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IRA investing in real estate is becoming increasingly popular. There is no way to cover all of the ins and outs of IRA real estate investing in a single article of this length, but I can at least give you some of the highlights.
If you’ve heard or read the success stories, you may be “chomping at the bit”, but IRA investing in real estate is not without risks. So, you need to get some education first.
Experienced investors have programs that can help. Of course, advice like that is not free, but if it helps you find good deals and avoid the common mistakes, then it is well worth the cost.
In order to begin IRA real estate investing, you need a self directed account and an account custodian. You should choose someone reliable, with years of experience. They can’t suggest specific deals or anything like that, but they can provide you with some of the education that you need.
For example, the better custodians provide education about prohibited transactions, prohibited investment types and the rules about self-dealing. If you make a mistake, your account could lose its tax free status.
Once you have selected an account custodian, you need to decide how to fund the account. If you currently have a traditional account, you should be able to “roll it over”, without penalty, although the bank or brokerage that you are currently using may charge a fee.
This is the best time to consider IRA investing in real estate, because you may have a large amount of un-invested cash. If you can find a few good deals, you can make big profits quickly. Or, if you want a consistent flow of income into the account, you may want to consider a rental property.
There are many options to choose from when it comes to IRA real estate investing. You can buy houses, apartment buildings, raw land, mobile homes, and office buildings or simply finance other people’s homes. But, there are some things that you must avoid.
You cannot sell your own home to your account. You cannot use the account to buy property that you plan to live in at some point in the future. Your sons and daughters cannot rent apartments in buildings that owned by the account. Your parents could not have an office in a building held within the account.
The list of prohibited transactions is relative long, but not complicated, once you think about it. IRA investing in real estate or any other vehicle is designed to benefit your future, not your present day wealth. So, if you benefit from an investment, either directly or indirectly, your account could lose its tax free status.
One of the primary reasons that experienced investors suggest IRA real estate investing is because of the tax advantages. If you sell a property for a profit, there are no capital gains taxes. If the account makes rental income from a property that was purchased with cash from the account, there is no income tax.
So, experienced investors sometimes save as much as 25% by using their retirement accounts. That’s only a few of the advantages of IRA investing in real estate. It’s probably just enough to make you curious.
About the Author
W. Conley is an advocate of IRA investing in Real Estate as a means of diversifying your portfolio, while maximizing returns. He has successfully invested in Real Estate and has seen fantastic returns on his investments, all of which was done using a proven system. You can read more about the benefits of IRA investing by going to http://www.iloc-ira-site.com
Recessionproof Real Estate Investing with a Self Directed IRA LLC or Solo 401k
This digital document is an article from Real Estate Weekly, published by Thomson Gale on July 18, 2007. The length of the article is 759 words. The page length shown above is based on a typical 300-word page. The article is delivered in HTML format and is available in your Amazon.com Digital Locker immediately after purchase. You can view it with any web browser.Citation DetailsTitle: Should you ...
This digital document is an article from Units, published by Thomson Gale on August 1, 2005. The length of the article is 824 words. The page length shown above is based on a typical 300-word page. The article is delivered in HTML format and is available in your Amazon.com Digital Locker immediately after purchase. You can view it with any web browser.Citation DetailsTitle: Real estate a real IRA ...
Real Estate Investing For Dummies, 2nd Edition, is completely revised and updated to help you overcome the challenges and and take advantage of the opportunities in any real estate environment, including a down market. But Eric Tyson and Robert Griswold's core message remains as relevant today as it did upon the initial publication of Real Estate Investing For Dummies -- investing in real estate i...
This online guide was created to help buyers of real estate, whether for a personal residence or investment property, ensure that they protect themselves on their purchase by doing the proper due diligence. Professor Leonard Baron, MBA, CPA, is a nationally recognized expert on protecting oneself when purchasing property, a San Diego State University Real Estate lecturer, a commercial real estate ...
This digital document is an article from Mortgage Banking, published by Mortgage Bankers Association of America on July 1, 2004. The length of the article is 2459 words. The page length shown above is based on a typical 300-word page. The article is delivered in HTML format and is available in your Amazon.com Digital Locker immediately after purchase. You can view it with any web browser.Citation ...
Real Estate Investing For Dummies, 2nd Edition, is completely revised and updated to help you overcome the challenges and and take advantage of the opportunities in any real estate environment, including a down market. But Eric Tyson and Robert Griswold's core message remains as relevant today as it did upon the initial publication of Real Estate Investing For Dummies -- investing in real estate i...
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HUD finally allows Loan Modifications on FHA Mortgages
TROY, MI – On July 30, HUD published Mortgagee Letter 2009-23, that detailed their long awaited loan modification program for homeowners with FHA mortgages.
What took so long? President Obama announced the “Making Home Affordable Program” (MHA) for FNMA & FHLMC mortgages back on March 4th of this year.
We should all be glad HUD’s modification program is finally available, but HUD is supposed to be a homeowner advocate and watchdog. Some watchdog! HUD’s response time on this means if they were guarding your house, the crooks would have already been back several times and stolen everything but the kitchen sink before they sounded an alarm.
This latest piece of legislation does show the Obama administration fully believes the best way to solve the housing crisis and stem the tide of foreclosures is to make home payments affordable.
This was sorely lacking with FHA’s other modification options. Most homeowners with FHA mortgages were forced into forbearance programs that usually increased their monthly payments. HUD’s forbearance program was actually designed for different economic times when a job loss or other economic hardship was typically temporary. Worse-case in those days, a homeowner could usually sell their home to pay off the mortgage they were having difficulty paying. The current Great Recession and percentage of upside homes no longer makes forbearance a very realistic and viable option.
The new guideline kicks in August 15, 2009 for homeowners with FHA mortgages.
Who’s Eligible
The FHA mortgage to be modified must be at least 12 months old and the homeowner must have made at least 4 full monthly payments.
The FHA mortgage must be less than 12 months behind on payments, but surprisingly, it s required that the mortgage be at least 30 days behind. This is a major difference from the MHA program where no delinquency is required.
The homeowner must still live in the property with the FHA mortgage being modified, so rental properties with FHA mortgages are not eligible.
The homeowner cannot have deliberately defaulted on their FHA mortgage payments. I’d like to know how HUD and the mortgage servicers intend to determine this. My guess is that they won’t - except in obvious cases where a homeowner has a lot of liquid reserve funds in non-retirement accounts. T
he homeowner must first try to qualify for other loss mitigation home retention options – FHA Special Forbearance, Loan Modification and Partial Claim. This is a silly requirement that could lead to confusion, unnecessary delays and ultimately foreclosures instead of the intended modifications. FNMA & FHLMC modifications have no such requirement.
The Modification Process
A homeowner will have to submit detailed financial information to whoever is servicing their FHA mortgage and sign a hardship affidavit attesting to their financial difficulties. This information may be provided either in writing or verbally over the phone.
Similar to the FNMA/FHLMC modification process, the goal of the FHA modification is to lower the Principal, Interest, Taxes & Insurance (PITI) payment to 31% of the homeowner’s gross monthly income. HUD calls this a Front End Ratio.
Unlike the FNMA/FHLMC modification program though, the FHA version also has a Back End Ratio requirement where total debt payments including PITI, cannot exceed 55% of gross monthly income. Any second mortgages must also be included in the Back End Ratio.
The last calculation is the toughest to understand – up to 30% of the current mortgage balance, less payments in arrears (up to 12 months) and allowable foreclosure costs, may be deferred along with the corresponding payment amount. The amount deferred is also limited to that which will bring the PITI payment down to 31% of the homeowner’s gross monthly income.
Confused yet? I’d like to know why HUD made this so complicated. It’s bound to cause major confusion in the customer service ranks.
HUD did provide an example to illustrate the process:
Homeowner had a reduction of income and is delinquent 3 full mortgage payments. The unpaid principal balance on the mortgage on the date of default is $150,000 and the monthly payment is $1,220 (consisting of P&I of $920 and escrows, including MIP, of $300). The financial analysis reveals that the homeowner’s gross monthly income is $3,500 and the total monthly other recurring debt payments are $800.
In order to fulfill the 31% Front End Ratio requirement, the homeowner’s total monthly mortgage payment would have to be reduced to $1,085 ($3,500 x 31%). Therefore, P&I would have to be reduced to $785 ($1,085 total monthly mortgage payment less $300 escrow and MIP). Assuming that the loan modification will have an interest rate of 6% and a P&I of $785, the new mortgage amount would have to be $130,931, resulting in a principal reduction of $19,069 ($150,000 unpaid principal balance less $130,931). In this example, the homeowner’s Back End ratio is 53.9% ($1,885/$3,500), which satisfies the 55% Back End Ratio limitation.
In this example, the maximum principal deferment is $41,340 (30% of $150,000, less the $3,660 delinquency, or $45,000 - $3,660). However, based on their gross income, the homeowner is eligible only for a principal deferment of $19,069 plus $3,660 arrearages (which would include any foreclosure costs incurred to that point, in accord with Mortgagee Letter 2008-21) for the total deferment of $22,729.
Once a modified payment is calculated, a homeowner must undergo a trial modification period and make three consecutive trial monthly mortgage payments on time. Failure to do so will result in foreclosure.
The good news is that no payments will be due and no interest charged on the amount deferred until the rest of the mortgage is paid off. HUD is NOT forgiving part of the mortgage balance. Effectively, HUD is lowering the current payment by extending the term of the mortgage.
Other Issues
A lender may not charge a homeowner any fees for doing an FHA loan modification and all late fees must be waived.
No appraisal is required, but a lender may perform an inspection of the property to confirm it’s in livable condition.
The interest rate may be lowered to 2% above the monthly average yield on U.S. Treasury Securities, adjusted to a constant maturity of 10 years.
A modified mortgage must result in a lower payment for the homeowner.
By the way, lenders will be paid up to $1250 for each FHA mortgage they modify. Hopefully, lenders use that money to hire a few extra bodies to handle the increased workload and don’t just use the funds to pad their profits.
Click here to read more HUD issued guidelines on modifications.
Overall, it’s about time HUD caught up with FNMA & FHLMC in regards to more aggressive loan modification guidelines. It didn’t make sense to force FHA lenders to only offer an antiquated forbearance option to homeowners experiencing economic hardships.
It’s interesting that there’s still no official loan modification program to lower payments on VA mortgages.
I’d like to know how many homeowners with FHA mortgages lost their homes to foreclosure while waiting for these new modification guidelines from HUD. Many of them could probably have avoided foreclosure with this new modification plan. Congress should call the organization to task for this delay.
About the Author
Drew Sygit writes and speaks about the mortgage & real estate industries. He holds mortgage industry designations CMPS, CMC, CRMS, CMLO, CALO, has an MBA and is an approved industry instructor. He’s presented, spoken and/or written for HUD, Financial Planning Association, Financial Planners Association of Michigan, Michigan Association of CPA’s, Institute of Continuing Legal Education, Oakland Real Estate Investors Association, North Oakland County Board of Realtors and numerous industry publications. He also publishes his own blog.
CMHC mortgage changes to business for self program - Government Mortgage Rule Changes
