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Cousin Bubba wants a mortgage loan — from you!

April 26th, 2012

Whether you’ve won the lottery, profited from investments or just been diligent about building a nest egg, it’s possible that at some point a family member may come looking for some cash. If you’re really rolling in dough, you may even be asked to help with a mortgage loan. But should you get involved with such an important — and sizable — financial transaction?

First-time home buyers

A recent National Association of Realtors survey found that 7 percent of first-time home buyers relied on a loan received from a family member or friend to buy a home. At first glace this may seem like a bad idea all around, but there may be some cases in which becoming a relative’s mortgage lender makes sense. Use this checklist to decide if this is a lucrative financial opportunity or a potential disaster.

  1. Do you really have enough cash on hand to help your relative pay for a house? Do you have a hefty retirement fund and college savings for your kids? Are you going to struggle to pay daily expenses? Will you make more off the interest than with current savings and investments? A financial adviser can help review your situation to determine whether giving a relative a mortgage is a smart move or financial suicide.
  2. Is your relative responsible with money? If everyone in the family knows that Cousin Bubba is a deadbeat who is constantly dodging creditors, run the other way when approached for a home loan. Sure, you may want to help out your relative, but do you really want to get tangled up in his financial messes?
  3. Will a mortgage loan negatively affect your relationship? Just because you become your relative’s mortgage lender doesn’t mean you’ll have a say in how they maintain their home. Can you bite your tongue when he makes home improvements you absolutely can’t stand? Refrain from constantly making suggestions about what needs to be done in order to keep the peace.

Make it legal

If you feel confident about giving a relative a mortgage loan, make sure you have a solid legal agreement in place. An attorney can help with that. Another option is to set up an agreement through peer-to-peer lending organization National Family Mortgage, which says it has helped with more than $30 million in loans between relatives.

Key facts on foreclosure

January 24th, 2012

These days the news is full of stories of distressed homeowners landing in foreclosure. Mortgage borrowers can face foreclosure for a variety of reasons — CNNMoney recently wrote about a family who ended up in foreclosure because their title company went under and interrupted their refinance proceedings — but it’s a process you typically want to avoid no matter the cause.

While the foreclosure process differs from state to state, there are some general guidelines to know about foreclosure. Knowing these can help if you find yourself slipping behind on your mortgage.

The cost of missed payments

It usually takes about three to six months of missed mortgage loan payments to get the foreclosure process started. Late fees for a missed payment are likely to kick in after 10-15 days, and once you go 30 days without a payment, you will be considered in default on your home loan.

While you may be inclined to avoid your mortgage lender in the event of late or nonexistent payments, that’s not a wise approach. Contacting your mortgage lender as soon as you begin having financial problems can give you more options for help than if you wait. Avoiding your lender and falling further behind on payments is actually likely to speed up the foreclosure process and deepen your troubles.

Types of foreclosures

If you find yourself in the unfortunate situation of defaulting on your mortgage, there are three types of foreclosures you might suffer.

The first is a judicial foreclosure, which involves the mortgage lender filing suit with the judicial system. In these cases, you would receive a note in the mail demanding payment and have 30 days to respond. If you don’t make a payment in specified time frame, the property can then be auctioned to the highest bidder by a local court or sheriff’s office.

Similarly, a power of sale foreclosure can occur if you’ve defaulted on a home loan and have not responded to demands for payment over a specific period of time. But in this case, the mortgage company can carry out an auction of the property rather than having the sheriff ’s office or local courts do it, which is what distinguishes it from a judicial foreclosure.

The last type is strict foreclosure, which is not allowed in all states. In this type of foreclosure, when you default on a mortgage loan, the lender files a lawsuit against you. Then if you don’t make payments within a time specified by the court, the mortgage lender can take ownership of the property. This type of foreclosure is most commonly associated with homes where the loan amount is higher than the value of the property.

While foreclosures can come in different types, the end result of all is still likely to be unpleasant. The best defense against foreclosure, outside of staying out of default in the first place, is working closely with your lender to manage any difficulties you encounter in making your payments.

Should older borrowers refinance?

December 21st, 2011

How old is too old to refinance? A recent Reuters article weighed in on the wisdom of Federal Reserve Chairman Ben Bernanke refinancing his mortgage loan at the age of 57, just two years after his last refinance. With interest rates near historic lows, some baby boomers may be thinking about refinancing their mortgage loans to improve their financial situation. Here are some things to consider before applying for a refinance when you are near — or even past — retirement age.

  1. How many years do you have left on your current mortgage? Each time you refinance you are setting back the clock on your mortgage loan amortization schedule. Starting over with a new loan means that most of your monthly payments will go toward interest payments during the early years of the loan. So decide whether it is worth it to refinance your current loan and stretch out the payment for a longer period of time.
  2. Can you refinance into a shorter term? Refinancing into a 15-year term could make sense if you have already paid down a lot of principal on your current home loan. Depending upon how much principal you owe, your monthly payments could actually increase with a 15-year mortgage.
  3. Are you still working? Being employed with a healthy income can improve your chance of getting approved for refinancing. Mortgage lenders are scrutinizing financial information of potential borrowers to determine if they are a good risk. Your credit score and other information such as savings and assets will factor into whether you get approved for a loan. If you have already retired, it will likely to tough to get approved for refinancing, but you may qualify for reverse mortgage. Reverse loans allow people aged 62 and up to convert some of their home equity to cash.

Refinancing a mortgage loan can work for some older people. But take time to compare several mortgage quotes to get all the information you need about doing a refinance so you don’t end up struggling to make monthly payments well into your golden years.

What to do before re-applying for a home mortgage

December 21st, 2011

Getting rejected for a home loan doesn’t mean you can’t reapply and get approved later. But before filling out another mortgage application, here are some things you may want to consider doing first.

Clean up your credit

Mortgage lenders have money to lend if you are viewed as a good credit risk. A credit score of 720 or higher will be viewed positively if you apply for a home mortgage. However, even a good credit score won’t save your application if you are underwater your current home loan or have too much debt.

Getting rid of as much debt as possible can help your loan application. That doesn’t mean shifting debt around from one credit card to another or transferring all of it to a debt consolidation loan. You need to actually decrease the outstanding balance owed to creditors for it to really impact your credit score. If you need help putting together a debt reduction plan, look for a reputable credit counselor that can help.

Save more money

Whether you are look to refinance a home loan or get a new mortgage to buy a place, the more cash you have at closing the better. Having a large down payment when purchasing can help you avoid mortgage insurance payments if your equity is going to be 20 percent or higher. If you don’t have enough equity to refinance to take advantage of today’s low interest rates, you may be able to get approved for a loan by bringing cash to the closing.

Get help with a home loan

If all else fails with trying to get a loan on your own, consider asking a parent or other relative for help. You may have a better chance of getting approved for a mortgage if you have a co-signer with a strong credit history. A co-signer is someone who agrees to be responsible for the mortgage loan if you aren’t able to pay it back. Even if your relative isn’t willing to co-sign, he or she may be willing to contribute money toward the down payment.

Should you get a mortgage if you have bad credit?

March 18th, 2011

Advertisements promising mortgages for those with bad credit are a dime a dozen. But often, the claims are exaggerated and mortgage loan applicants are turned down because they are seen as too big of a risk. When people are approved for a loan even though they don’t have great credit, they end up paying more because of high interest rates. You may be determined to not let having bad credit keep you from getting a mortgage, but should you really get a loan?

Not-so-ancient history

The reason mortgage lenders review your credit history is to determine what kind of consumer you are. Having bad credit is a sign that something in your past and present has kept you from being financially responsible. Maybe you fell on hard times after a job layoff, divorce or major illness in your family. However you got to where you are, money has been handled in a way that indicates that lending money to you at this time might be a mistake.

Questions for you

Getting a home loan is a major financial decision that can really backfire if not handled properly. Ask yourself the following questions before applying for a mortgage:

  1. Are you really ready to take on the payments for the mortgage loan, taxes and insurance? Tax payments are set by your town based upon a property assessment, but mortgage and insurance payments will be affected by your credit score.
  2. Why can’t you wait to buy a home? Are you currently living in a rental and having difficulty keeping up with the monthly payments? Getting a mortgage loan isn’t going to improve that dilemma in most cases. Remember, owning a house means you’ll be responsible for repairs, upgrades, yard work and anything else that comes up.
  3. Why should mortgage lenders trust you to repay a loan? Be honest about your financial behavior up to this point. Have you been dishonest with others and yourself when dealing with bill collectors and creditors? Are you constantly making excuses for why you’re late with payments? Do you tell your kids or other family members to lie to bill collectors when they call? These are signs that you probably are not ready to get a home.

Repair credit before mortgage application

The bottom line is that going through the steps to repair credit can prepare you for getting a mortgage loan down the line. If you need help doing this, find a reputable debt counseling agency in your community.

Should you accelerate mortgage loan payments?

March 13th, 2011

Many Americans have slashed their spending and are doing without in order to pay off debt and lessen the effects of the troubled economy. Paying off mortgage loans early has become more popular, something that many financial experts have traditionally advised against.

Getting free of a mortgage

The argument for accelerating payments on a home mortgage is that you build equity faster and ultimately will own it free and clear of any debt obligation. You will always have the security of knowing that the place is yours as long as you want it to be. Paying off a home mortgage in full also would likely free up a significant chunk of your income, allowing you to have more control and freedom to use it for other purposes.

Using income for other investments

Those who are against accelerating mortgage payments often cite the loss of the mortgage interest tax deduction. They also point out that instead of putting extra cash toward a home loan, the money could be invested in mutual funds or other investments that may earn you more money. Also, during the years when you are accelerating mortgage payments, you may have less income to put toward other things.

Biweekly mortgage payments

Before you starting attacking your mortgage debt for a faster payoff, learn as much as you can about the various methods. Biweekly mortgage loan payments can allow you to pay off a 30-year mortgage about six years ahead of schedule. Instead of making mortgage payments once a month like a lot of borrowers do, you make a payment every two weeks. So instead of making 12 payments a year it works out to 13 payments.

Most mortgage lenders allow biweekly payments, but usually charge a fee to set it up. Skip the fee and set up your own biweekly mortgage payment plan. Check with your mortgage lender to see if you can send half of the payment every two weeks. If the lender won’t allow it, divide the monthly payment by 12 and add that amount to the payment on the principal each month.

Use cash windfalls

Use bonuses and other cash windfalls to pay down mortgage debt. Make sure you don’t need the money for other expenses that are more pressing than paying off a mortgage. For instance, putting lump sums of cash toward credit card debt can wipe out high interest payments, which would give you a better return on your money than paying off low interest mortgage debt.

Using a cash windfall as a down payment on a home

February 18th, 2011

Should you use an inheritance or other cash windfall as a down payment on a home? Obviously, the more money you have for a down payment the better. But is getting a mortgage loan to buy a home the best use of your money at this time?

Do you have a lot of debt?

Owning a home is part of the American dream. But it can be easy to rush into home ownership without really being ready for all the financial responsibilities. For instance, many people apply for mortgage loans even though they have a lot of credit card debt, auto loans, student loans and other bills. Take a careful inventory of your finances and decide whether it makes more sense to use a cash windfall to pay off some of your debt, especially high-interest debt like credit cards.

Do you have emergency savings?

Owning a home means that you’ll be responsible for all maintenance and repair costs. It is not a good idea to purchase a home without having money set aside in savings for routine maintenance and other projects that may come up. It is also important to have money in savings for other emergencies that may occur, such as car repairs, medical expenses or a sudden drop in income. If you have little or no money saved up, you may be better off using your windfall to boost savings.

Do you anticipate a large expense soon?

Are you about to send your kid to college or anticipating some other important event that will cost big bucks? Put together a spending strategy that prioritizes future expenses. As you go through the numbers it may become apparent that this is not the time to get a mortgage to buy a home. You also may find that you need to put together a budget so that you can take care of your financial obligations and still save up for buying a place in the future.

Take time to plan ahead

Avoid rushing into home ownership even if you can qualify for a home mortgage. Too many Americans have made the mistake of getting mortgage loans when they really could not afford them. If you need help knocking out debt and building up a savings, get help from a debt counselor. If you do receive a windfall for a significant amount, a knowledgeable financial adviser can help you figure out the best way to handle it.

Getting rid of a troubled home loan

February 11th, 2011

Are you desperate to get rid of your mortgage problems? You are not alone. Zillow recently reported that 27 percent of U.S. homeowners are underwater on mortgage loans. There also were 261,333 foreclosure filings in January, according to RealtyTrac.

But homeowners dealing with foreclosure and underwater home loans aren’t the only one struggling. Some borrowers are struggling to make monthly mortgage payments due to a drop in income, job layoff, illness or some other factor beyond their control. There is no easy solution to dealing with mortgage problems, but there are several options to consider.

Sell your home

Getting rid of a mortgage loan is the best option if you really can’t afford to make the payments. Just because you sell the property you currently live in doesn’t mean you won’t be able to purchase another home in the future. Find out what’s going on in your neighborhood in terms of home sales. If there have been a lot of foreclosures, the value of your home is likely to be affected. But even if you are underwater on a mortgage loan that doesn’t mean you have to give up the idea of selling. But you may have to consider a short sale.

A short sale occurs when the mortgage lender agrees to accept a lower payoff that what you owe on a home loan. The advantage to doing a short sale is that the lender can recover some of what’s owed. You would be able to get out from under a troubled loan and avoid foreclosure. Keep in mind that any mortgage debt that is forgiven by the mortgage lender in such a deal may be taxable, so it’s important to consult with a tax advisor.

Mortgage refinancing

Maybe you are feeling pinched by monthly mortgage payments, but things haven’t gotten so serious that you are about to lose you home. If you still have some home equity and good credit, you might qualify for a mortgage refinance. The more equity you have and the higher your credit score the better. Refinancing could be the right move it you are paying interest that is much higher than current mortgage rates. A mortgage payment calculator can help determine how much money you could actually save by refinancing.

These are just a few ways to get out from under expensive mortgage payments. There may be other solutions that suit your financial needs. Talk with your mortgage lender or a housing counselor to learn more about your options.

A quarter of Nevadans who lost homes strategically defaulted

January 28th, 2011

Almost a quarter of Nevada residents who lost their homes to foreclosure walked away from them. A Nevada Association of Realtors (NVAR) Report found that 23 percent of homeowners strategically defaulted on mortgage loans. The report also found that most Nevadans facing foreclosure did not know about federal and nonprofit programs designed to help them.

Many of the people who went through foreclosure had experience at least two “life-altering events” that increase their risk of defaulting on a home mortgage. Losing a job and medical expenses were the most common events that triggered a foreclosure. Also, 46 percent of homeowners blamed banks and lenders for foreclosures, 20 percent blamed the government and 13 percent blamed homeowners.

Residents don’t know where to turn for help

Nevada has consistently had one of the highest rates of foreclosure in the U.S. With so much attention given to foreclosure during the housing crisis, it seems surprising that so many homeowners would be unaware of programs that can help them.

Linda Rheinberger, 2010 NVAR president, said in a statement:

“We think this research will help the public, the real estate industry, lawmakers and others grappling with this difficult issue. Personally, it was striking to see that nearly one in four Nevadans who lost homes to foreclosure admitted that they simply walked away from their mortgage. As for solutions, there may not be a single cure-all, but this report suggests that we can do more to make distressed homeowners aware of the free and low-cost resources available to them.”

Arranging a short sale

Among the alternatives to foreclosure is arranging a short sale. A short sale occurs when a mortgage lender agrees to allow you to sell a home for less than what is owed on a mortgage loan. The mortgage lender is able to recover some of the mortgage loan, and you, the homeowner, get out from under the burden of a mortgage you can’t afford.

Should you let extended family move in to help with the mortgage?

January 21st, 2011

The economic crisis has led more people to move in with family members. As a result, there has been an increase in multi-generational households since the recession began.

A record 49 million Americans, or 16.1 percent of the U.S. population, lived in a multi-generational household in 2008, compared with 12 percent in 1980, according to the Pew Research Center. Back in 1940, about a quarter of the population lived in multi-generational households.

Use checklist before living together

If you’re struggling to pay your home loan and other bills, it could help to have extended family members move in (and pay rent). But make sure that everyone involved has realistic expectations about the arrangement. Consider the following things when trying to decide whether to invite relatives to move in.

  • Do you actually like and get along with your relatives? You can’t pick your family members, but you can choose whether or not to be in close proximity to them. If you and your relatives have a history filled with disagreements and clashes, living together to get the mortgage paid could be a huge mistake.
  • Who will be responsible for various household bills? Ultimately, your name is on the documents for the home mortgage, so it is your responsibility to make sure it gets paid each month whether or not your relative comes up with cash to help. If necessary, draw up a formal contract that spells out the obligations for everyone.
  • If your adult children are moving back home, don’t expect them to have curfews or ask your advice for every move they make. It is important that they respect you and your home, so setting up some rules before they move in is important.
  • Set up an agreement for sharing household chores. You should not be picking up after your relatives all the time. Everyone should be fully aware of their responsibilities for cleaning the home, yard work, waiting for the cable guy, etc.
  • Are small children moving in with your relatives? If so, are they expecting you to be a regular babysitter? Decide exactly how much involvement you want to have with carpools, playground duty, and other child care arrangements.
  • Are elderly parents moving in? If so, what kind of care are they going to need and can you handle it?

Set up a plan for everyone

Depending on your particular case, there may be other factors you need to consider before agreeing to a multi-generational living arrangement. Take time to think through your situation to make your living arrangement as smooth as possible.