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Can’t Get a Mortgage? Consider a Rent-to-Own Deal

February 26th, 2010

Having bad credit can keep you from qualifying for a home loan.  But that doesn’t mean you can’t work toward becoming a homeowner. Consider renting a house that gives you an option to buy it.

What Is a Lease-Option?

A rent-to-own or lease-option deal allows you to rent a home and pay extra each month toward purchasing the property at a later date for a specific price. When you sign the lease the seller requires you to pay an option fee of up to 5% of the purchase price.

Lease-options specify a period of time that you have to decide whether or not to actually buy the property. If you don’t excercise your option to purchase the home, you lose the option fee and the additional money paid toward the purchase. 

Why Rent-to-Own?

A rent-to-own deal can allow you “try out” a house and neighborhood before committing to buying property there. Also, if you can’t get a mortgage loan because of bad credit, a lease-option gives you time to save up money for a down payment. You also can work on cleaning up bad credit, although rent payments are not factored into the credit scoring formula, according to the Mortgage Professor. Having good credit and a hefty down payment improves the chances of a mortgage lender giving you a home loan down.

Deals Can Backfire

Use caution when entering into a rent-to-own deal. Make sure you understand all the terms and use an attorney to review the contract. Some problems that can derail your plans to buy a home this way include losing your option fee and rent payments by falling behind on rent payments. The deal also dies (and you lose the money) if you get evicted. Make sure that any home you lease-option isn’t in the foreclosure process so you don’t lose your money.

Falling Home Values

Also keep in mind that signing a lease-option contract could backfire if real-estate prices continue to drop. The home’s value could fall below the purchase price by the time you actually have to make a decision to buy it. A recent report by Fiserv and Moody’s Economy.com said the average home price in the U.S. is likely to fall 6% by 2011.

Lease-options can work in your favor if you know what you’re doing. But don’t get in over your head just because you are too eager to buy a house when you really can’t afford one. You can rent a place while taking the time to repair credit and save up a down payment without getting into a contract that could result in losing your shirt.

Government to Help Housing Markets Suffering the Most

February 19th, 2010

People struggling with mortgage loans in five states are getting additional aid to get them through the housing crisis. President Obama said the government plans to give $1.5 billion to local and state housing agencies in an effort to help troubled homeowners.

Help for Troubled Mortgage Loans

Funds are to go to agencies in Nevada, California, Arizona, Florida, and Michgan, states hit hardest by the housing downturn. Those states have seen housing prices plunge more than 20% from their peak.

Money can be used in various ways, including modifying home loans that are underwater or helping unemployed people struggling with mortgages to avoid foreclosure. Housing agencies can also use the aid for “programs encouraging sustainable and affordable homeownership,” according to the White House blog.

Get Help with Your Mortgage

While these programs should help many troubled homeowners, you may need to look for relief sooner than that. Contact your mortgage lender or loan servicer if you are already behind on monthly payments. You may be eligible for a mortgage refinance or loan modification.

Refinance Mortgage

Mortgage refinancing through the government’s program requires:

  • Your mortgage loan to be guaranteed by Fannie Mae or Freddie Mac
  • You to be current on mortgage payments
  • The ability to make payments on the refinanced home loan
  • You to be the owner-occupant of a one- to four-family home

If you don’t have a home mortgage guaranteed by Fannie Mae of Freddie Mac, don’t assume that your mortgage lender can’t help you. They may have some other program to help you do a mortgage refinance.

Mortgage Loan Modification

Getting approved for a home loan modification through the government’s program requires:

  • Your mortgage payment (including taxes and insurance) to be greater than 31% of your monthly gross income
  • You must be able to document financial hardship that is keeping you from affording your mortgage payment
  • Have a first lien that originated before Jan. 1, 2009

If you are facing foreclosure, mortgage loan servicers can’t proceed with a foreclosure sale until you’ve been evaluated for help through the mortgage loan modification program.

Contact Mortgage Lender

The most important takeaway is that you must be proactive about getting help with your mortgage loan. Ducking and dodging phone calls and letters from your mortgage lender isn’t going to help your situation. Be diligent about tracking down someone at your mortgage lender who is authorized to set up some kind of deal to get back on track with your home loan.

CitiMortgage Offers Foreclosure Alternatives Program

February 12th, 2010

CitiMortgage is giving some homeowners struggling with mortgage loans a break. The mortgage lender is allowing distressed homeowners in six states to remain in their homes rather than face foreclosure.

Foreclosure Alternatives Program

CitiMortgage is offering the deed-in-lieu program to people who currently have a home loan through CitiMortgage and live in Texas, Florida, Michigan, Illinois, New Jersey, and Ohio. They must be at least 90 days delinquent on mortgages to qualify for help.

The distressed homeowners will be able to remain in their homes for six months while figuring out where to move. After six months, they must agree to sign over their property deeds to the mortgage lender.

Sanjiv Das, CEO of CitiMortgage, said in a statement, “At CitiMortgage, we’re committed to finding every solution possible to help families facing foreclosure. However, the reality is that not every homeowner has the financial ability to remain in their home. The goal of the program is to help homeowners make a smooth transition into the next chapter of their lives.”

Mortgage Lender Gives Relocation Help 

As part of the agreement, CitiMortgage provides relocation counseling and at least $1,000 to help borrowers move to other housing.

Some homeowners may receive assistance with certain housing expenses if they can’t afford them. Although borrowers are responsible for utility bills, the mortgage lender may help with other costs, such as homeowner’s association dues and escrow fees.

Keeping Homes from Being Trashed

The assistance program also requires homeowners to maintain homes in their current condition. “Once the owner moves, we get the property that’s in better condition, so we can immediately market it,” Mark Rodgers, Citigroup’s director of public affairs, told the South Florida Business Journal.  ”It’s much more likely to sell quickly in good condition than in bad condition.”

Mortgage Modification or Short Sale

Before a distressed homeowner is helped through a deed-in-lieu of foreclosure, the lender evaluates the situation to see if a mortgage modification can help. Borrowers who don’t qualify for a mortgage loan modification may get approval for a short sale. That allows them to sell for less than they owe on a home loan.

Only when a homeowner can’t be helped with a mortage loan modification or short sale are they considered for the deed-in-lieu program.

Do You Have a Big Enough Down Payment for a Mortgage Loan?

February 5th, 2010

It’s a buyer’s market right now for people wanting to purchase homes. Housing prices are affordable and mortgage rates are low. But if you don’t have a sizable down payment saved up, you could end up straining your finances.

Use a Mortgage Payment Calculator

Before applying for a home loan you should go on a fact-finding mission to determine how much house you can afford. While it’s fun to visit open houses and browse through homes for sale at various Web sites, it’s just as important to crunch the numbers with a mortgage payment calculator to see what your monthly bill is going to look like.

Your Down Payment Matters

So much attention gets focused on mortgage rates that many people don’t really stop to think about how the size of their down payment is a key factor in how money they’ll shell out for housing payments for the next 30 years or so.

During the housing boom, mortgage lenders often enticed borrowers with home loans that required zero or low down payments. Millions of home buyers jumped into these mortgage loans, desperate to get a piece of America’s homeownership dream even though it meant high monthly payments or mortgage rates that would adjust up in the future.

Who Can Get Low Down Payments?

Mortgage lenders are reluctant to offer many borrowers low down payment mortgage loans these days. Some borrowers may be able to qualify for low down payments, but many mortgage lenders are looking for 20% down to underwrite home loans at the best mortgage rates.

FHA Changes Down Payment Rules

Even the Federal Housing Administration is rethinking its 3.5% down payment option. It recently announced a policy change to only allow people with credit scores of at least 580 to qualify for the 3.5% down payment. Borrowers with lower credit scores must put down at least 10% on a mortgage loan.

Beyond Home Loan Principal and Interest

When using a mortgage calculator be sure to plug in your estimated costs for homeowners insurance, property taxes, and homeowners association (HOA) dues. Depending upon where you buy a home, these costs could add a significant amount of money to your monthly housing bill.

Are You Ready to Get a Mortgage Loan?

Your fact-finding mission should determine whether or not you are ready to apply for a mortgage loan and buy a home. After running all the numbers through your calculator and looking at how much debt you can afford to carry on your current income, it may be prudent to postpone a home purchase. But if you feel that you are ready to take the plunge, shop around and compare quotes from several mortgage lenders to find the best deal.