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Community Corner

Real Estate Market Changes: Obama Care and Escrows

Real Estate Market Changes: Obama Care and Escrows     
by John Occhi, REALTOR
951.443.6259
February 18, 2014

This morning at the Southwest Riverside County Association of REALTORS (SRCAR) weekly ‘Marketing Meeting’ Gene Wunderlich, former two time President of SRCAR and standing Director of Government Affairs (GAD) alerted the REALTOR to an alarming trend that is developing and spreading heartache across the State of California…soon to be here in the Temecula – Murrieta Valley.

Without getting up on a soap box and either advocating for or against our President and his legendary Affordable Health Care Reform Act, commonly known as Obama Care there are two issues that will effect real estate sales, from this point forward.

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A NEW CAPITAL GAINS TAX ON THE RICH

The first issue is not going to have a direct effect on very many transactions – but those that it does will feel the consequences.  There is now a 3.8% tax on high income home sellers, earning in excess of $200,000 or $250,000 for married couples filed jointly.  The income is for Adjusted Gross Income (AGI).  The new tax is on their Capital Gains in excess of $250,000 for the single seller or $500,000 for the married taxpayers.

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This is obviously a very quick snapshot of the new tax and if you want to know more, you really need to discuss the matter with your tax professional for advice that is pertinent to you.

YOUR HEALTH INSURANCE AND YOUR NEW MORTGAGE

When qualifying for a mortgage, the lender has always looked at your Debt to Income Ratio, or DTI.  Under the new rules of the Dodd-Frank Act mortgages have to meet the new “Qualified Mortgage” (QM).  The new QM has a ceiling of 43% DTI where most Government Sponsored Agencies (GSE) like VA, FHA, Fannie Mae, Freddy Mac, USDA, etc., had a 45% DTI last year.  Again, there is much to this discussion and certainly not enough room here to discuss in any detail.  I just wanted to lay the foundation for the scenario Mr. Wunderlich shared at the SRCAR Marketing Meeting this morning.

Lenders have always looked at the borrower’s monthly bills and obligations in determining debt.  This includes rent/mortgage payments, utilities, un-used gym memberships, child care and everything else the borrower spends their money on.  This is revealed on the loan application and verified by reviewing 3 months (or more) of bank statements.

The law now requires EVERYONE to have health insurance.  It’s no longer an option.  Therefore, if you never had insurance in the past, you MUST have it today.  If it’s something you must have, then its one more debt that needs to be factored into your DTI.  Even if you have had health insurance for years, chances are very good that you’ll be paying more for it now…resulting in more debt each and every month.

WHAT SHOULD YOU DO?

I suppose that depends if you are in favor of the law or not.  Either way, contact your local politicians and let them know how you feel.

If you are planning on buying a home anytime soon, I’d look hard at doing it sooner rather than later.  Apparently, this trend has started in Northern California where one title company has had 9 escrows fall out so far this year because of the DTI factoring in health insurance that the borrower did not have prior to this year.  So, while there are no known cases here in the Temecula – Murrieta Valley, or elsewhere in Southern California it’s believed to only be a matter of time.

Check with your REALTOR and Lender to make sure you cover all your bases.

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