Condo vs. Co-Op

I don't come across many buyers looking to buy a co-op but there are a few on the market. In this post, I reference Bankrate's "Condo or Co-Op? What's the difference?" for the comparison.

Both condos and co-ops are considered "common interest developments." A common interest development is a housing development in which their are individual ownership of units with the right to use/share common space.

In a...

• Condo, "each unit owner owns an individual apartment in fee simple. In addition, the buyer owns an undivided interest in the common elements such as the exterior walls, roof, pool and other recreational area."
  
  
• Co-Op, "the building containing the residential units (or apartments) is owned by a 'copperative housing corporation.'"

Both condos and co-op owners have monthly maintenance fees to pay. The key differences are:

• Form of ownership "A condo is considered real property and a cooperative is considered intangible personal property. A condominium owner actually owns the apartment in fee simple, like any other homeowner, and owns an undivided interest in the common areas like parking lots, recreations areas, lobbies and hallways. In a cooperative apartment complex you don't actually own any real estate. Rather, you own shares in a not-for-profit corporation. As a shareholder you get the right to lease space in the building. The corporation owns the common."
  
  
• Property Taxes "Because condos are owned individually, they appear in the property tax rolls as separate entities and, accordingly, individual owners are taxed separately. The entire property co-op is owned by the corporation, so it appears on the tax rolls as a single piece of property. The corporation pays the property taxes and passes along the cost to the tenant-shareholders, usually as part of the monthly maintenance fee."
  
  
• Financing "Since there is no fee simple ownership of the unit in co-ops, it is sometimes difficult to obtain financing because the security for the loan is the resident's shares in the corporation. Many lenders will not lend money on a co-op at all... [Those that do typically] offer far fewer mortgage options, normally require larger down payments and charge higher interest rates. [Additionally,] most co-op owners cannot get a home equity loan or line of credit and in a co-op each individual is dependent on the solvency of the entire project. If the corporation were to go bankrupt, all shareholders would feel the pinch. Individual condo owners are responsible only for mortgage debt and taxes solely on his property."
  
  
• Federal Tax Deductions "In the condo situation, each individual is able, easily, to deduct payments made for mortgage interest and property taxes if he resides in the unit and further deductions for such things as depreciation and maintenance if the condo is used as a rental property. The co-op tenant-shareholder can only easily deduct his proportionate share of the property taxes and interest on the underlying mortgage."
  
  
• Monthly Fees "Maintenance fees, paid usually on a monthly... basis, generally are significantly higher in a cooperative because the corporation is collecting mortgage and property tax payments from each shareholder in addition to [costs] for... [landscaping, security, and insurance.] However, because co-ops are able to borrow funds for costly repairs or capital improvements projects, unit owners are less likely to face large assessments to their monthly fees as condo owners would.
  
  
• Ownership Transfer "One of the good things about not being considered real estate is when the lease rights to a unit in a co-op change hands (because a seller sold his stock shares to a buyer) there is much less in the way of state and local taxes on the transaction and far less in settlement costs because there's no appraisal, survey or title work to be done."
  
  
• Powers of the Board "Despite the fact that many condo associations contend that they are empowered to either approve or disapprove the transfer of ownership, the reality is that they have almost no power at all. Co-ops, on the other hand have the right to approve or deny the sale of shares on the basis, for example, of the buyer's perceived inability to make the payments."

Source: BankRate.com

Consumer's Guide to Lock-In Mortgage Rates

It's important to know your rights. In this blog, I provide excerpts from the Consumer's Guide to Mortgage Lock-Ins, which is published by HSH Associations.

About this Guide...

"he Federal Reserve Board and the Office of Thrift Supervision prepared this booklet on mortgage lock-ins in response to a request from the House Committee on Banking, Finance and Urban Affairs and in consultation with many other agencies and trade and consumer groups. It is designed to help consumers understand an important aspect of home financing."

What is a Lock-In?

"A lock-in, also called a rate-lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. Depending upon the lender, you may be able to lock in the interest rate and number of points that you will be charged when you file your application, during processing of the loan, when the loan is approved, or later.

A lock-in that is given when you apply for a loan may be useful because it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked in, you should be protected against increases while your application is processed. This protection could affect whether you can afford the mortgage. However, a locked-in rate could also prevent you from taking advantage of price decreases, unless your lender is willing to lock in a lower rate that becomes available during this period.

It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in. A loan commitment is the lender's promise to make you a loan in a specific amount at some future time. Generally, you will receive the lender's commitment only after your loan application has been approved. This commitment usually will state the loan terms that have been approved (including loan amount), how long the commitment is valid, and the lenders conditions for making the loan such as receipt of a satisfactory title insurance policy protecting the lender."

The guide also answers important questions, such as:

• Will your lock-in be in writing?
• Will you be charged for a lock-in?
• How long are lock-ins valid?
• What options are available for setting the mortgage terms?
• What happens if the lock-in period expires?
• How can you speed up the approval of the loan?

If you are planning on buying a home soon, and are currently working with lenders, I encourage to read this resource.

Source: Consumer's Guide to Mortgage Lock-Ins

Say YES to Foreclosures in this Economy (?)

I don't agree but economist Christopher Thornberg thinks so. As quoted in the Mortgage Insider, he says:

“I argue... that foreclosures are good for the economy. If someone stops paying their over-sized mortgage on a deeply underwater house they have a lot more money to spend on things like iPods and clothes. So in a sense all these foreclosures are probably one of the things stabilizing consumer spending. That’s far more important to the economy than whether people pay off their mortgages."

He continues...

“The financial meltdown is done... and what you call a financial meltdown I call a comeuppance. The banks are already screwed. I fail to see how trying to keep people mired in debt as a way to help banks is good social policy.”

Source: Mortgage Insider

Strong opinions. I look forward to your thoughts!

Home Prices -- Defying Laws of Economics

An article in the New York Times, "Why Home Prices Keep Falling," describes the plight of U.S. home prices and the expectation that they will continue to fall through 2010, maybe even 2011.

"Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient. Why would a sensible person watch the value of his home fall for years, only to sell for a big loss?[...] If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter."

The articles continues with several plausible explanations for this behavior. They include...

1. Sales of existing homes are mainly by people who are planning to buy other homes.
2. Other sellers are not in a rush to sell due to the decreased value of their home.
   
3. The decision to buy and switch to renting often requires the assent of multiple parties: spouse/partner, children, etc.
4. Prospective buyers are dissuaded to buy due to the gloom of unemployment that surrounds them.

Source: New York Times

myFICO webinar: Credit in Today's Climate

This myFICO webinar "describes some of the fundamentals of FICO® scores and then takes a closer look at some topics pertinent to today's credit climate... Ethan Dornhelm, a FICO scoring expert shed light on questions like "How do you get the highest FICO scores?" and "How do foreclosures affect your FICO score?". The myFICO® panel then spent about 15 minutes fielding questions from the audience."

FHA Appraisal Requirements

Most first-time home buyers seek an FHA-insured loan when purchasing their home. A few weeks ago, I blogged about Understanding FHA Insured Loans in which I mentioned very briefly the minimum property requirements necessary to be approved for the loan.

Below you will find excerpts from HUD Mortgagee Letter 2005-ML-48 regarding repair and inspection requirements, which I hope would be helpful to buyers as they consider potential properties.

"FHA Repair Requirements: Below are examples of minor property conditions that no longer require automatic repair for existing properties include, but are not limited to:

* Missing handrails * Cracked or damaged exit doors that are otherwise operable * Cracked window glass * Defective paint surfaces in homes constructed post 1978 * Minor plumbing leaks (such as leaky faucets) * Defective floor finish or covering (worn through the finish, badly soiled carpeting) * Evidence of previous (non-active) Wood Destroying Insect/Organism damage where there is no evidence of unrepaired structural damage * Rotten or worn out counter tops * Damaged plaster, sheetrock or other wall and ceiling materials in homes constructed post- 1978 * Poor workmanship * Trip hazards (cracked or partially heaving sidewalks, poorly installed carpeting) * Crawl space with debris and trash * Lack of an all weather driveway surface

Below are examples of property conditions that may represent a risk to the health and safety of the occupants or the soundness of the property for which FHA will continue to require automatic repair for existing properties include, but are not limited to:

* Inadequate access/egress from bedrooms to exterior of home * Leaking or worn out roofs (if 3 or more layers of shingles on leaking or worn out roof, all existing shingles must be removed before re-roofing) * Evidence of structural problems (such as foundation damage caused by excessive settlement) * Defective paint surfaces in homes constructed pre-1978 * Defective exterior paint surfaces in home constructed post-1978 where the finish is otherwise unprotected * Exposed sub-flooring, missing carpet, vinyl, tile floors

FHA Inspection Requirements: FHA no longer mandates automatic inspections for the following items and/or conditions in existing properties:

* Wood Destroying Insects/Organisms: inspection required only if evidence of active infestation, mandated by the state or local jurisdiction, if customary to area, or at lender's discretion * Well (individual water system): test or inspection required if mandated by state or local jurisdiction; if there is knowledge that well water may be contaminated; when the water supply relies upon a water purification system due to presence of contaminants; or when there is evidence of: Corrosion of pipes (plumbing)Areas of intensive agriculture within 1/4 mile Coal mining or gas drilling operations within 1/4 mile Dump, junkyard, landfill, factory, gas station, or dry cleaning operation within 1/4 mile Unusually objectionable taste, smell or appearance of well water (superceding the guidance in Mortgagee Letter 95-34 that requires well water testing in the absence of local or state regulations) * Septic: test or inspection required only if evidence of system failure, if mandated by state or local jurisdiction, if customary to the area, or at lender's discretion * Flat and/or unobservable roof

FHA Appraisal Requirements: Appraisers are to recommend only those repairs necessary to make the property comply with FHA’s Minimum Property Requirements (MPR) or Minimum Property Standards (MPS) together with the estimated cost to cure. Recommended repairs are based on a visual inspection of readily observable items only.

Cosmetic repairs are not required; however, they are to be considered in the overall condition rating and valuation of the property. Examples of cosmetic repairs would include surface treatments, beautification or adornment not required for the preservation of the property. For example, generally, worn floor finishes or carpeting, holes in window screens, or a small crack in a windowpane are examples of deferred maintenance that do not rise to the level of a required repair but must be reported by the appraiser. The physical condition of existing building improvements is examined at the time of the appraisal to determine whether repairs, alterations or inspections are necessary - essential to eliminate conditions threatening the continued physical security of the property.

Required repairs will be limited to necessary requirements to:

• protect the health and safety of the occupants (Safety)
• protect the security of the property (Security)
• correct physical deficiencies or conditions affecting structural integrity (Soundness)"

Monetizing the First-Time Home Buyer's Tax Credit

A few weeks ago, I blogged about the 2009 First-Time Home Buyer's Tax Credit. Well, the Department of Housing has finally released details on how buyers can access the tax credit in advance to use toward their down payment.

As reported in The Boston Globe, "Thousands of first-time homebuyers will be able to get short-term loans so they can quickly make use of a new $8,000 tax credit to pay for some of the costs of buying a home purchase[...]

Most borrowers will still have to come up with the FHA's required 3.5 percent down payment, unless they work through a state or local housing agency or an approved nonprofit. But there are many other potential uses, such as for closing costs and fees, or to beef up the down payment beyond the minimum level."

Source: Gov't Allows Short-Term Loans for Tax Credit