The residential mortgage market has long made a distinction between two categories of mortgage loans depending on the amount being borrowed. “Conforming loans” are those up to a stated ceiling amount (currently $417,000) and “jumbo loans” are those in amounts above the conforming limit. Rates have historically been higher for jumbos than for conforming loans, and for some time now the differential in rates between conforming and jumbo loans has been substantial, making it significantly more expensive to obtain mortgages in high loan amounts.
As part of the 2008 economic stimulus package, Congress increased the ceiling amount for conforming loans in certain high cost areas around the country. In the Boston area, the conforming loan ceiling was raised to $523,750 for 2009. This has allowed borrowers to obtain higher mortgages at conforming rather than the higher jumbo rates. Congress recently passed legislation extending the increased ceilings through December 31, 2010. So for another full year, the conforming loan limits in the Boston area for single family homes and condominiums will remain at $523,750.
This is good news for those of you in the Boston area looking to purchase or refinance, as it remains possible for another year to obtain that higher loan amount at lower cost.
Sunday, November 22, 2009
Tuesday, November 17, 2009
Attorney Representation in Residential Purchase and Mortgage Transactions
I represent many buyers of residential real estate, and I am often asked by clients whether or not I can, or should, represent the mortgage lender as well. This is a good question, and one worth spending a moment to discuss.
In Massachusetts, a residential mortgage loan must be prepared and closed by an attorney. In this context, the attorney represents the lender, but it is fairly common for a buyer to ask the mortgage lender to permit their own attorney to close the mortgage loan as well. Although a technical conflict, it is a conflict that is regularly waived by both buyer and lender because the interests of both parties are largely the same. Both want clear title, proper documents and all other matters to be in order for closing. It is extremely rare that the interests of buyer and lender become adversarial, but in those rare cares, an attorney acting in dual representation would be required to withdraw. In over 25 years of practicing real estate law, and in representing both buyer and lender in a majority of those cases, I have never been required to withdraw due to a conflict between the parties.
In my view, there are two compelling advantages to a buyer in having the buyer’s attorney close the mortgage loan: quality control and cost savings. From a quality control standpoint, most buyers feel there is comfort in knowing that the attorney they have engaged is also the one responsible for the important pieces of due diligence and preparation needed to get to closing, rather than an attorney other than the one they selected and with whom they may not be familiar. As to cost, regardless of who represents the lender, one of the buyer’s closing costs will be an attorney's fee to the lender's attorney to close the loan. This is generally a fixed fee determined by the lender and the attorney and quoted to the buyer on the good faith estimate of settlement charges. Because an attorney representing only the lender generally will not be involved with any matters outside the scope of the loan closing, a prudent buyer will also engage an attorney to handle the negotiation of the purchase and sale agreement and and any other matters that may arise strictly between buyer and seller. Depending on the buyer’s wishes, this personal representation may end upon execution of the P&S or may continue through and including the closing, and naturally, the buyer will pay a separate fee to the attorney for these services. If two attorneys are involved, there is a probability of overlap in the effort to reach the closing table, and the buyer may feel he or she is paying twice for certain services. Instead, if the buyer’s attorney closes the loan as well, all preparation is consolidated into one effort, thereby reducing any duplication of effort and thus reducing the total legal fees in the transaction.
Most, but not all, lenders will honor a buyer’s request to have their personal attorney close the loan, so long as that attorney is qualified, but remember that this request must be made early in the process before the lender assigns the transaction elsewhere. If you are buying residential real estate financed by a mortgage loan, and your attorney is experienced in the representation of mortgage lenders, I encourage you to consider asking your lender at the time of application to use your own attorney to close the mortgage loan as well. The odds are you will be quite satisfied with the outcome.
In Massachusetts, a residential mortgage loan must be prepared and closed by an attorney. In this context, the attorney represents the lender, but it is fairly common for a buyer to ask the mortgage lender to permit their own attorney to close the mortgage loan as well. Although a technical conflict, it is a conflict that is regularly waived by both buyer and lender because the interests of both parties are largely the same. Both want clear title, proper documents and all other matters to be in order for closing. It is extremely rare that the interests of buyer and lender become adversarial, but in those rare cares, an attorney acting in dual representation would be required to withdraw. In over 25 years of practicing real estate law, and in representing both buyer and lender in a majority of those cases, I have never been required to withdraw due to a conflict between the parties.
In my view, there are two compelling advantages to a buyer in having the buyer’s attorney close the mortgage loan: quality control and cost savings. From a quality control standpoint, most buyers feel there is comfort in knowing that the attorney they have engaged is also the one responsible for the important pieces of due diligence and preparation needed to get to closing, rather than an attorney other than the one they selected and with whom they may not be familiar. As to cost, regardless of who represents the lender, one of the buyer’s closing costs will be an attorney's fee to the lender's attorney to close the loan. This is generally a fixed fee determined by the lender and the attorney and quoted to the buyer on the good faith estimate of settlement charges. Because an attorney representing only the lender generally will not be involved with any matters outside the scope of the loan closing, a prudent buyer will also engage an attorney to handle the negotiation of the purchase and sale agreement and and any other matters that may arise strictly between buyer and seller. Depending on the buyer’s wishes, this personal representation may end upon execution of the P&S or may continue through and including the closing, and naturally, the buyer will pay a separate fee to the attorney for these services. If two attorneys are involved, there is a probability of overlap in the effort to reach the closing table, and the buyer may feel he or she is paying twice for certain services. Instead, if the buyer’s attorney closes the loan as well, all preparation is consolidated into one effort, thereby reducing any duplication of effort and thus reducing the total legal fees in the transaction.
Most, but not all, lenders will honor a buyer’s request to have their personal attorney close the loan, so long as that attorney is qualified, but remember that this request must be made early in the process before the lender assigns the transaction elsewhere. If you are buying residential real estate financed by a mortgage loan, and your attorney is experienced in the representation of mortgage lenders, I encourage you to consider asking your lender at the time of application to use your own attorney to close the mortgage loan as well. The odds are you will be quite satisfied with the outcome.
Thursday, November 5, 2009
First Time Homebuyer Tax Credit Extended
Good news for first-time homebuyers! The United States Senate has voted to extend and expand the first-time homebuyer tax credits which have been in place as part of the economic stimulus package enacted earlier this year; the House is expected to follow suit later this week. The program was scheduled to expire at the end of November, but will now be extended through June 30, 2010. Under the new bill, Buyers who have owned their current homes at least five years will be eligible for tax credits of up to $6,500. First-time homebuyers, or anyone who hasn't owned a home in the last three years, will still get up to $8,000. To qualify, buyers have to sign a purchase and sale agreement by April 30, 2010, and close by June 30. The credit is available for the purchase of principal homes costing $800,000 or less; vacation and second homes are not eligible. There are income caps: the credit is phased out for individuals with annual incomes above $125,000 and for joint filers with incomes above $225,000.
If you are considering the purchase of your first home, this is the time to do it! Lower prices and the tax credit make this a most favorable time to become a homeowner.
If you are considering the purchase of your first home, this is the time to do it! Lower prices and the tax credit make this a most favorable time to become a homeowner.
Friday, October 9, 2009
S Corp or LLC?
I was recently asked to explain the difference between a Massachusetts Subchapter S corporation (S Corp) and a Limited Liability Company (LLC). As I was pondering the response, it occurred to me that this would make a great topic for a blog entry!
Both an S Corp and an LLC provide limited liability protection of personal assets against lawsuits and other liabilities of the business. Both also offer the benefit of the "pass-through" of profits and losses to the individual tax return of the shareholder/member, thereby eliminating the double taxation which occurs for standard business ("C") corporations. Other comparisons of the two highlight the differences.
1. Formalities of creation: Both are created by the filing of an organizational document with the Massachusetts secretary of state. The filing fee for a corporation is $275 (for up to 275,000 shares) and the filing fee for the LLC is $500. An S Corp also requires the additional step of filing a Subchapter S election with the IRS once the corporation is formed. Both must file an annual report each year with the Secretary of State. The annual report filing fee for a corporation is $125 per year and the filing fee for the LLC is $500 per year.
2. Formalities of Operation: An S Corp is governed by the corporations statute, which requires the creation of bylaws, the maintenance of formal minutes and other records, and the holding of annual meetings. The LLC has no such formal requirements, though the creation of an Operating Agreement is highly recommended.
3. Composition of Participants: An S Corp may have no more than 75 shareholders, all of whom must be U.S. citizens or have residency status. All shareholders must be individuals. Only one class of stock is permitted. The corporation is controlled by officers and a board of directors. In contrast, members of an LLC may be individuals or separate legal entities, U.S. citizens or not. There are no limits on the number of members permitted, and there may be different classes of members. An LLC may be run by the members or by managers who may not be members.
4. Allocation of Profits and Losses: With an S Corp, the allocation of profits and losses must be according to the ratio of each shareholder’s percentage of stock ownership, even if a different distribution scheme is preferred. With an LLC, profits and losses may be allocated to members in whatever manner the members wish regardless of their percentage of ownership. This, for example, would allow a member who contributes less capital but more "sweat equity" to receive a higher portion of profits despite a lower capital contribution.
5. Self-employment taxes: With an S Corp, income paid to shareholders as distributions is not subject to self-employment taxes; instead only the salary paid to an owner/employee is subject to self-employment tax. With an LLC, members are considered to be "self-employed" and, as such, must pay self-employment tax on all income received from the LLC. If the business operates in active trade, the members are active in running the business, and self-employment taxes on the members would be high, an S Corp may be preferred; the business can elect to pay a lower salary and more in distributions to minimize this tax. The downside of the S Corp in this context is that payroll taxes must be paid, and the paperwork associated therewith can be substantial.
So which is right for you? If your priorities are operational ease, flexibility with membership and allocations of profit and loss, and low maintenance, then an LLC might be your preferred entity. If you are looking to save on employment taxes and annual filing fees, and you don’t mind the structural limitations, then an S Corp may be right for you. In any situation, it is crucial to seek the advice of a competent attorney and accountant in order to make a fully informed choice.
Both an S Corp and an LLC provide limited liability protection of personal assets against lawsuits and other liabilities of the business. Both also offer the benefit of the "pass-through" of profits and losses to the individual tax return of the shareholder/member, thereby eliminating the double taxation which occurs for standard business ("C") corporations. Other comparisons of the two highlight the differences.
1. Formalities of creation: Both are created by the filing of an organizational document with the Massachusetts secretary of state. The filing fee for a corporation is $275 (for up to 275,000 shares) and the filing fee for the LLC is $500. An S Corp also requires the additional step of filing a Subchapter S election with the IRS once the corporation is formed. Both must file an annual report each year with the Secretary of State. The annual report filing fee for a corporation is $125 per year and the filing fee for the LLC is $500 per year.
2. Formalities of Operation: An S Corp is governed by the corporations statute, which requires the creation of bylaws, the maintenance of formal minutes and other records, and the holding of annual meetings. The LLC has no such formal requirements, though the creation of an Operating Agreement is highly recommended.
3. Composition of Participants: An S Corp may have no more than 75 shareholders, all of whom must be U.S. citizens or have residency status. All shareholders must be individuals. Only one class of stock is permitted. The corporation is controlled by officers and a board of directors. In contrast, members of an LLC may be individuals or separate legal entities, U.S. citizens or not. There are no limits on the number of members permitted, and there may be different classes of members. An LLC may be run by the members or by managers who may not be members.
4. Allocation of Profits and Losses: With an S Corp, the allocation of profits and losses must be according to the ratio of each shareholder’s percentage of stock ownership, even if a different distribution scheme is preferred. With an LLC, profits and losses may be allocated to members in whatever manner the members wish regardless of their percentage of ownership. This, for example, would allow a member who contributes less capital but more "sweat equity" to receive a higher portion of profits despite a lower capital contribution.
5. Self-employment taxes: With an S Corp, income paid to shareholders as distributions is not subject to self-employment taxes; instead only the salary paid to an owner/employee is subject to self-employment tax. With an LLC, members are considered to be "self-employed" and, as such, must pay self-employment tax on all income received from the LLC. If the business operates in active trade, the members are active in running the business, and self-employment taxes on the members would be high, an S Corp may be preferred; the business can elect to pay a lower salary and more in distributions to minimize this tax. The downside of the S Corp in this context is that payroll taxes must be paid, and the paperwork associated therewith can be substantial.
So which is right for you? If your priorities are operational ease, flexibility with membership and allocations of profit and loss, and low maintenance, then an LLC might be your preferred entity. If you are looking to save on employment taxes and annual filing fees, and you don’t mind the structural limitations, then an S Corp may be right for you. In any situation, it is crucial to seek the advice of a competent attorney and accountant in order to make a fully informed choice.
Wednesday, September 30, 2009
Good news for the local housing market?
The Boston Globe reports today that Massachusetts home sales have continued to increase for the second consecutive month, indicating (in its view) that the housing market is beginning to recover. Do we believe this? Perhaps the power of the press can make it so! Read the complete article at http://www.boston.com/business/articles/2009/09/30/signs_point_to_recovery_in_mass_housing/
Sunday, September 27, 2009
More new federal lending regulations
The federal government has been staying busy in its efforts to revamp the mortgage lending industry. In addition to the new regulations previously reported here, an article in today's New York Times explains additional limitations on lenders making high-cost mortgage loans to borrowers who cannot demonstrate a clear ability to repay the loan in the conventional manner. Borrowers with low credit scores or no ability to fully document their income will find it far more difficult to obtain mortgage financing. The full article may be found at http://www.nytimes.com/2009/09/27/realestate/27mort.html?emc=tnt&tntemail1=y.
Tuesday, September 15, 2009
Significant Changes to Mortgage Lending Disclosure Rules and Their Impact on Your Closing
The Mortgage Disclosure Improvement Act, which affects all residential mortgage loan applications submitted on or after July 30, 2009, imposes substantial additional compliance obligations on the part of mortgage lenders, in an effort to provide more transparency and fairness and to better protect consumers in making choices about mortgage financing. These new regulations are likely to lengthen the time it takes to close a mortgage loan. It is important that all parties involved in a real estate mortgage transaction understand these new regulations and consider their impact on the timing of the process. Following is a summary of the changes and how they may impact you:1. A lender is now required to provide a good faith estimate of closing costs (GFE) and an initial Truth In Lending Disclosure Statement (TIL) within three business days after receiving a mortgage loan application. The lender may not collect any up-front fees from a borrower, except for a credit report fee, until the initial GFE and TIL are received by the Borrower.
2. No mortgage loan may close less than seven business days after the date on which the borrower is issued the initial GFE and TIL.
3. A home buyer must be provided with a copy of the appraisal not less than three business days prior to closing.
4. If the Final Truth-In-Lending Disclosure form (TIL) indicates an increase of .125% or more in the Annual Percentage Rate from the APR stated in the initial TIL, there is a mandatory 3 day waiting period before the loan can close in order to give the borrower an opportunity to review and agree to the new numbers.
These new regulations have the potential impact of delaying the timing of closing a mortgage loan. The ordering of appraisals may be delayed until the lender is able to collect the appraisal or application fee. A delayed appraisal may result in a longer time between application and when the lender issues a commitment letter and clears a loan to close. All of this means that the closing date set in a purchase and sale agreement between a buyer and seller may no longer be certain, since it is possible that the lender will be required to delay the closing in order to meet these new disclosure and timing requirements. In certain circumstances, these waiting periods may be waived by the borrower if it is determined to be "necessary to meet a bona fide personal financial emergency". It remains to be seen what constitutes "a bona fide personal financial emergency" and whether individual mortgage lenders will permit waivers as a matter of policy.
As a buyer, realtor or buyer’s attorney, you would be well advised to include a clause in your purchase and sale agreement which grants an extension of the stated closing date if required by the mortgage lender in order to satisfy these new regulations. Without that, a buyer might be caught in that no-man’s land between having a contractual obligation to close on a stated date or forfeit a deposit, but not yet having mortgage funds available from the lender. Query whether such a circumstance will qualify as a "bona fide personal financial emergency" which permits a waiver of the notice periods.
Subscribe to:
Posts (Atom)
