Purchasing Issues

The Seven Habits of Highly Effective Mortgage Applicants

Tuesday, May 12, 2009 by Paul Klemme

As relocation professionals, what are some things we can do to prepare our transferees to navigate through this complicated and confusing time?
The first and probably best thing a transferee can do is talk to a relocation lender early in the process. Knowing where you are and what you need to do is critical to avoid stress, as well as be in a position to be aggressive with a home purchase offer, close on your terms and complete a successful relocation. The up-front application discussion should cover these seven things to ensure a successful home purchase.

1. Know Your Credit Report: Many people don’t know what is on their credit report, a complete review is necessary to understand your credit situation and fix any issues that may exist.

2. Be Prepared to Provide Documentation: Income and asset documentation is required now. With all of the changes that have occurred in the mortgage industry, the level of verification is considerably higher than it was a few years ago.

3. Do Research on Product Availability: There are still many products available to fit a variety of needs. Understanding what is available and how you qualify is essential.

4. Learn about Property Type Trends: With declining property values, some property types such as condominiums, and other unique housing types are experiencing resale issues as guidelines have become more restrictive on property issues. Preparing for this reality is essential in setting sale expectations.

5. Be Ready to Provide Information for Rate Calculations: Many applicants call to ask “what is your rate?”, but this isn’t an easy question to answer anymore. Interest rates take into consideration factors like credit, LTV, property type, location, and loan size—so be prepared to provide your loan counselor with additional information.

6. Get Pre-Approved: You can still be approved over the phone or online quickly and easily in most cases. By being approved up front, you will be in the best negotiating position when you are ready to buy.

7. Talk through the Complete Mortgage Process: A complete conversation will include the entire mortgage process. Understanding the what, when and whys of returning your documents, the home appraisal, your loan commitment as well as what is involved in closing your loan is critical. It is important to know exactly what you should expect after the closing. Setting the right expectation will lead to a successful transaction.

Talking to a professional relocation lender applies to those buying in the short, intermediate or long-term. Start the conversation early on and a successful purchase will follow. Please contact me if you have any questions.

Employer-provided Relocation Loans

Wednesday, January 21, 2009 by hank roth

In today’s precarious economy, many employers are considering giving relocation loans to employees. Several of these employers may not have provided relocation loans to employees before, but are now looking for ways to increase the opportunity to make such loans available. .

A relocation loan that is done correctly can be offered to the employee interest-free and without exposure to creating imputed interest to the employee which would be treated by the Internal Revenue Service as compensation income.

The following information concerning below market rate loans is an excerpt from an article published by the Worldwide Employee Relocation Council® (ERC) in its Tax and Legal MasterSource:

A. Types of relocation loans

1. Mortgage loans

A mortgage loan is extended by the employer to the employee with the understanding that the employee will use the proceeds of the loan to purchase a new principal residence. Such loan may be a demand or term loan, and is conditioned on the future performance of substantial services for the employer. The loan may have a market interest rate, a below market interest rate, or no interest at all.

2. Equity bridge loans

A loan may be offered to an employee in order to enable the employee to receive the equity out of an old unsold residence to make the down payment on a new residence. The terms of the loan may require that the proceeds be repaid within a short time after the sale of the former residence. The loan may have a market interest rate, or a below market interest rate, or no interest at all.

B. Imputation of interest on a loan transaction

1. Explanation of imputed interest

When a loan is made at a below market interest rate, or with no interest at all, the Internal Revenue Code may impute interest to the loan even though the lender and borrower never did. If imputed interest rules apply to an employee relocation loan, the amount by which a market rate of interest exceeds the loan’s actual rate of interest is considered income to the employee borrower. (The market rate used is the "applicable federal rate," which is computed by the IRS under a formula in the Internal Revenue Code and periodically adjusted.) This income is considered to be derived from the employer-lender, because the employer-lender is considered to have paid interest on the loan to itself on behalf of the employee-borrower.

2. An example of imputed interest

An example of imputed interest may be helpful in understanding this complex area. Assume that the employer has made an interest-free bridge loan to the employee. The market rate of interest on the loan would be $100 per month if interest were charged by the employer-lender. No interest is paid by the employee-borrower or received by the employer-lender. However, the tax law considers the employee-borrower to have owed $100 of interest, and since the employee’s obligation to pay this $100 was satisfied by the employer-lender, the transaction is treated as though the employer-lender paid $100 per month to the employee-borrower, who then repaid it to the employer-lender. This characterization of the transaction gives rise to $100 per month of compensation income to the employee-borrower.

3. Reporting requirements for imputed interest

The employee-borrower must report imputed income on his/her tax return, even though the employee never received it, but then may be entitled to a corresponding deduction for the interest theoretically paid on the employee’s behalf by the employer-lender.

4. Negative tax consequences of imputed interest

If interest is imputed to loans it has negative tax consequences for the employer-lender and may have for the employee-borrower. The employer-lender must pay payroll taxes (FICA, RRTA, and FUTA) on the amounts imputed as interest income to the employee-borrower. (The employer-lender, however, does not have to withhold federal income taxes on the imputed interest income.) The employee-borrower may or may not be eligible for a deduction of the imputed interest. The interest on a mortgage or bridge loan may be deductible as "qualified residence interest" under the general rules applicable to homeowners. However, there may be situations in which interest income is imputed to the employee, but the employee is unable to take a corresponding interest deduction. For example, there is a $100,000 limit on the amount of home equity debt upon which interest is deductible.

C. Avoidance of imputed interest

1. De minimis exception

If the total principal amount of the employer’s mortgage loan, bridge loan, or both outstanding to the employee does not exceed $10,000 during the year, the loans are ex-empted from the imputed interest rules due to their small size. No interest will be imputed in this situation.

2. Exemption for employee relocation loans under regulation 1.7872-5T

Under a temporary regulation, imputed interest will not apply to compensation-related mortgage or bridge loans if the following requirements are met:

a. Exemption for mortgage loans

The loan agreement must require the following provisions:

i. The proceeds of the loan must be used only to purchase the new residence.

ii. Such loans must be secured by a mortgage on the new principal residence acquired in connection with the relocation of the employee to a new principal place of work.

iii. The loan must be a demand or term loan.

iv. The benefits of the interest arrangements must not be transferable.

v. The below market interest rate (or the lack of interest) must be conditioned on the future performance of substantial services by the employee.

vi. The employee must certify to the employer that the employee reasonably expects to itemize deductions for each year the loan is outstanding.

b. Exemption for bridge loans

The terms of the bridge loan must meet all the requirements for the mortgage loan as stated above except for the security requirement. Note, however, that any interest actually charged on a bridge loan will not be deductible by the transferee unless the loan is secured by either the old or new residence. In addition, the bridge loan agreement must provide that the loan is payable in full within 15 days after the sale of the employee’s immediately former principal residence. The aggregate of the principal amount of all outstanding bridge loans must not be greater than the employer’s reasonable estimate of the equity in the former residence. The former residence must not be converted to business or investment use.

c. An unresolved issue

One issue that remains unresolved under the temporary regulation is whether the exemption applies in situations where imputed interest would not be deductible under the general rules applicable to home mortgage loan interest deductions. This problem is particularly acute for bridge loans, which are often unsecured by either the old or new residence, and, even if secured by the old residence may be considered home equity loans, and therefore limited to $100,000 of principal on which interest would be deductible. Although the IRS has not spoken to this issue, it is arguable that the 1986 Tax Reform Act, which imposed the current limitations on deductibility of interest, would be held to modify the exemption contained in the temporary regulation. However, in the absence of any IRS statement of position, it should be assumed that the regulation may still be relied upon. The IRS continues to follow the regulation, and has shown no interest in revisiting it.

Some Employees Unwilling to Relocate in the Current Real Estate Market

Friday, October 24, 2008 by SIRVA Relopinion

We all know that real estate is local. However—in our current real estate situation—we are seeing more markets continue to see a slip in home sales with only a few who are reporting an increase. The National Association of Realtors (NAR) reports areas such as Colorado Springs, Colo., Sacramento, Calif. and Spartanburg, S.C. are experiencing double-digit pending sales gains compared to a year ago with a significant percentage of these sales attributed to investors who are buying foreclosed properties. So while some markets have seen tremendous growth in home sales compared to last year, others have seen contract signings slashed by as much as 50 percent.

The current real estate market for the typical residential home is still very much a buyer’s market. Attractive interest rates, large inventories of homes for sale and lower-than-average sale prices make it a great time to buy. Sellers aren’t so fortunate. In fact, some areas have seen home values drop so low that typically willing transferees are hesitant to relocate because of loss-on-sale concerns or owing more on their properties than the current market value sales price.

According to a recent survey conducted by the Worldwide ERC®, the number one reason employees are reluctant to relocate is a direct effect of the troubled real estate market. The survey indicated that more than 95 percent of respondents reported "slowed real estate appreciation at the old location," as the reason their employees are averse to moving. This is a stark contrast from last year when only 16 percent cited the real estate market as the reason for their reluctance. Instead, high housing costs, high cost-of-living and family resistance to move, were top concerns.

"Today, it’s an unfortunate fact that those true soldiers that have faithfully relocated every two to three years are cooling to the idea because of the economy and the fear that they will take a considerable home loss-on-sale," says David Barlow, SIRVA’s senior consultant.

Barlow advises companies that have not done so to consider implementing a loss-on-sale policy to remain competitive and to help their transferees with the reality of falling home values and sale prices. He also advises companies that already have a loss-on-sale policy to re-evaluate the loss-on-sale limit or cap to ensure it is sufficient in today’s difficult real estate market.

"In the past, $25,000 was a typical loss-on-sale cap, but today that figure is increasing and could approach $75,000," he explains.

Negative Equity a Grim Reality
While many companies are struggling with situations where transferees are not willing to relocate because of a significant loss-on-sale, others are dealing with a less common but potentially even more difficult scenario— is trying to relocate employees who have negative equity in their home.

Barlow explains that SIRVA is seeing this problem grow from what used to be a very low percentage of relocation candidates, which is a definite sign of the times.

Negative equity comes into play when a home’s value is less than the amount of all outstanding debts against the home. This can happen if an individual takes out a line of credit, second mortgage or other loan on his or her home, which must be paid before the home can close. It can also happen if the home’s value has decreased below the value of the original mortgage. This can occur with low or no money down loan products that were prevalent in the last 5-10 years.

"If a transferee purchased a home for $350,000 two years ago, and in today’s real estate market that home is only worth and sells for $325,000, then the owner is looking at a $25,000 loss on sale," explains Barlow. "This situation would generally be covered in whole or in part by a loss-on-sale policy. However, if the same individual also took out a $50,000 home equity loan (in addition to a $300,00 first mortgage), then he or she is now on the hook for whatever portion the company does not cover in the loss-on-sale benefit. If the first mortgage and the line of credit is greater than the net proceeds of the sale of the home plus the loss-on-sale benefit then the homeowner is in a negative equity situation or is considered to be ‘upside down’.

"If the homeowner can’t repay this total debt at the home closing, the home can’t be sold. This is a significant issue in corporate relocation because all obligations have to be cleared when closing the sale of the home, and if the individual can’t clear the obligation and sell the home, the relocation can’t proceed."

SIRVA’s Solution
SIRVA works closely with companies to minimize the risks of relocating individuals with negative equity. SIRVA counselors are trained to ask the right questions and uncover negative equity situations in the discovery phase, before the relocation is initiated.

"If we determine a relocation candidate will be in a negative equity situation then we can alert our clients who will then have to make some tough decisions," explains Barlow. "The best course of action may be to select another candidate."

Barlow says the last course of action a company should take is to settle the negative equity obligation for the employee in the form of a lump-sum payment.

"Our counsel has always been against paying the negative equity to the employee. Imagine the potential equity issues if an employee were to find out the company settled a colleague’s unique financial obligation. This could create more problems than it solves," he says. "Consider the similar transferee who did not take out an equity line who would—in effect—be penalized for his/her conservative financial management."

Instead, Barlow advises companies that absolutely have to relocate a high-value employee with negative equity to consider a loan—rather than just cutting a check—for the outstanding debt.

"Companies can give transferees the opportunity to pay the loan back or use it as a retention device, forgiving portions of the loan over time," adds Barlow. "Companies could also consider a temporary domestic assignment or home-retention allowance. Either would allow the company to relocate an individual with negative equity by not selling the home and thus not having to deal with the debt obligations during the relocation process.

Barlow emphasizes how important it is to identify negative equity transferees before relocations are initiated.

"This is one of the ways SIRVA’s consulting services can help companies execute their relocation programs while minimizing the risks of the current real estate market," he continues. "Our obligation is to work with clients to identify every possible course of action in order to make a relocation happen."* It’s no secret that the current real estate market has had a significant impact on the relocation industry. Companies have had to re-evaluate and update their corporate relocation policies to overcome the challenges of the current market.

Barlow doesn’t wager a guess on when the market will turn, but he expects companies will be working through the challenges of the current real estate market for some time to come.

How SIRVA Can Assist With Group Moves

Tuesday, September 30, 2008 by SIRVA Relopinion

If you have a group move to manage and are seeking assistance, SIRVA Relocation is able to provide the following services:

Defining Objectives
SIRVA works closely with your Company’s management team to define the overall objectives of the move and ensure their implementation during the move process. As a part of our consultation, we will discuss the Company’s business and human resources goals and objectives, policy issues, the group move timeline, and factors to consider in the cost analysis and process development.

Relocation Cost Analysis
We provide expertise in analyzing the total cost of a group move by detailing the cost impact of policy decisions and local market conditions on both the Company and the employee.

Policy Design
SIRVA can incorporate your business objectives into an appropriate group move policy. A key component of policy design is the solicitation, review and analysis of your employees’ input via the employee survey that we will design to meet the needs of your employee population and the constraints your management has placed on the process. This information, along with policy and benefit guidelines, will result in a Group Move Policy Handbook detailing the corporate relocation program for your employees.

Employee Presentations
We have the depth of experience to assist the Company in securing the employee’s enthusiastic commitment to the move through a carefully planned and professionally presented program for the entire family. This program includes a complete overview of the new destination city and state, plus the ability for employees to ask questions and address concerns about the move. In short, we bring the experts in each resource area to the transferee.

Relocation Resource Center
SIRVA can prepare an on-site, on-going “Relocation Resource Center” for employees and their families, which provides information about the destination city’s schools, housing options, medical facilities, etc.

Information Kit
Each employee will receive a complete package of information about the destination city including, if appropriate, a video about the city. Employees will be assigned a personal relocation counselor who is available to answer questions, research any specific needs they or their family members may have, and arrange for individual home finding trips to the new city (if included in the plan).

Area Tours
SIRVA can organize area tours guaranteed to satisfy your employees’ questions about their new city.

Other services include:
• Home Marketing Assistance
• Home Purchase Assistance
• Home Finding Assistance
• Temporary Housing Assistance
• Spouse Job-Finding Assistance
• Employee Expense Tracking Administration and Tax Calculation Capabilities
• Mortgage Assistance
• Vendor Selection and Management
• Training Material and Programs

Introduction to Home Sale Tax Issues

Monday, July 21, 2008 by hank roth

Employers who reimburse brokers’ commissions and closing costs on the sale of their employees’ homes, as part of a relocation, create taxable income for those employees. Since the Tax Reform Act of 1993, no deductions for such relocation expenses are available to employees, and, therefore, all such payments create fully taxable income. As an example, the average sales commission and closing costs on a $300,000 home are approximately $24,000 or about 8% of the home’s value. Reimbursing these fees creates a tax liability for the transferee of approximately $8,400 in state, local and federal taxes. For transferees in high-income brackets, this tax liability can run as high as $11,400 (slightly under 50% of the estimated closing costs).

Many employers, attempting to relieve the tax liability for their employees, reimburse their employees for these taxes. In the relocation industry, this is commonly referred to as “gross up.” On a $8,400 tax liability, however, the initial reimbursement creates $3,300 in additional taxes for the transferee. Most companies also gross up this amount. If $8,400 is fully grossed up, so that the employee has no net-tax liability, total tax reimbursements come to an average of $16,080 (about 67% of the broker’s commissions and closing costs reimbursed) and can reach over $21,230 (about 88.5% of the reimbursement) for employees in the highest tax bracket.

To eliminate the creation of taxable income these reimbursements create, certain employers have used home purchase programs – also called “buyouts” – designed to utilize the tax effect of the 1972 IRS Revenue Ruling 72-339. In November of 2005, the IRS finally issued an updated and very detailed new Revenue Ruling (Rev Rul 2005-74) which reaffirmed that home sale programs if constructed in alignment with the examples in the Revenue Ruling would still obtain the tax benefits of Rev. Ruling 72-339. Unfortunately, according to the Employee Relocation Counsel (ERC), historically the cost of buyout programs average almost 17% of the acquisition price of the home. As a result, many corporations have never employed home purchase programs, while others have abandoned buyouts and are looking for other options…read more.

To read the rest of the conversation, visit our resource library.

SIRVA Advantage Caters to Companies Relocating 30 or Fewer Transferees Annually

Friday, June 27, 2008 by SIRVA Relopinion

There is no such thing as a small relocation, but some companies don't require the large-scale support needed by those relocating hundreds or even thousands of employees annually. For these companies, SIRVA Advantage might be the answer. SIRVA Advantage is a program developed specifically for companies that relocate fewer than 30 employees per year. Currently, 120 companies participate in the program.

Through the program, companies have access to a dedicated service delivery team with specialized experience in small-volume relocations. Users don't have to be experts in relocation because all the details are handled for them. SIRVA can get a relocation program up and running quickly, and because they manage every aspect of the program, companies don't have to worry about the details. Transferees receive the full benefits of having a corporate relocation provider manage their transfer without the large corporate relocation budget.

"Companies that relocate a small number of employees have different needs than those of their large-volume counterparts," said Tim Callahan, senior vice president of sales and marketing SIRVA, Inc. "These companies may not be as familiar with the process or the complexities involved in different domestic or international relocation scenarios because they simply don't relocate employees as often."

Using SIRVA Advantage, companies can choose their services á la carte, which offers them the flexibility to develop a cost-effective custom program to fit their needs. SIRVA Advantage provides companies with guidance and assistance on a range of relocation issues, including:

Domestic and international support
Fixed-fee or traditional home sale programs
Home marketing services
Home finding and new home purchase services
Home rental and temporary housing services
Mortgage services
Move management
Tax and legal services
Vendor contracts
Online relocation tracking and reporting

One-on-one attention and interactive tools
The Advantage process starts with a consultation between our client and SIRVA Advantage's Business Development Manager, Jane Yanosko, to coordinate services tailored for each transferee - with this program a corporate relocation policy is not needed, SIRVA's abbreviated contract serves as the purchase order for all services authorized by the client. Once services are determined and the transfer process is initiated, the client and the transferee receive dedicated support from relocation counselors and associates focused on serving clients with fewer than 30 relocations annually.

In addition, transferees have access to MoveOurHome.com, a Web portal designed to help them take an active part in their move. MoveOurHome.com has up-to-the-minute relocation information configured on a per-client basis. On the site, transferees can view company-specific policy information and transferee-specific relocation program information.

"Transferees can submit, view and check the status of expense reports, communicate with their relocation counselor, and specify home and area preferences," continues Callahan. "They also have access to an online move organizer and essential destination information such as weather, crime statistics, school reports, population figures and other community information."* SIRVA Advantage was developed based on input from current customers and internal service teams, and is designed to provide a company will a small or no relocation program a high level of service on a more flexible, on-demand basis.

To learn more about SIRVA Advantage, contact Jane Yanosko, SIRVA Advantage business development manager, at 800.531.3840 or jane.yanosko@sirva.com.

What Transferees Need to Know About the Changing Mortgage Market

Tuesday, June 3, 2008 by SIRVA Relopinion

Mortgage expectations in the United States have changed as a result of the current lending market, and transferees will face a different lending process from what existed only a few months ago. While it is still easier to get a home loan today than it was eight years ago, transferees should be aware of several changes so they can avoid mortgage surprises.

"Transferees should be encouraged to be pre-approved and speak to a mortgage counselor once they accept a relocation, even if they are not yet ready to purchase a home," says Rick Hoover, director of client services at SIRVA Relocation. "A credit check can be completed up front, which allows transferees to be proactive in addressing any issues. They should also be prepared to provide relevant financial documentation, as programs that allow no, low or limited documentation have disappeared or been drastically curtailed in most areas."

In addition, transferees should also expect to buy within their salary range, since the use of projected bonuses or incentive pay is no longer acceptable. They should also expect to make a down payment, as zero down loans are not as accessible. Making a down payment-even a small one-also lowers the opportunity for negative equity situations in the future.

Another significant change is the availability of certain types of loans. Jumbo loans are now more restrictive than smaller conforming loans, and as a result, executives who may have been approved for jumbo loans last year may no longer qualify. Also, combination loans-such as 80/10/10 or 80/20 loans-which many transferees have used to avoid mortgage insurance or as a bridge loan, are more restrictive than ever. Pricing and underwriting guidelines have made these options less favorable, causing mortgage insurance to once again be more prevalent than in the recent past.

"Mortgage lending changes regularly, and it is important that transferees have access to a knowledgeable resource to answer any questions," continues Hoover. "SIRVA has mortgage counselors available to work with transferees within a company's relocation policy parameters. They can walk transferees through various lending options and help determine the right loan for them based on several factors, including risk levels, cost, credit qualification and housing needs."
Hoover emphasizes that if companies conduct their own counseling with employees, they should stress that transferees talk to a lender at the beginning of the process, even if they don't intend to purchase a home right away. This will help transferees better understand what will be required once they are ready to move forward.

Regardless if transferees work with a SIRVA Mortgage counselor or another mortgage professional, they should have the proper financial documentation available before beginning the lending process. "Underwriting guidelines can change daily," explains Hoover. "The more educated transferees are about the process, the better prepared they'll be."

For more information about the latest mortgage trends visit Paul Klemme's Blog, "The Mortgage Insider" or visit our resource library to view our recent Webinar, "Today's Mortgage Industry and its Impact on Relocation."

Loss-on-Sale Programs Still “Hot” Policy Issue

Tuesday, March 18, 2008 by David Barlow

During the recent SIRVA University in Scottsdale, one of the sessions was a “standing room only” roundtable discussion on domestic policy issues. Client participants were asked what policy issues they were most concerned about. The overwhelming winner was Home Loss-on-Sale. As it turned out, a full session at SIRVA U had been scheduled on this topic and it too was very popular with the attendees. Every indication is that Loss-on-Sale situations will continue to be with us for quite some time.

This Home Loss-on-Sale session outlined the seven decisions that companies must make in putting in place a Loss-on-Sale program (or revising one currently in place). In addition, the session reiterated that Loss-on-Sale has NOTHING to do with whatever equity the transferee may or may not have in the property. Loss-on-Sale is simply the difference between the net purchasing price and the net selling price of the property. Of course capital improvements in whole or in part may be added to the purchase price.

A copy of the Loss-on-Sale session from SIRVA U as well as an updated benchmark on what SIRVA clients are doing is available at: www.sirvauniversity.com