CPAs provide mortgage and refinancing tips in today's subprime climate

The domino effect of the subprime mortgage crisis has affected not only the housing and construction markets but has also trickled down to other credit markets, affecting those attempting to secure car and other personal loans. With uncertainty abounding, members of the New York State Society of Certified Public Accountants (NYSSCPA) are advising consumers to tread carefully.

Howard Landsberg, CPA, chair of the NYSSCPA Real Estate Committee, encourages patience.

“People should refinance now, but wait to purchase a home. Buyers stretching to afford their first home are being hit the hardest in the present market. Lenders have reined in their underwriting rules for borrowers with less than perfect credit. If you can improve your credit score, it is better to wait to buy,” says Landsberg.

Robert Reitman, CPA, former chair of the committee, adds, “In my opinion, people should wait to purchase a home as reports are stating values of properties are declining in the majority of the United States. If an individual can lock into a fixed rate mortgage they can afford, as compared to their current variable mortgage product, it would be prudent to refinance. They need to assess the amount of cash they have available to pay for housing. They should not extend themselves with a product they cannot afford if interest rates increase in the future.”

Consumers should also consider the differences between a fixed rate mortgage and a variable rate mortgage. A fixed rate mortgage offers predictable housing costs for the life of the loan. A variable rate is a mortgage on which the interest rate charged by the lender may be adjusted in accordance with a stipulated cost-of-funds index (e.g., prime rate).

With so many real estate buying opportunities in the current market, many consumers are considering a second home. Unless you are prepared to pay cash for the property, the answer to whether you should look into purchasing a home hinges on your ability to qualify for a mortgage on the second home. Lenders use two benchmarks when reviewing mortgage loan applications:

  1. Total mortgage payments should not exceed 33% of the borrower's total income;
  2. Total debt repayment (mortgage loans, home equity loans, credit card or installment debt) should not exceed 38% of income.

The market is also influencing parents to opt out of paying increasingly expensive on-campus room and board fees. For many, buying an apartment for college-age children could be considered a second home. Parents are also co-signing loans for their children. Banks typically design loans for students who will use the home as his or her primary residence, and require a down payment of about 3 percent of the purchase.

If you are in a foreclosure situation and the bank sells your home for less than the amount left on your mortgage, any forgiven debt can be treated as taxable income. The IRS form for reporting this is 1099-C. The C stands for cancellation of debt.

And finally if you are considering a home purchase, NYSSCPA recommends consulting with your CPA who will have a better understanding of your current and future financial portfolio.

Reprinted with permission from the NYSSCPA

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