The Accunet Mortgage Show (8/16/2020) Episode

This week, Brian and David discuss Fannie and Freddie’s new tax, how self-employment and pre-approvals are inextricably linked, and how capital gains should be reported!

This week’s highlights:

  • Brian explains Fannie and Freddie’s new refinance fee
  • David and Brian give a clear example of why pre-approvals matter
  • Brian explains what you can gain (or lose!) from a capital gain

Loosening the Tourniquet on the CARES Act

Fannie and Freddie announced this week that they would be making rate increases on all home refinances as an ‘adverse market fee‘ to counter the effects of COVID-19 on the real estate market.

Since the banks assume there might be higher defaults and foreclosures in the future when the ‘tourniquet’ of the CARES Act forbearance allowance is loosened, they are accommodating with a Market Condition Credit Fee in Price to ensure they have money in reserves to prevent Americans from being impacted long-term.

Many news sources initially reported that the increases would be ‘instant’. However, Brian and David clarified that this rate increase entails no upfront fee, and will get rolled into a homeowner’s current interest rate. This is a typical effect, and rates are expected to go up by a quarter on smaller loan balances.
If a homeowner had an interest rate locked in prior to Fannie and Freddie’s announcement, the rate will remain unaffected.

If you have questions about refinancing and rates Accunet has a comprehensive guide for refinancing your home.

Self-Employment Ch-ch-changes

Brian told the story of two of his trusted past clients who were self-employed/small business owners.
They sold their existing home, pocketed a lot of money, and are now currently renting.

They wrote several offers in spring on a new home, had an offer accepted in May, and were expected to close by end of June.
However, their seller requested that they as buyers pay ~$15,000 to repair the septic system on the home that failed to pass inspection. Unsurprisingly, the couple and walked away from that offer (and that property is still on the market 6 weeks later).

In searching for yet ANOTHER new home, by July 29th their original pre-approval had expired.
Brian was happy to assist, but the rules state the couple would need refreshed documentation and an updated credit report in order to secure new financing – just in case their financials had changed drastically since the springtime.

Unfortunately, since the husband owned a small business, COVID changed how the financing rulebook is written. Now, a 30-year-fixed rate is toughest to obtain for underwriting self-employed borrowers.
If the couple had a financial loss since their last evaluation in spring, Accunet would have to count it against their income, and even though they were retirement age, they could not secure manufactured income by taking IRA withdrawals.

Accunet pointed them to a different investor who could work around the new self-employment restrictions, and fortunately, Brian found them the same rate and closing costs as they had back in May!

Financial circumstances can change at any time. Get a Rock-Solid Pre-Approval today!

Having your cake and eating it too

Brian spoke about a client who was looking to sell his lake house in Northern Wisconsin and received an offer far above market price – a cash deal with no contingencies to close at the end of September.

The last time Accunet financed this lake house was as a second home, and since then, the client has been renting it out and reporting rental income on his tax return.

Through his efforts, the client wound up with a capital gain, which is the cost of the house plus any improvements he made, compared to the amount for which he would sell it.
The base totaled to be a $750,000 gain!

According to the IRS website, if someone has a capital gain on their primary residence, it is a $250,000 per person exemption on capital gain taxes.
However, since this was the client’s second property… he was not eligible for that capital gain exemption. And, with that kind of increase to his income, he will be in the highest long term capital gains tax rate.

David suggested that he can roll that gain via 1031 exchange (aka the Starker Exchange) into a ‘like’ property: if the client were to buy the same kind of property after the sale, the IRS will allow a delay on paying that tax.

If the client says he is wanting to purchase another rental property, Accunet will have to charge him rental property pricing. The client wanted to argue then that, no, the new property would be his primary property!

Brian said he could not have his cake and eat it too. A homeowner cannot call something a rental property for the IRS, but tell the lender it is something different (that’s fraud!)

Brian urged that in light of all the COVID effects on the real estate market, it is not so bad to pay the capital gains tax even if it takes a bite out of your winnings — the capital gains tax may go up in the future!