The 5/1 ARM is popular with some homebuyers and homeowners with equity who are refinancing. The attraction of a 5/1 ARM is that it offers a fixed rate for five years that is significantly lower than what is available on 30-year fixed-rate mortgages.

At the end of May, 5/1 ARMs were available from some lenders with interest rates as low as 3.75 percent with no points. Points refer to the loan origination fee: 1 point is equal to 1 percent of the mortgage amount.

The interest rate on a 30-year fixed-rate loan was as low as 4.5 percent with 1 point. Interest rates vary from one location to the next, and not all mortgage products are available in every state.

Last year, high-end buyers paid a premium for jumbo financing, if they could find it at all. At the end of May, some lenders offered 5/1 ARMs for 4.5 percent in amounts up to $1 million to borrowers with a 20 percent cash downpayment, and up to $2 million or more with 25 percent down.

The downside of a 5/1 ARM is that at the end of the fifth year, your mortgage payments could jump significantly. To determine your new interest rate when the five years of fixed-rate financing expires, a margin is added to an index that fluctuates over time to arrive at your ARM rate for the next year. There should be a cap on how high the rate can go each time it adjusts (in this case, annually) after the initial five-year period.

Let’s say the index on your 5/1 ARM is the 1-year constant-maturity Treasury rate (CMT). In April 2010, the CMT was 0.45 percent. If you’re margin is 2.75 percent, and your mortgage converted to an ARM in April 2010, your new interest rate would have been 3.2 percent. However, in April 2006, the CMT was 5.9 percent, which would have given you an interest rate of 8.65 percent and a huge jump in your mortgage payments.

HOUSE HUNTING TIP: Often the initial fixed-rate payments on a 5/1 ARM are interest only. Some 5/1 ARMs start at a rate — called a teaser rate — that is lower than the current index plus the margin. This could result in a significant rate and monthly payment increase at the first adjustment. Make sure your 5/1 ARM doesn’t have a prepayment penalty, so that you have the flexibility to pay down the principal balance at any time without penalty.

One way to protect against a large increase in your mortgage payment when the loan converts from fixed-rate to adjustable is to pay down the principal balance. Each time the interest rate changes, an ARM is recast so that the monthly payments are based on the new principal balance.

Despite the savings possible in the first five years of a 5/1 ARM, low fixed-rate mortgages are the choice of most homebuyers and borrowers who plan to stay put for the long term. In the current volatile housing market, buying for the long haul is a good strategy.

Homeowners who don’t intend to stay long in their home are good candidates for a refinance to a 5/1 ARM. For example, empty-nesters who plan to trade down to a smaller home within the next five years would pay the loan off before it converted to an ARM, with possibly much higher monthly payments.

It’s even possible to get cash back on a 5/1 ARM refinance, or consolidate debt, as long as you have sufficient equity in your home.

THE CLOSING: On a refinance, some lenders will lend up to 80 percent of the appraised value, less loans you already have secured against the property.

That’s what Frank Nothaft did. And he isn’t alone. Millions of people in recent months have become part of a phenomenon known as “cash-in” refinancing.

“It’s picked up dramatically,” says Nothaft, chief economist at mortgage giant Freddie Mac, the government-chartered enterprise that purchases mortgages from lenders.

Typically, people refinance to “cash out” some of the equity they’ve built up in their homes over the years as a result of rising home values and paying down what they borrowed to buy the house. During housing’s heyday, some folks became serial refinancers, turning in their old loans for new ones with almost every downtick in market rates and every new jump in their home’s value.

The bubble burst, of course, and now many homeowners are upside down on their loans. They owe more than the current appraised value of their homes, so at first blush they would seem unable to benefit from mortgage rates that are bouncing somewhere around the 4.75% level for ultra-safe, 30-year fixed-rate mortgages.

Enter the cash-in refi. It’s not a new concept, but it has “picked up dramatically” in the last six to nine months, Nothaft reports, to the point where cash-in refinancing is at its highest level since the mid-1980s when Freddie Mac began tracking the characteristics of refinance transactions.

In last year’s fourth quarter, a third of all borrowers who refinanced lowered their principal balances by putting money into the deal rather than taking it out. The share dropped a bit in the first quarter, but the Freddie Mac economist expects the percentage to “remain elevated” for a number of reasons.

Certainly the chief driver of the cash-in craze is to earn a better return on your money. With savings accounts and other investments yielding little or nothing in profits these days, Nothaft thinks it makes sense to put some of your funds into your home, especially if you can knock a point or two off the mortgage rate.

“You’ll get a much better return on your money by paying down” the amount you owe the bank, he says.

Even though she says she didn’t realize there was a name for them, Amy Tierce, who heads one of the top-producing branches in Fairway Independent Mortgage’s 90-office network, does cash-in refinances “all the time.” And the Needham, Mass., loan officer points out there are other reasons to bring some money to the closing table.

One is to avoid the higher rate charged on high-balance loans. These so-called jumbo mortgages are typically priced about 1 percentage point higher than conventional loans. The cutoff between conventional and jumbo is $417,000 in most places, but as much as $729,750 in high-cost markets.

Tierce recently worked with a couple who wanted to refinance the jumbo loan on their second home in Brookline, Mass. Finding no product that would improve their situation — loans on vacation properties are difficult to find and expensive these days — she suggested that the couple do a cash-out refi on their principal residence and use that money to do a cash-in refi on their second house.

Now they have two loans “at absolute rock-bottom rates,” Tierce says. “They rebalanced their debt, and the result was an overall savings north of $1,200 a month.”

Another reason to consider moving your money into your mortgage is to get out of paying private mortgage insurance or avoiding PMI altogether.

Most lenders require mortgage insurance on loans with a loan-to-value ratio of 80% or more as a way to protect themselves against the possibility that the borrower fails to make his payments as promised. So, if you can get your balance under the 80% threshold, it sometimes makes sense to do so

Cash buyers have made up at least a quarter of home purchasers since the beginning of 2010, a figure buoyed by more affordable home prices and a substantial volume of distressed properties.

According to the National Association of Realtors’ monthly Realtors Confidence Index survey, buyers paid all in cash in 15 percent of transactions in October 2008, the first month the association conducted the survey.

Fast-forward to May 2010, and an estimated 25 percent of transactions were in cash. That’s a jump from 12 percent in May 2009. From January through April, cash buyers’ share of transactions hovered at 26 or 27 percent, according to the NAR survey.

According to real estate professionals across the country, first-time homebuyers are rare — though not unheard-of — among cash buyers. More commonly the cash buyers include parents buying homes for grown children, move-up buyers, retirees buying second homes, and foreigners buying vacation homes.

Many are investors — people seeking to buy a property for rental income, or “fix-and-flip” buyers who seek to make quick fixes to the property and resell it within a short period of time. According to NAR, investors made up 14 percent of buyers nationally in May.

In areas with a high number of distressed properties, cash buyers’ share of the market can exceed 40 percent.

In the nation’s foreclosure capital, Las Vegas, bank-owned homes and short sales made up 70 percent of closings in May, according to Forrest Barbee, a director at the Greater Las Vegas Association of Realtors. And according to the association’s MLS, cash buyers made up 43 percent of closings in May, Barbee said.

“Everyone paying cash — foreign investor, domestic investor or traditional buyer — realizes that ‘cash is generally king’ when targeting bank-owned (REO) properties,” Barbee said.

“Of course, everyone with cash is hoping to play ‘let’s make a deal’ because they are bringing cash to the table. However, with over 40 percent of our closings being cash transactions, they don’t always have the leverage they expect because they are very likely competing with other cash buyers.”

Sellers often prefer to deal with cash buyers for several reasons. The home being sold could be in a condition unlikely to qualify for financing — it may need major repairs or be involved in litigation, for example.

Also, the deals are more likely to close — and faster — if mortgage lender requirements and appraisals are not an issue. Cash buyers are also a welcome sight for developers who need to have a minimum percentage of units in contract before any of the units can qualify for conventional and FHA financing.

Cash buyers themselves also benefit from a faster close and don’t have to pay lender fees. Because of the benefits to sellers, cash buyers are often in a better position to buy investment properties.

“Quite a number of investors have been sitting on cash — some pulled their money out of the stock market when they had the chance — and buying up a lot of properties under $100,000 to drive themselves a very good positive cash flow,” Barbee said.

He described the investment opportunities in the Las Vegas area in this way:

“An investor with $180,000 to spend could purchase one single-family home at an exceptional price and rent it for, say, $1,200 per month. However, they could also pick up three condos near the strip at $60,000 each, with rental income potential of $900 per month each. Many of these condos can be purchased only with cash due to litigation or other reasons.

“Similarly, a flipper may also be able to purchase the same properties and flip them within 90 days and make $8,000-$10,000 each in some cases.”

Cash buyers often get discounts on the properties they’re buying, though as Barbee noted the size of that discount can vary depending on market conditions.

In the New York City market, for example, about 20 percent of all sales are to cash buyers. Some of those buyers think they’ll get a discount of as much as 20 percent because they’re paying in cash, according to CitiHabitats sales manager Sara Rotter.

Instead, “it’s fair to say (they’ll get) maybe 2 to 8 percent off of the asking price, with 8 percent being on the generous side,” she said. She advised real estate agents and brokers to manage buyer expectations accordingly.

How much a property is discounted also depends on whether or not it is a distressed property. Ron Strehlow, a cash buyer in the Denver metro area, buys only short sale or foreclosure properties in order to fix and flip them. He buys about 10 a year.

“There needs to be a 30 percent to 40 percent discount from retail price,” he said. “The properties I look at would only be purchased by investors. They’re extreme fixer-uppers. Properties that banks generally won’t loan on because the kitchen often isn’t complete, things like that.”

Inventory also plays a role, since homes in certain price points may attract multiple bids. In the New York City market, primary-home buyers outnumber investors, Rotter said, so purchasing is more evenly spread among price points as families buy according to their needs.

In the Denver market, however, homes under $150,000 are especially sought-after by investors for their flip potential, according to Andrea Altieri of Candlewood Realty, the brokerage Strehlow works with.

“All of my cash buyers are investors,” Altieri said. “We have less than a month’s inventory of anything less than $100,000. The competition for those properties is fierce, and multiple offers, with highest and best final bids, are the order of the day.”

Real estate professionals  contacted most commonly cited past clients, referrals and website traffic as the main sources of their cash-buyer clients.

“Cash buyers can carry a lot of leverage, especially in today’s market, and because of this are looking for solutions that are more advantageous,” said Sherwin Sucaldito, an agent for Chicago brokerage @properties.

“Cash buyers can be time-conscious, not specifically just the time frame to purchase, but in communication, follow-up and action. Some cash buyers have the ability to close within days, something that some sellers are not able to accommodate.

“Doing preliminary research and understanding your client’s needs and how they fit with potential properties, (homeowners associations) and sellers can save time and avoid wasted effort,” Sucaldito said.

It is the role of the agent to explain advantages and disadvantages involved in cash transactions, Rotter said. One potential disadvantage is that cash buyers can’t deduct mortgage interest on their tax returns.

“It depends on the buyer’s financial situation, but sometimes it helps to have the write-off,” she said. Another disadvantage is that the buyer ties up a substantial amount of money in an asset (a home) that cannot be converted into cash very quickly.

“Paying all cash, the person might not be left very liquid. Mortgage rates are at historical lows and buyers can invest that liquidity in other areas” if they take on a loan to buy a home instead, Rotter said.

Because some buyers who submit cash offers attempt to switch to a financed transaction later, some banks have also gotten more stringent in their demands for proof of funds, Barbee said.

“Banks no longer accept a mere letter, even on bank letterhead, stating that the client has cash assets; they are looking for an actual account statement that explicitly demonstrates that seasoned cash funds are available for the purchase,” he said.

Almost half, 46 percent, of foreign buyers paid in cash between May 2008 and May 2009, according to NAR’s 2009 Profile of International Home Buying Activity, based on a survey. After personal reasons, the inability to obtain financing ranked as the No. 1 reason foreigners elected not to buy in the U.S.

But “the process of legally moving large amounts of cash into the U.S. from other countries is evidently fairly straightforward and problem-free, even with the background red tape of documentation and compliance,” said Steve Wiley, owner of Smarter Choice Real Estate in Lincoln, Neb.

“I had one client who did this from Turkey,” he said, adding that cash buyers in his market are either cash-rich farmers or people relocating from outside the U.S.

Favorable exchange rates have encouraged foreigners to buy in the U.S. According to both anecdotal evidence from real estate professionals and stats kept by NAR, Canadians tend to predominate among foreign buyers. Canadians accounted for 18 percent of transactions involving foreign buyers in 2009, the largest share among all nations.

“Canada has a really strong dollar right now,” said Evan Sage, a sales agent in Toronto. A couple of his clients have bought investment property in the U.S. recently.

“Florida, South Carolina, California, Arizona are easy to travel to for winter getaways. Our interest rates are still very low, so (buyers) can borrow for other investments and we all have faith that the hard-hit areas in the U.S. will rebound sooner than later.”

From January 2009 through April 2010, cash purchases — indicated by a sale where no corresponding purchase loan was recorded — made up at least a quarter of California’s transactions, hitting a peak of 30 percent in January and February 2010.

That’s according to real estate information company MDA DataQuick, which cautions that on some of those purchases the buyers might have used a nontraditional form of financing or put a mortgage on the property later. During the same period, FHA -insured home loans made up between 36 and 39 percent of transactions.

Not every multiple listing service keeps track of whether a transaction is paid for through cash or financing. Among those that do, buyers are typically most likely to purchase through conventional loans, FHA-insured loans or cash, in that order.

In some areas, however, cash transactions outnumber those with FHA financing — and even outnumber conventional loans. According to the Arizona Regional MLS (which covers the Phoenix metro area), cash buyers accounted for 41 percent of purchases from January through May.

That figure was 29 percent and 25 percent for FHA and conventional loans, respectively. Moreover, those proportions are not significantly different from those for the same period last year, when cash buyers made up 39 percent of sales and FHA and conventional loans each accounted for 28 percent of sales.

According to the Houston Association of Realtors MLS, which covers the greater Houston metro area, 22 percent of single-family home sales from January through May were in cash; 39 percent were financed with conventional loans, and 34 percent were financed with with FHA-backed loans.

As overall sales fluctuated, however, there were proportionally more cash and FHA sales than conventional loan-financed sales. In January, for example, sales overall fell 10 percent year-over-year. Meanwhile, cash and FHA sales fell only 1 percent each, while sales with conventional loans fell 20 percent.

In May, FHA sales in the Houston market were up 42 percent compared to May 2009, while cash sales were up 18 percent, and conventional sales were down 2 percent. Total sales were up 17 percent.

Metropolitan Regional Information Systems Inc. (MRIS), the largest MLS in the nation, covers the Mid-Atlantic region, including parts of Maryland, Northern Virginia, Pennsylvania, West Virginia and Washington, D.C. Cash buyers made up about 16 percent of sales overall in May, while conventional sales made up 43 percent of sales and FHA sales made up 42 percent.

Sales overall rose by 20 percent in May compared to May 2009, though FHA and cash buyers rose faster (by 24 percent each) than those with conventional loans (17 percent).

But about two years ago, lenders began limiting the conditions under which they would offer these mortgages, and industry executives say that since the start of the year, all the nation’s major lenders have followed suit.

“It’s been a tightening across the board,” said Nathan Long, the chief executive of VAMortgageCenter.com, an online broker of V.A. mortgages.

Lenders will still offer V.A. loans with no down payment, he said, but “if you have a credit score of 610, the best thing to do is work on your credit and try again in a couple of months, because you don’t really have any options.”

Mr. Long says major lenders like Bank of America, Citigroup and JPMorgan Chase, typically will not offer V.A. loans to borrowers with credit scores below 610. Debora Blume, a spokeswoman for Wells Fargo, said the cutoff score for her bank’s V.A.-insured loans was 600.

The tighter credit policies also extend to the Streamline Refinance program, which allows borrowers with V.A. loans to refinance into another V.A. loan with very little paperwork and, until recently, no appraisal.

Mr. Long and V.A. representatives say that lenders are now requiring borrowers to pay for an appraisal, which can cost $300 or more depending on a home’s location. If the new loan amount is more than the value of the home, they will most likely reject the application.

Not surprisingly, V.A. loan volume has fallen so far this year. William White, the acting assistant director for loan policy at Veterans Affairs, said his agency was on pace to insure about 300,000 mortgages this fiscal year, which ends Sept. 30, versus 325,000 in 2009. The nation’s overall loan volume rose about 19 percent during the same period, according to the Mortgage Bankers Association, to $1.92 trillion from $1.62 trillion. (The trade group tracks only total dollar amount.)

Mr. White said he understood why lenders might be restricting the loans, as the V.A. insurance only covers 25 percent of the loan amount. But he added that borrowers of V.A. loans generally had a lower default rate than prime borrowers over all — 2.6 percent versus 3.4 percent, according to the Mortgage Bankers Association — despite the fact that their credit scores were typically lower.

V.A. mortgage borrowers tend to “show some discipline,” Mr. White said, offering one explanation, “and we think they try real hard to make their payments.”

The average credit score for a V.A. borrower last year was just over 700, while the average credit score for all borrowers was 750, according to the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the government-sponsored companies that establish underwriting standards.

Mr. Long noted that V.A. loans remain competitive with other loan products. Borrowers who qualify — they must prove 24 months of continuous active military duty, and cannot have experienced a dishonorable discharge, among other things — can secure rates of 4.75 percent on 30-year fixed-rate loans, he said. That is the case even for borrowers with 620 credit scores, he added. The average rate nationwide for all 30-year fixed-rate loans is around 4.70 percent.

There is a one-time insurance fee that varies according to the size of the loan and the borrower’s credit profile, but the average is about 1.75 percent of the loan amount. On a $200,000 mortgage the cost would be $3,500. About a quarter of applicants — disabled or retired veterans, for instance — qualify for exemptions from that payment.

The report, by the Treasury Inspector General for Tax Administration (TIGTA), identified 14,132 erroneous credits totaling at least $26.7 million — a tiny sliver of the more than $12.6 billion in refunds paid to date, but a troubling indication that the program remains vulnerable to fraud.

The erroneous refunds included $17.6 million in credits allowed for 2,555 taxpayers who appear to have purchased their homes before the tax credit first took effect in April 2008, and $9.1 million in credits to 1,295 prisoners who were incarcerated at the time they reported purchasing their home.

The report also estimated “tens of millions of dollars” in credits were issued to 10,282 taxpayers who claimed to have purchased homes that were also used by other taxpayers to claim the credit. In one case, as many as 67 taxpayers listed the same home to claim the credit.

“The good news is that the IRS has made significant strides resolving problems associated with this program,” said J. Russell George, the Treasury Inspector General for Tax Administration, in a press release announcing the release of the report.

Unlike a previous audit, no minors were found to have received the credit, he said.

“However, the bad news is that prisoners are allegedly improperly receiving the credit for buying homes while they are incarcerated,” George said.

In addition, the report found that at least 34 IRS employees claimed the credit despite indications that they owned a home within the past three years. This is in addition to the 53 IRS employees identified in a previous TIGTA report issued in August.

In a memo responding to the report, Richard Byrd, commissioner of the IRS Wage and Investment Division, said the IRS “is running a well-rounded compliance program that has helped protect the interest of the nation’s taxpayers” but acknowledged that “more can be done to ensure the accuracy and legitimacy” of claims.

Byrd said that in the process of paying out more than $12.6 billion in tax credits to more than 1.8 million homebuyers through February 2010, the IRS has denied 285,504 claims that lacked adequate documentation.

In addition, the IRS has frozen 112,852 refunds pending civil examination, and conducted 114,418 post-refund and amended return audits. The IRS has also identified 98 potential criminal schemes, opened 155 criminal investigations, and recommended seven prosecutions, Byrd said.

Between August 2008 and November 2009, Congress passed three different versions of the credit, “each of which required the IRS to develop new forms and guidance, reprogram systems, and develop compliance filters. We appreciate that the report recognized many of the steps we have taken to prevent inappropriate claims from being paid.”

“Given the complexity of tax administration and the time constraints the IRS is faced with in implementing legislation, it would be impossible for us to either stop or address every potentially erroneous claim,” Byrd said.

But homes purchased before April 9, 2008, were never eligible for the tax credit, and the TIGTA audit found that the IRS approved some claims on home purchased in 2007 or earlier.

All of those claims were processed before July 2009, when the IRS initiated controls to identify such claims before refunds are issued.

Going forward, the IRS has developed a “Recapture and Repayment” strategy that will use third-party data to identify potential fraud triggers, including the date of a home’s purchase, Byrd said.

Prisons report the status of inmates to the IRS on a voluntary basis, and “without congressional action to require state and federal prisons to report the status of inmates to the IRS, there will be gaps in the data and compliance problems will persist,” Byrd warned.

He said the IRS takes “very seriously” the issue of potentially erroneous claims filed by IRS employees, and “will continue to work closely with TIGTA on their investigative efforts to identify intentional employee noncompliance” with the homebuyer tax credit and other provisions of the tax code.

In other words, the buyer is not officially approved for the mortgage until the results of second credit report are approved. There may be other last-minute verifications of undisclosed liabilities, such as job status, that may be “refreshed” as well.

Example:

Buyer A listed his three credit cards on his loan application. The lender approved Buyer A’s credit and approves the mortgage loan request, partially based on this information. Buyer A goes to Home Depot, applies for yet a fourth credit card.

The day before the closing, while Buyer A’s excitement is peaking, the lender refreshes his credit to make sure his credit score is still as good as it was when it was pulled the first time.

The lender discovers that Buyer A’s credit score has been lowered because Buyer A applied for a fourth credit card. It’s called finding an “undisclosed liability,” and it is not going to end well for the buyer.

Under the LQI, the lender could delay the closing, increase the interest rate, ask for a larger downpayment, or cancel the closing. In some states, Buyer A could lose his deposit.

“The impact on closings is too early to measure,” according to Gail Stanley, an Orlando mortgage lender, “but my guess is that homebuyers will be well coached.

“What lender, mortgage broker or real estate broker isn’t going to use every communications tool available to make sure the buyer does not even think about using available credit, much less apply for more during the ‘refreshing’ period?” Stanley asked.

“The mortgage lending business as we have known it is over,” according to Boston’s MetLife Home Loans’ senior mortgage consultant, Brian Cavanaugh. “Quality loan service and counseling will replace rate shopping because mortgage pricing is so competitive.

“Homebuyers need to work with loan officers who clearly understand the new guidelines and can help the buyer understand the importance of complying with them. Mortgage financing is incredibly important in personal financing now and it needs to be understood and protected,” Cavanaugh said.

Stanley said that pulling the second credit report is not new, and that the LQI will be a welcome new tool for lenders who practice responsible lending.

“We all realize that buyer qualifications need to be tightened and that the lender needs to be protected. Consumer education is the challenge,” Stanley said. “Realtors need to encourage their buyers to be as complete as possible in the original application and to be careful not to do anything that will negatively impact their credit score before the escrow closes.”

Depending on the state and the standard purchase and sale agreement used, borrowers could lose their deposits, according to Boston attorney Richard D. Vetstein. He recommends that real estate attorneys review standard purchase agreements.

Vetstein posted some advice about Fannie Mae’s LQI on his Massachusetts Law Blog. “If you’ve taken out new loans that are sizable enough to affect the debt-to-income-ratio calculations used in your original mortgage approval, the deal could fall through. The added debt load could render you ineligible for the mortgage because you suddenly appear unable to handle the payments without a strain on your household budget,” he notes.

Also, “Many lenders already pull second credit reports right before the closing, but the Fannie Mae mandate will likely result in a markedly increased number of lenders pulling second credit reports and performing other last-minute verifications.” And Vetstein states that a surge in new use of existing credit sources could also impact consumers’ ability to secure a home loan.

But holding the buyer accountable pales in comparison to the stringent accountability now in place to prevent lenders from submitting contract products for sale to Fannie Mae with “undisclosed” liabilities. (See www.efanniemae.com, keyword: Loan Quality.)

Just as lenders are calling for refreshed truth from buyers, Fannie Mae is not asking — it is forcing lenders to upgrade the quality of their underwriting and to get used to the new system and embedded, stringent accountability tools for meeting clear, detailed and tougher underwriting standards.

Fannie Mae’s ultimate goal is not to punish the lender or homebuyer. It is to be repaid. Not only will profits start flowing again, but investors will return. And when that happens, loans will become easier to obtain.

There will no doubt be faults found with Fannie Mae’s Loan Quality Initiative, but “lack of accountability” will not be one of them.

It is a welcomed and refreshing thought.

So the sellers added an addendum to the purchase contract wanting us to pay for their share of closing costs because they have no money. I understand they have no money, but they signed the contract stating that they would pay for some things and I don’t feel the cost to clean up the house to market it should be included in the closing costs. Is this legal? We feel exploited.  Nancy L., Costa Mesa

Nancy, often, in a short sale the answer to the question of “who pays” for a given line item is simple: whoever wants the deal to close the most! And when, as in the vast majority of short-sale situations, the seller doesn’t even possess the funds to pay for an item, and the behemoth of a bank flat out refuses to, the question becomes whether the buyer is willing to pay the cost or would prefer to walk away from the deal and the home.

When the sellers submit a short-sale offer and application package to the bank, the bank always has the right to accept, reject or make a counteroffer, the latter of which is essentially what happened here. The bank countered the sellers’ application, accepting the terms of your offer but refusing to cover all the requested closing costs. In effect, your offer has been countered at an additional $4,200, and you came up by $2,000.

The underlying wrinkle here is, because the fee is being charged by the sellers’ agent, and not an outside third party, perhaps you feel the sellers’ agent could reduce or waive the fees. (In fact, the bank might think so, too, which is why they refused to pay it — it’s probably the only closing costs the sellers requested the bank pay that is not necessarily an absolute impediment to closing.)

So, ask the listing agent to reduce or waive the cleanup fee. And, when your agent communicates your request to the listing agent, make sure your agent also communicates that the transaction may be in jeopardy over it. And if they refuse and the bank refuses to pay the difference, then the ball is back in your court to determine whether you’re willing to lose this house over that $2,000.

Think of it this way: Would you be willing to pay an extra $2,000 for the place, if the bank had come back and simply said they wouldn’t take the offer unless you came up that much? I’m not suggesting that you should, or shouldn’t — just that you think of it this way.

What’s legal between two parties to a real estate transaction is largely based on what they agree to. This issue you’re having is really a short-sale seller attempting to renegotiate the terms based on the bank’s response to their short-sale application — there’s nothing illegal about that (although there is lots that’s irritating about it!).

You have the legal option to either take it, work a resolution out, or leave it — and any of those would be legal alternatives to their attempt to change the terms via this proposed addendum.

Ronald Gitter, a New York City real estate attorney who blogs at CoopAndCondo.com, has a rule that seems pretty appropriate here — he says, “If it costs less than a ‘flat-screen,’ work it out.” So, obviously, the $2,000 gap in your place would buy a pretty incredible flat-screen TV (or two), but the principle applies.

BofA has already provided an approval and terms, and it’s pretty unlikely they’ll change their minds. Be prepared in your own mind with the knowledge of whether the $2,000 is a deal-breaker for you, or whether you want the house enough (and are otherwise getting a good enough deal) to warrant coming up with the $2,000, despite the irritation factor.

And tons of it — literally — are out there: The Environmental Protection Agency estimates lead was used in paint in more than 38 million homes before it was banned for residential use in 1978.

As of April, if you renovate a home that was built before 1978, potentially sending the paint’s potent substance into the air, your contractor will have to prove that he’s able to get the lead out.

A new federal law requires that remodeling contractors and painters who work on such older homes complete an eight-hour course on containing and safely removing lead-contaminated materials such as drywall, plaster and wood trim and paneling.

Five things to know about the Lead Renovation, Repair and Painting Rule:

1. The lead-containment rule doesn’t apply to all homes: Only those built prior to 1978 are affected. And it doesn’t apply to comparatively small jobs, such as those that affect less than 6 square feet of painted surface per room or less than 20 square feet of painted surface of a home’s exterior. Work crews must be supervised by a certified lead renovator who has passed the mandatory course; certified firms must register with the EPA. (Do-it-yourself homeowners aren’t affected by the new rule.)

2. The EPA and a number of state health departments around the country are overseeing the training of tradesmen, according to Ada Duffey, president of the Milwaukee Lead/Asbestos Information Center in Wisconsin. She estimates her firm has trained 4,500 people in the construction trades on the rule since September.

“There are particular work practices (that now must be followed), such as posting warning signs and keeping people out of the work area,” she said. “They must use a HEPA vacuum (or high-efficiency particle arrestor, to filter contaminants), and they’re going to have to clean up really thoroughly at the end, packaging up their waste and removing it from the site.”

Some other requirements include testing for lead before beginning a job, and if lead is found, the workers must seal off the site with plastic and seal-off doors and air-conditioning vents. The workers also must use respirators and conduct a “cleaning verification” of the area at the completion of the project.

3. In addition to requiring certain steps, the new law also forbids some fairly common practices.

Among them: open-flame burning or torching of paint; using a heat-gun above 1,100 degrees Fahrenheit; using paint strippers that contain methylene chloride; using machines that remove paint through abrasive blasting, sand painting, machine sanding, among others, unless the devices have approved filters; high-pressure water blasting, unless it’s in a contained area or works with approved filtration.

4. The EPA estimated that steps taken to follow the new rule would add $8 to $167 to the cost of an interior job, though many in the construction industry say the steps, including taking the course, could add considerably more.

Remodeling magazine, a trade journal, estimated it could add 5 to 11 percent in labor and materials costs to home-renovation projects.

5. The EPA maintains a list of renovators, by ZIP code or by city and state, who have completed the federally run training program at www.epa.gov/lead. Wisconsin, Iowa, North Carolina, Mississippi, Kansas, Rhode Island and Utah are administering their own programs, and the EPA suggests homeowners in those states who are seeking trained renovators contact the National Lead Information Center, 800-424-LEAD (5323).

While the biggest federal incentive for homebuyers expired for most consumers on April 30, members of the military could have an additional year to buy a home and claim the homebuyer tax credit.

The law allows service members another year to buy a home and claim the credit if they served on official extended duty outside of the United States for 90 days or more at any time between Jan. 1, 2009, and May 1, 2010.

Those members have until April 30, 2011, to sign a sales contract, and until June 30, 2011, to settle and close on the home. Both the $8,000 first-time and $6,500 repeat homebuyer tax credits are included in the rule.

“Congress recognized that many service members may have missed out on the homebuyer tax credit due to being posted overseas,” said Bob Jones, chairman of the National Association of Homebuilders. “It is only fitting that they be given another year to take advantage of this opportunity in appreciation of the sacrifices they have made serving our country.”

Typically, homes that are sold or that cease to be used as a principal residence within three years of the initial purchase are subject to recapture of the tax credit. However, qualified service members who sell or move from a tax-credit home within three years of the initial purchase due to official extended duty are exempt from the recapture rule.

“Qualified service member” means a member of the uniformed services of the U.S military, a member of the foreign service of the U.S., or an employee of the intelligence community.

For years, all military personnel on active duty have been eligible for help with their mortgage and other debt under the Soldiers’ and Sailors’ Civil Relief Act (SSCRA).

The act allows Reserve and National Guard members and other military personnel whose mortgage obligations pre-date the start of their active duty to cap their mortgage rates at 6 percent while they are on active duty. Other benefits of the act include a prohibition on lenders foreclosing against affected military personnel during, and three months after, their tour of active duty.

Since home-loan rates have hovered around 6 percent for several months, one of the most significant provisions of the act includes consumer debt. It limits the amount of interest that may be collected on all debts — not just mortgages — of persons in military service to 6 percent per year during the period of military service.

This provision applies to debts incurred prior to the commencement of active duty and includes interest on credit-card debt, car loans and other debts.

Another key provision under the SSCRA protects dependents from being evicted while service members are serving. If a service member rents a house or apartment that is occupied for dwelling purposes and the rent does not exceed $1,200 per month, the landlord must obtain a court order authorizing eviction.

This provision applies regardless of whether quarters were rented before or after entry into military service.

In cases of eviction from dwelling quarters, courts may grant a stay of up to three months or enter any other “order as may be just” if military service materially affects the service member’s ability to pay the rent.

This provision is not intended to allow military members to avoid paying rent, but rather to protect families when they cannot pay the rent because military service has affected their ability to do so.

Another significant protection under the act relates to civil proceedings. Service members involved in civil litigation can request a delay in proceedings if they can show their military responsibilities preclude their proper representation in court. Service members who are on an extended deployment or stationed overseas most often invoke this provision.

The Office of the Undersecretary of Defense for Personnel and Readiness emphasized that the provision applies to pre-service debts, and the interest-rate reduction doesn’t occur automatically — service members must request it.

The bank that I’m buying the property from is charging me $100 per day because we didn’t close on time. How can I back out of this mess? What can I do to get my $6,000 deposit back? –Carlos M.

Carlos, welcome to the not-always-so-wonderful world of buying a condo in a non-Housing and Urban Development (HUD)-approved complex using an FHA loan. Many people are not aware, but to buy a condominium with an FHA loan, not only must your particular unit pass FHA’s condition guidelines, but the actual complex must be approved by HUD.

There is a website operated by the federal Department of Housing and Urban Development, which administers the FHA loan program, with a searchable database for all FHA-approved condo complexes in the country.

But what about complexes that are not HUD-approved?

Until Feb. 1 of this year, there was a fairly simple process for obtaining an FHA “spot approval” of a complex — it was a simple form that required some information from the homeowners association’s management company and also required that the escrow holder document that fewer than 10 percent of the units in the complex were attached to FHA loans.

It was somewhat of a nuisance to get through, because in a larger complex, it was very work-intensive for escrow to pull all the trust deeds so they could verify the “less than 10 percent” FHA loan requirement, but it was generally not a deal-killer.

However, in an ostensible effort to “streamline” the spot approval process, HUD and FHA did away with spot approvals entirely this year. Instead, every time a buyer wants to finance a condo purchase in a non-HUD-approved complex, they must initiate the full process of having that complex become HUD-approved.

The upside? Every complex will have to go through this only once. The downside? HOA management companies across the nation were unprepared for this change, and are moving extremely slowly — if at all — to provide the documentation and signatures HUD requires to effect this approval and close these transactions.

As such, home purchase transactions across the country are being canceled or, like yours, severely impaired by the molasses-like pace of these approval applications and HOA managers’ responses to HUD requests.

But here’s the rub. You’ve already removed all your contingencies. I don’t know what state you’re in, but almost everywhere, removing your contingencies also renders your earnest money deposit nonrefundable if you cancel the transaction. First things first — decide if you still want to buy the place. If you don’t, and are willing to forfeit your $6,000, that is an option available to you.

However, if you do still really want the home, push your mortgage broker (your team member closest to the HUD approval process) to call in all the favors she can to get the HOA management company’s deliverables in. He or she will have much better luck exerting pressure there than on the HUD side of the equation.

Once that process is done, express to your real estate broker that you simply do not have the extra cash to pay a $100 per diem late fee on top of your downpayment and closing costs, as the bank is requesting. This late-fee provision is very common in REO purchase contracts, but I’ve also seen this waived by the bank/seller many times when they are made aware that the buyer (a) is not at fault for the delay, and (b) does not have the wherewithal to close the transaction if the late fee is imposed, but can close if the late fee is waived.

In fact, I’ve been involved in numerous transactions where the bank simply did not ask for the late fee, although it was in the contract, and they were entitled to it. Rather, banks generally wield the late-fee provision as leverage to get a buyer to perform; as a result, you are unlikely to get the bank to waive the late fee until you are in a position to close.

You are not legally entitled to your deposit money back. You can certainly ask, but it is very unlikely to happen. Accordingly, if you can get the management company’s signatures and materials in, it behooves you to do what you can to get the late fee waived and close the transaction. This is much more likely to happen than a refund of your deposit money.

However, you are not really in a position to request a late-fee waiver until your side is ready to perform by closing the transaction. So, to put first things first, have your mortgage broker or lender lean hard on the management company to respond quickly to the HUD requests