Thank you Cislo Title

Last night I had the pleasure of attending Cislo Title's 16th Annual Client Appreciation Party at St. John's Activity Center.

What a wonderful event! Great food-catered by The Pier of Argentine accompanied by a great atmosphere with live music and dancing.

Thanks Cislo Title! Looking forward to working together for many years to come.

Real Estate Exchanges

Procrastination in our workaday world is generally not a virtue unless taxes on real estate transactions are involved. Rising real estate values have created opportunities for real estate investors to improve their positions by doing tax-free exchanges of investment property.

Property held for investment or business use and sold at a profit is subject to capital gains transaction on the gain over cost basis. Depreciable investment property, held for many years, typically has a lower cost basis, further exacerbating the tax problem.

These taxes can be deferred by doing a tax-free exchange, commonly called a 1031 transaction. In an exchange transaction the seller sells one property and within a specified period buys a second. If done within the rules, any gain on the sale of the first is deferred until the second, or purchased, property is sold.

For this to work, specific rules must be followed. First, the property to be exchanged must be qualified, defined as real estate property held for investment or income-producing purposes or equipment used in a business. Property not qualifying includes personal use real estate, foreign real estate, property held for sale, inventory or stock-in-trade securities and notes.

The IRS has allowed broad definitions of like kind to apply. Grade or quality of property does not matter. Farmland can be exchanged for commercial or residential rental property. Unimproved land can be exchanged for a leasehold property of 30 years or more. Solely owned property can be exchanged for a tenant in common interest in a property.

Next, if the purchased property is of lesser value than the sold property, or the sold property has a mortgage, the seller will get the boot, in this case boot is a term for a taxable gain on the boot portion.

Certain time lines must be followed for a qualified exchange to occur. The seller must identify a replacement property within 45 days of completing the sale of the original property. The seller can identify up to three properties as prospective purchases. The outright purchase must be completed within 180 days of the sale of the first property.

The transaction in a delayed exchange, as outlined above, requires the use of a financial intermediary. The intermediary steps into the sellers shoes and acts as the seller in the closing of the selling transaction. The intermediary will hold the proceeds of the sale while the property to be purchased is identified and subsequently purchased.

The intermediary may not be related to the seller, may not be an employee or may not have acted recently as a professional advisor to the seller. Generally intermediaries are title companies or law firms specializing in that business. They are paid a fee and/or interest on the money they hold in their trust account.

Exchanges may be simultaneous in that the closing of the exchange and the replacement properties take place on the same day. A delayed exchange is the most common, with the target, or replacement, property being acquired after the original property is sold. A reverse exchange is allowed when the target property is purchased in advance of the sale of the original property.

In a more complicated transaction, the taxpayer can arrange to acquire a property and improve the property as part of the transaction. In this case, the intermediary must retain title to the property until the improvements are completed.

Finally, multiple-asset exchanges are allowed between individuals, investors, small businesses and large corporations. For example personal property such as trucks, helicopters, planes, and furniture can be exchanged along with real estate.

Reprinted with permission. The opinions expressed are those of Wendell Cayton, a Registered Investment Advisor in the states of California and Washington, and not those of any company with whom he is associated. He may be contacted at Cayton@ix.netcom.com.

Understand Credit Reporting

Historically low interest rates present a welcome opportunity for many homeowners to improve their financial situation by refinancing their mortgage. But, like everything else in the world of finance, there are no free lunches. To take advantage of these lower rates, homeowners must leap the FICO hurdle.

To qualify for the best loans at the lowest rates, borrowers have to qualify financially and are scored by lenders using a computerized model for evaluating credit risk, developed by Fair, Isaac, and Company, known as the FICO score.

Mortgage lenders are in the business of making money by lending it and being repaid on time. They gauge the risks associated with making that loan on a number of factors, not the least of which is the likelihood of timely repayment.

The FICO scoring system compares borrower’s credit capabilities to those of similar borrowers all over the country. A borrower’s credit history gives a strong indication of integrity, attitude, and discipline as well as a measure of their capability to pay bills on time.

Three major credit reporting agencies gather credit information: Experian, Equifax, and Transunion. The firms act independently of each other and use different methods for gathering information, hence the reports of each may differ.

The reporting agencies issue several different types of reports. A Consumer Report is the basic consumer report issued when an individual orders his own credit report. The Merchant Report is more complete and contains the full FICO scores.

Lenders view these scores as just one of several criteria for evaluating the ability of a borrower to pay back a loan. The scores, ranging from 0 to 1000, are numbers that tell lenders how likely an individual is to repay a loan, or make credit payments on time. The higher the score, the better the credit risk. Scores of 700+ make A credit grades, 640+ for a B grade, and below 579 fail.

According to mortgage broker Ron Goerss of Partners Mortgage, the most important factors to mortgage lenders are mortgage history, derogatory credit history, liens or judgments, length of credit history, depth of credit history, proportion of debt to credit balances, and the amount of available credit.

A borrower can improve his FICO score over time by paying bills—especially mortgage payments—on time. Late payments cost points. To get the best scores, one should accumulate at least 36 months of a timely payment history. Generally speaking, a borrower will have an excellent credit score with four major accounts ($1,500 credit limits or higher) all with 36 months of spotless payment history, and all usually maintaining balances that are at or below 60% of available credit limits.

Despite paying bills on time, it is still possible to have a lower credit score. Too many open accounts with higher balances will pull the score down. Too many inquiries hurt the score. Too many monthly obligations weaken the score.

Finally, the real negatives are late mortgage payments, collection history, charge-offs, repossessions, and bankruptcy. While all of those can be worked around, most lenders will refuse a conventional loan to someone with foreclosure history on their report.It’s a good idea to periodically review your FICO score. Erroneous information may be reported, and if you know ahead of time, you can write a letter to the credit-reporting agency and request a correction. For more information on FICO scoring and obtaining your FICO scores, I refer you to these websites: www.creditline.com and www.creditreporting.com

Reverse Mortgages: An Overview

Boomers ready to retire may find themselves house rich and cash poor. Rapid appreciation of personal real estate coupled with five years of a sideways stock market presents a liquidity problem for retirement planning.

The solution for some may lie in a reverse mortgage. In simple terms a reverse mortgage offers the opportunity for a property owner to tap the equity in their home without having to pay back the loan during their life or while they live in the home.

This is accomplished by entering into an agreement with a lender who is willing to advance a sum of money against the equity in the home, either in the form of a lifetime annuity, a lump sum or a line of credit with the understanding that the lender will recover the loan plus interest when the home is sold or the owner passes on.

The amount that can be advanced is a function of three factors. First, the owner(s) must be age 62 or older. Second, the amount advanced will depend upon the value of the home. Finally, interest rates in effect at the time of the loan figure into the equation. For example, an older borrower with a more valuable home during a low interest rate environment will have access to more cash than one faced with the reverse.

A reverse mortgage differs from a home equity line or conventional mortgage in several significant respects. First, the borrower does not have to meet borrowing qualification standards for credit, income, assets and ability to repay the loan. The borrower does not have to make periodic payments. And, the borrower cannot lose the home for non-payment.

For a home to qualify it must be the principal residence, either a single family residence, a 2-4 unit building, or a federally-approved condominium or planned unit development. The home cannot be a mobile home, but some programs offer loans on “manufactured” homes, providing they are on a permanent foundation and taxed as real estate.

Homes must be free of debt. Owners with an existing mortgage can utilize the opportunity to withdraw a lump sum to pay off the mortgage although that will reduce the amount of income available.

Payments can be structured and/or combined into a number of formats. Lump sums, lines of credit, monthly payments and lifetime annuities are the most popular. Some line of credit programs provide for the credit line to increase each year, recognizing the increasing property value. Loans that offer lifetime payments obligate the lender to keep paying even if the value of the home is exceeded. The lender must accept the value of the home for their only source of repayment.

Payback of the loan is due when the principal owner fails to occupy the house for 12 consecutive months or more, sells the home, or dies and leaves the home to heirs.

Reverse mortgages work well for older owners who are reasonably sure they intend to live out their lives in their homes. Before considering a reverse mortgage in such circumstances the owner should give careful considerations to their home’s “senior friendliness.” A “senior friendly” home ideally is all one level, with wide passageways for walkers and wheel chairs, and accommodative bath facilities. It should be located in a neighborhood accessible to public transportation and shopping for basic necessities, or the owner should have a plan to handle those situations when driving is no longer possible.

Finally, those considering a reverse mortgage should bear in mind that they are spending their children’s inheritance. If leaving the home as a legacy is important, a reverse mortgage, with its high fees and compounding interest, will take a large chunk from this legacy.

Reprinted with permission. The opinions expressed are those of Wendell Cayton, a Registered Investment Advisor in the states of California and Washington, and not those of any company with whom he is associated. He may be contacted at Cayton@ix.netcom.com.

Fast Credit Repair

by SCOTT MEDINTZ

Mortgage professionals can deliver better service, build loyalty, and provide valuable advice by helping clients improve their credit scores.

The reality is poor credit scores can be repaired.

Many borrowers see a low credit rating as an insurmountable barrier. But the reality is that poor credit scores can be repaired - which presents brokers with a significant opportunity. All it takes is an investment of time, a little forethought, and some reimagining of your role as a broker to deliver the kind of tangible benefit that helps generate repeat business and referrals. For instance, last winter Money magazine found it was possible to lower a consumer's interest rate about 150 basis points by boosting his credit scores just 50 points; he would have saved more than $80,000 over the life of a $200,000, 30-year mortgage at the time. Actual savings will vary with interest rates, but a higher rating should still be a money-saving asset.

Keep in mind, however, that in some cases it's more cost-effective to refer a client with a particularly complicated financial history to a company that specializes in repairing credit and boosting scores (see the sidebar "Cleanup Companies").

Consumers consider us counselors, and we have a responsibility to them.

COUNSEL CLIENTS. Repairing credit requires commitment and discipline on the part of clients, which is easier to encourage when they understand the broad impact their credit rating has on their purchasing power. "Customers consider us counselors, and we have a responsibility to them," says George Hanzimanolis, president of Bankers First Mortgage in Tannersville, Pa. It helps to remind them that beyond mortgages, credit ratings help determine how much they will pay for auto leases, insurance, and other purchases. Ideally, clients will address their credit issues before seeking a loan, but Hanzimanolis says that if they need a mortgage immediately - if they arrive at his office after having successfully bid on a home, for instance - he'll secure the best loan they qualify for in the short term and then work with them to improve their credit record so they may qualify for a lower rate in the future.

If, on the other hand, a customer walks in the door looking for guidance on how much she can reasonably spend and credit repair is necessary, get started on it immediately. Angela Martin, a broker with Capital Mortgage, Inc., in St. Louis, Mo., spends the first 15 to 20 minutes with new clients talking about the credit process before getting to their particular needs. I tell people, "Pay attention to credit the way you pay attention to family. It's your baby - you need to take care of it."

FIX ERRORS IN THE CREDIT REPORT. Lenders generally look at credit reports generated by each of the three major credit-scoring companies - TransUnion, Equifax, and Experian. You have to access reports from all three in order to start with an accurate assessment, as there are often inconsistencies. A credit score is determined by several factors (see "What's in a Credit Score?" below), including the number of recent inquiries, so don't rush to pull the scores yourself, because it may knock a few points off your client's total.

Martin sends clients to www.myfico.com, a commercial Web site where people can purchase credit reports and find out their scores before they come to see her. Alternatively, the recent Fair and Accurate Credit Transactions Act (FACTA) mandated that the industry set up a free centralized source - www.annualcreditreport.com - where consumers can get one free report per year from each of the major credit bureaus. The free reports do not, however, include the numerical FICO score, which lenders regard as crucial.

FICO scores help determine how much a customer can borrow and at what rate, though of course income and assets are factored in as well. FICO scores are tallied by the three major credit bureaus.

Challenging errors in a payment history is usually the most effective strategy for improving a credit score. Overdue medical bills, often the result of an insurance snafu, are common. Unfortunately, clearing things up can be a hassle. The client must contact each of the creditors and try to establish, say, that a payment marked as 60 days past due was merely 30 days late, and get the creditor to acknowledge the error in writing. Then he has to forward the information to each of the credit bureaus. He can also contact creditors and ask for a lower interest rate, arrange a new payment schedule, or even negotiate to pay the creditor back at a rate of, perhaps, 60 cents on the dollar. Many companies are willing to make a deal just to get the debt off their books.

Challenging errors in a payment history is usually the most effective strategy for improving a credit score.

IMPROVE CREDIT RATIOS. Clients should lower their credit ratio (the percent of a credit line being used) by devoting available cash to reducing credit card debts to 50 percent of the limit - and to 25 percent if at all possible. It's best to pay down larger debts first, since larger missed payments count for more points. They also should avoid what Martin calls "credit card roulette" - transferring balances between cards or opening new accounts in order to consolidate or lower their ratios. Maxing out a high-limit card can devastate a score. Plus, the average age of a person's credit lines has an impact on the score. "Credit needs to age," Martin says. Canceling credit cards altogether is also a no-no, as even dormant, untapped lines enhance a score.

RAPID RESCORING. To speed up the repair process, brokers are increasingly using "rapid rescoring," which allows them to ask credit report resellers to enter the new information as soon as a change in credit status has been documented. Instead of waiting months for the information to work its way through the system, rapid rescoring gets the score recalculated in about 72 hours. The cost varies, but $30 per disputed item per credit bureau is typical, and can be money well spent.

TEACH BY EXAMPLE. Hanzimanolis aims to equip his customers with the skills they need to fix their own credit. He invites them to his office and has them watch as he talks to creditors about outstanding bills "to sort of teach them how to do it." Once they get the strategy, he hands them a list of contacts and phone numbers and sends them off to finish the job.

Advise them not to open new credit lines or make large purchases while seeking a mortgage.

PREVENTIVE ACTION. Hanzimanolis also helps clients develop the skills to maintain sound financial behavior. "A lot of times the problem is just their way of life - they don't know how to budget," he says. "So I sit them down and talk about budgeting. And then I'll ask them, "Do you mind if I call you once every month or two and check up on how the budgeting is going?"

While looking over a customer's credit report recently, Martin saw that he was getting zinged for being late on ridiculously small payments. "He kept saying how busy he was. And I understand that; we're all busy," she says, "so I told him to put himself on automatic payments."

It's also important to make sure clients don't mess up their credit score during the underwriting process. Advise them not to open new credit lines or make large purchases while seeking a mortgage. Martin says that one woman she was working with charged $800 worth of clothing in the middle of the application process. It lowered her credit score by 15 points, she says.

CLEANUP COMPANIES. Helping to fix credit reports for customers with spotty credit histories could eat up all of a broker's time. So brokers frequently have to make a cost-benefit analysis: Is the benefit in terms of goodwill generated worth the substantial amount of time required by the process? Melissa Cohn, president of Manhattan Mortgage Co., in New York, N.Y., and one of the countrys top brokers for close to a decade, passes clients on to credit cleanup companies, which specialize in negotiating with creditors. When doing so, it's important to find a reputable firm to refer your clients to, Cohn says. "We're very careful about who we use." To find credit counseling resources in your area, go to www.debtadvice.org.

What's in a Credit Score?

The formulas the three credit bureaus use to generate scores are closely guarded proprietary information, but the factors considered and their relative weightings are shared with the public.

Payment history counts for 35 percent. Scores suffer for late bill payments in the past seven years, with bigger reductions for more recent delinquencies, and for longer stretches and greater amounts. Bankruptcies, legal judgments, and liens can also harm scores.

CREDIT UTILIZATION, or the amount of credit a borrower uses, counts for 30 percent. The biggest factor is the "credit utilization ratio," the portion of total revolving credit extended that is used. For installment loans, the key ratio is the outstanding balance to the original loan amount, so advise clients to avoid maxing out credit lines.

LENGTH OF CREDIT history counts for 15 percent. Lenders prefer that clients have a long history of managing payments and credit lines, so if clients cancel any credit cards, make sure they don't cancel the ones they've had the longest.

RECENT ACTIVITY, including credit inquiries, suggests to creditors that borrowers are looking to open new credit lines. It counts for 10 percent. Lenders are wary of people taking out lots of credit in a short period, and rapid inquiries suggest they may have been turned down.

MIX OF DEBT, or the combination of credit cards, retail accounts, mortgages, and education loans, counts for 10 percent of the score. In this case, the more variety the better, as lenders prefer a mix of secured and unsecured debt.

SCOTT MEDINTZ is a senior editor at Money magazine.
Reprinted with permission from Argent Mortgage.