taxes, and that borrowers won’t be without homeowners insurance in the event that the property is damaged.

An impound account ensures that the only person who will become owner of the house in case of default will be the lender. Even if an impound account is not required, one can be elected at the loan signing. Some consumers would rather set money aside in a high-interest savings account, and feel that impound accounts are a bad idea. Further, if the mortgage company does not pay bills – like property taxes and homeowners insurance – when they are due, the homeowner will still be on the hook. Therefore, homeowners should be aware of the due dates for these payments and monitor their impound accounts carefully.

Although the impound account is designed to protect the lender, it can also be beneficial for some borrowers. By paying for big-ticket housing expenses gradually throughout the year, borrowers avoid the sticker shock of paying large bills once or twice a year, and are assured that the money to pay those bills will be there when they need it.

Dear Michael: I am purchasing a new home and my agent states that it is time to remove my loan contingency. I am not comfortable doing so. Why must I remove my loan contingency? I plan on purchasing this home no matter what.

Answer: You hired your agent because you trusted him/her. Or you should have hired your agent because you trusted him/her. If your appraisal came in at full value and all the lender’s conditions have been met for your loan to be approved, then there is no valid reason why you should not remove your loan contingency. The seller needs a guarantee from the buyer that he/she is purchasing their home and means business. The fact that you plan on “purchase this home no matter what” bares little security to a seller that vested his/her lifetime retirement on his/her home. If there is minimal doubt that you may not be approved for a loan for whatever reason, hold off on removing your contingency. Be upfront with the seller and explain the situation.

In this day and age, lenders requirements for loan approval can go beyond reasonable time. The seller has to understand that you are not ready to remove your loan contingency because of factors beyond your control. If the seller cannot wait any longer, he/she will give you a notice to perform a removal of contingency, at which time you can opt to either cancel the agreement or remove your contingency. If you remove all your contingencies including your loan, and decide to cancel the purchase, you could stand to lose your earnest deposit.

Dear Michael: I was wondering if you would know of any tax issues regarding a short sale. A friend of mine stated that I may have to pay taxes on the forgiven amount associated with my potential short sale. Are you familiar with this?

Answer: Congress passed the Mortgage Forgiveness Debt Relief Act of 2007, which offered relief to homeowners who would formerly owed taxes on forgiven mortgage debt after facing foreclosure.

Normally in United States law, when a lender decides to forgive all or a portion of a borrower’s debt and accept less, the forgiven amount is considered as income for the borrower and is liable to be taxed. However, after the signing of the Mortgage Forgiveness Act, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residence – rental properties are ineligible for relief.

Consultation with a tax advisor is necessary to ensure that a borrower qualifies. The amount of forgiven mortgage debt allowed to be excluded from income tax is limited to $2 million per year.

Michael Kayem is a Realtor with Re/max/Execs, serving Culver City and the Westside since 2001. Contact him at (310) 390-3337 or homes@agentmichael.com.