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Archive for Friday, October 7, 2005

Many FHA borrowers can qualify for refund

Paying loan off early results in money back

October 7, 2005

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Q: I heard a radio report that said most homeowners can cancel their mortgage insurance after their equity stake in the home reaches at least 20 percent. My home is worth about $200,000 and I only owe $100,000, so my equity level is an even-higher 50 percent. Nonetheless, the bank says I can't cancel the mortgage insurance because the loan is insured by the FHA. What gives?

A: The Federal Housing Administration issues mortgage-insurance policies that promise to repay banks if FHA borrowers default on their loans. Many FHA borrowers have relatively modest incomes and couldn't qualify for a mortgage without such government insurance.

Because the FHA is a public agency and its mortgage-insurance plan works a bit differently, its policies aren't subject to the same cancellation rules that apply to those issued by private companies. Instead, the insurance generally must remain in effect until the loan is repaid by selling the home or refinancing.

Fortunately, most FHA borrowers who pay their loans off early by selling or refinancing are entitled to a refund of their unused insurance premiums. Make sure you contact the FHA to see if you qualify for a refund when the loan is finally paid.

The FHA also is holding millions of dollars in unclaimed refunds for its previous borrowers who didn't ask for their money back when their loans were retired or borrowers the government has been unable to locate. Those borrowers can find out if they're owed a refund by calling the U.S. Department of Housing and Urban Development at (800) 697-6967 or by visiting www.hud.gov on the Internet and clicking the "FHA refunds" link.

Q: We purchased a new home in August, but we do not own the land that is underneath it. Instead, the land is still owned by the development company, and we have a 99-year "ground lease." We already know that we will be able to deduct our mortgage-interest payments on the home itself, but will we also be able to deduct the cost of leasing the land?

A: I can't give you a definite answer because your letter doesn't give me the specifics of the lease. But generally, the Internal Revenue Service permits eligible taxpayers to deduct rental payments for the land underneath their home provided that they hold a valid option to purchase the land at a later date.

Ground leases raise some unusually tricky tax issues, so it's important to discuss the specifics of your particular situation with an accountant or other tax professional.

The idea of buying a home but renting the land underneath might sound odd to a lot of readers, but it's actually a fairly common practice in many parts of the nation - especially in coastal areas or vacation hot-spots where property prices have skyrocketed. Renting the land instead of including it as part of the sale can cut the buyer's monthly housing expenses by more than 50 percent.

Ground leases also are popular in many retirement communities, where many residents live on a fixed income and need to keep their monthly cash outlays to a minimum.

Q: Are you the same Dave Myers I saw on TV last week, answering questions about what mortgage lenders do when borrowers get divorced?

A: Yes, that was me. The interviewer's topic hit close to my heart: My own divorce was finalized a few weeks ago, ending a relationship that spanned three decades.

A divorce can exact a terrible emotional toll, but it's pretty much a "non-event" in the eyes of a mortgage lender. Both people remain liable for payments on a loan that they jointly took out, even if one spouse leaves and signs a quitclaim deed that surrenders his or her stake in the home to the other person.

For example, if the husband signs a quitclaim and moves out, he would simply be ceding his partial ownership interest in the property to his former wife. He would still be required to make the monthly mortgage payments if his ex did not, and his credit would be damaged by any late payments, default or foreclosure in the future.

There are really only two practical ways the departing husband could remove his liability for future payments: The property would either have to be sold and the original mortgage retired, or the wife who continues to live in the home would have to refinance in her name only.

- David W. Myers is a 20-year veteran of the newspaper and magazine business, having previously covered real estate for the Los Angeles Times and Investor's Business Daily.

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