Q: My son is looking into purchasing a townhome from a builder who has filed for bankruptcy. The development has not sold many units and therefore is not warranted. The development is in a great location with lots of amenities and upgrades. My son would like to take advantage of first-time homebuyer incentives and the low real estate prices.
Should he buy? Your thoughts and comments on this situation would be greatly appreciated.
A: It's unclear from your e-mail exactly where your son is looking to buy, but in this current market environment there are more homes for sale than there are buyers, and many builders are teetering on the edge of solvency.
Here's one piece of advice: Your son shouldn't buy a home solely for the tax incentives or the new $8,000 tax credit that has been recently announced by Congress. Instead, your son should buy a home that suits his needs and is in a good neighborhood, and he should make sure the home is in good shape and will not cause him (too many) headaches in the future.
Just because the developer is in bankruptcy doesn't mean the home that the builder put up was poorly constructed. But what it does mean is that your son won't have a builder to back up the product in the future. If your son decides to move forward, he should hire a great home inspector to take a careful look at the interior and exterior of the home for construction problems. The last thing your son would want is to buy the home only to find out that there is a $50,000 problem with it.
Next, because your son is looking at a townhome in a development, he needs to decide how much pain he wants to live through in the future as the development is built out.
If he buys the home, and he and a couple of other owners are the only people living in the development, would he really want to live in an empty development? What happens if the developer or somebody else takes over the development and then sells the units at a price far lower than what your son paid for the home? That could eliminate your son's equity. Would he still want to buy if this were a possibility?
Also, if he is living in an unfinished development that is a construction site, it could be years before the build-out is completed. Once it is finished, if he wanted to sell and move, he would be competing against sellers with much newer properties, again limiting his upside.
When your son finds the right home, he can take advantage of today's low interest rates, deducting the interest he pays on his mortgage, deducting the cost of his real estate taxes, and taking advantage of any first-time-buyer tax credits offered by the federal government and local municipalities and agencies.
But make sure he buys the right home at the right price, in the right place, and from the right seller.
Q: We are refinancing our first mortgage and as part of the commitment letter, the bank is asking for us to provide a "subordination agreement." We have a second mortgage with the same bank. We have no other mortgages or liens. Why are they asking for this form and what does it mean to us?
A: Presumably you are keeping your existing home equity line of credit (HELOC) and the lender is refinancing only the primary mortgage on your home.
When you took out that primary mortgage, it was probably 80 percent of the purchase price of the home. That lender wanted to make sure that the primary mortgage on your home was the first mortgage with the first priority on the home. In a nutshell, if you default on your primary mortgage, that lender would get first dibs on the proceeds from the sale of the home through foreclosure.
In your case, the first mortgage stands first in line, with the HELOC following in second place. If you were able to get a third loan on the property, that next lender would stand in third place.
When you pay off that primary mortgage and take out another loan, that next loan you take out gets in line behind the other loans on the property. So, the new mortgage would come behind the HELOC in order of importance. But your new lender wants to be first in line. To move to the front of the line it needs to get the second lender to subordinate its position in line to the new first lender.
Usually, you would get the request from the bank to get the subordination agreement signed when different lenders are involved. If your bank is a small bank, they could do the paper work "in-house." Larger lenders have different departments in various states with the mortgage department in one state and the HELOC and second mortgage departments in another state.
You should remind the lender that the HELOC is held by the company to see if your loan officer can help you out in getting the paperwork signed. The lender may tell you that it's up to you to get it done. If so, you'll need to call the toll-free number that your HELOC lender has provided to speak to the customer service department to determine where you need to send the document to get it signed.
Finally, some lenders will not sign the subordination agreement. Recently, one national lender indicated that they would no longer sign subordination agreements, effectively forcing those borrowers to close their HELOC accounts with the bank and obtain a new HELOC account elsewhere.
In other cases, the HELOC lender may determine that your property value has declined, that you are no longer as good a credit risk as you were when you took out the HELOC, or that you have requested to increase the amount of your first mortgage. For these or other reasons the HELOC lender may refuse to sign the subordination document.
You shouldn't wait to move on this. Since you know that you need the document signed, pick up the phone and start the process. Make sure your HELOC lender gets the document, approves it, signs it and sends it back to you for your closing.
If you know early enough that you have a problem with the HELOC lender, then, at least, you can find another lender to refinance your HELOC, or work with your HELOC lender to modify the terms of your current loan. If none of these plans work, you can decide whether now is really the time to refinance your primary loan and what you have to do to make it work.
