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Loan Approval Leverage

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Posted On: 08/01/2012

QUESTION:

If I get a pre-approval letter from a lender, doesn’t that tell a seller how much I can really afford and undermine my bargaining position?

ANSWER:

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Maybe, but there are several considerations. First, you want a seller to know that you’re qualified to purchase the property, otherwise the owner has no incentive to accept an offer that may not reach closing.

Second, you don’t have to tell the seller the absolute maximum loan amount you can afford, just that you can pay the amount you’re prepared to offer.

Here’s an example: A lender reviews your paperwork and feels you can afford a $250,000 mortgage. That’s great, but you don’t have to borrow that much. Then you find a property that will require a $190,000 mortgage. The lender gives you a letter saying you can afford a $190,000 loan. That’s a statement that is entirely true, and yet does not say you could possibly bid more.

QUESTION:

I own a property in California and lived there for three years. I then rented the property for a year, and now I plan to sell it. Will I be subject to capital gains?

ANSWER:

In general, if you sell a personal residence, you can protect as much as $500,000 in capital gains if you’re married, $250,000 if you’re single. A big question here is whether the property is a principal residence or an investment for tax purposes.

You may be able to avoid capital gains from the sale of a property. The IRS website indicates that “if you used and owned the property as your principal residence for 2 years of the 5 year period ending on the date of sale, you have met the ownership and use tests for the exclusion,” even if the property was rental property (for a maximum of 3 years) before the date of the sale.

As is always the case with taxes, the complete rule is complex. Please see a tax professional for specifics.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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