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4 things to consider before getting a mortgage for a fixer-upper

January 14th, 2011

There’s something about old and/or rundown houses that can bring out the inner handyman in many people. But before you get caught up in DIY dreams of renovating and restoring an old house to its former glory or turning a huge profit on a foreclosure disaster, there are several things to consider. Use the following checklist to decide if buying a fixer-upper is the right choice before applying for a home loan.

  1. How much will it cost? Don’t just factor in the purchase price and then name a dollar amount that you are willing to spend. You must do the math to actually determine the realistic costs that are going to be associated with the particular property you want to buy, not just the payments on a home mortgage. You’ll need to thoroughly evaluate the property and note all the repairs needed and what they are likely to cost in your area. If you hope to sell the home after fixing it up, it’s important to research current market values in the neighborhood.
  2. You must get a home inspection. Do not even think of skipping this step. To get arrive at a realistic cost estimate, it is imperative to have a thorough home inspection. Hire someone who is reputable and knowledgeable about what it will take to update the home. When you make an offer for a house the contract should have a contingency for the inspection so that if major deficiencies are discovered you can get out of the contract or try to negotiate for a lower price if you still want the property.
  3. Does the home need major structural improvements? Replacing plumbing, totally re-doing wiring, or fixing foundation issues can really drain your wallet. Are you willing to pay for these expenses and deal with any surprises that come up in the process?
  4. Will you need to apply for a home equity loan to pay for all the repairs? While many homeowners assume they’ll be able to get home equity loans when they apply for them, the fact is that many lenders are turning down many applicants even if they have good credit. Make sure that you aren’t going to be stuck without the funds you need to spruce up a fixer-upper once you’ve committed to monthly mortgage payments.

It’s important to choose the right repairs and renovations if you are on a limited budget. If you plan to remain in the home for many years, you’ll have time to budget and save for any work that is needed as you go along.

Should you get a home loan or keep renting?

December 31st, 2010

The state of the nation’s housing market is a frequent topic of discussion. Stories about mortgage rates, home prices, and foreclosures often lead the day’s headlines. If you are a renter you may be wondering if the time will ever be right to buy a home. Regardless of what happens with the broader economy, here are four questions to ask yourself when deciding whether or not to make the leap into homeownership.

  1. Have you paid down debt? Or do you still have a lot of debt from credit cards, student loans, auto loans and other types of financing? When you apply for a home loan your finances are scrutinized by mortgage lenders. One of the factors they are going to focus on is your current debt-to-income ratio. So if you seem to be struggling to pay all the bills with your current debt level, it’s unlikely you are going to get approved for a mortgage. Work on tackling that debt before getting serious about shopping for a mortgage loan.
  2. Do you have a hefty down payment? The more you have saved up for a down payment, the better off you are. When you make a down payment that decreases the amount of principal you have to finance with mortgage loan. Aim for a down payment of 20 percent of the purchase price to avoid mortgage insurance (MI) payments. While there are mortgage loan programs for buyers who don’t have a 20 percent down payment, do yourself a favor and take the time to save as much money as possible.
  3. Can you afford a home? Do you have enough income to cover all the expenses related to owning a home? In addition to monthly mortgage payments for principal and interest, you’ll pay for homeowners insurance and property taxes. Depending upon the community to live in there may be monthly dues. There also will be expenses for routine maintenance and repairs, yard care, snow removal, etc.
  4. Is it a smart move? Are you likely to move anytime soon because of a job change? If there is a good chance that you may have to move soon, buying a home at this time may not be the right move for you. If you’re refinancing, it’s important to look at how long it will take to recoup the closing costs involved with refinancing a home mortgage. Ideally, you would want to remain in the home for at least that amount of time.

Making the move to homeownership is a big step. While current mortgage rates may have you chomping at the bit to get a home loan, it’s important to make sure that your finances can really handle everything that is involved.

Proof of homeowners insurance needed at mortage closing

December 3rd, 2010

Mortgage lenders usually require that you come to closing with a homeowners insurance policy that is paid up for the first year. The insurance policy protects you in case the property is damaged by fire, high wind or other natural disasters. Use the following guide when shopping for a homeowners insurance policy for your new home.

  • Don’t confuse homeowners insurance with mortgage insurance (MI), often referred to as private mortgage insurance (PMI). Homeowners insurance is to cover damage to your home. MI is a fee that you pay to protect the mortgage lender in the event that you default on a home loan. Most mortgage loans require MI if the down payment is less than 20 percent.
  • Homeowners insurance does not cover all disasters. For instance, floods generally are not covered by standard homeowners policies. You won’t need to purchase a flood policy unless you live in a designated flood zone. If you need a flood insurance, the first year’s premium must be paid at closing.
  • Compare several homeowners policies to find the right coverage. Ask people you know for recommendations and whether or not they have ever filed a claim with their insurer.
  • Find out about discounts that may be offered by insurers. Burglar alarms and smoke detectors are among the things that may qualify you for a discount on your policy.
  • Insuring your home, car, boat, etc. with the same insurer may get you a lower premium. Even if you hadn’t planned to get a new auto policy, it may be a good idea to get quotes before choosing a homeowners plan. If you already have a homeowners policy your current insurance firm may reward you for being a long-time customer if you use it for the new policy.
  • Your credit score matters. Many insurance companies pull credit reports as part of the underwriting process. Not only can poor credit keep you from qualifying for the best mortgage rates, but it also can force you to pay higher insurance premiums.
  • Ask for replacement cost coverage instead of actual cash value coverage. If you have to file a claim, replacement cost coverage means you’ll be reimbursed the full amount that it costs to replace your home, subject to policy limits.

Get all the facts before signing up for any insurance policy. Ask for the highest deductible that you can afford to keep the premiums down.

FTC rule cracks down on mortgage relief firms

November 19th, 2010

A new Federal Trade Commission (FTC) rule is aimed at cracking down on mortgage relief companies that make use deceptive practices. Some homeowners who are struggling financially have become victims of various mortgage relief scams that have proliferated during the housing crisis.

No advance fees for mortgage relief

The FTC rule makes it illegal for firms offering help with mortgage loans to collect advance fees before any services have been provided. Some companies that offer foreclosure rescue or loan modifications services have required homeowners seeking assistance to pay large sums of money upfront without delivering on their promises. Some of the companies claim that they are affiliated with the government and government programs that offer housing assistance.

“At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results,” FTC Chairman Jon Leibowitz said in a statement. “By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

Documentation before collecting money

Now mortgage relief companies must provide written proof that a mortgage lender or servicer has agreed to make changes to a mortgage loan before any fees can be collected. Companies that offer help with mortgages also must inform consumers that they have the right to turn down an offer without paying any fees.

Mortgage relief firms also must disclose to consumers that:

  • They are not affiliated with or approved by the government
  • They are not affiliated with or approved by mortgage lenders
  • Mortgage lenders may not agree to modify home loans
  • If they tell customers to stop making payments on a mortgage, that they could lose their home and damage their credit

False claims about help with home mortgages

Mortgage relief companies also must refrain from making false claims about their services. Among those false claims are those that about the likelihood that customers will get the results they want, refund and cancellation policies, whether the company provides legal representation for consumers, and the amount of money a homeowner will save using the company’s services. The FTC rule also prohibits mortgage relief firms from telling consumers to stop communicating with their mortgage lenders or loan servicers.

What happens during the foreclosure process?

November 6th, 2010

If you’ve received a notice of foreclosure, you may be confused about what the foreclosure process actually involves. Whether you are current on mortgage loan payments or have fallen behind, the following guide can help you understand how the foreclosure process works.

What is a foreclosure?

A foreclosure is an action by a lender to take ownership of property for which the loan is in default. It starts when a homeowner has fallen behind on home loan payments, thus defaulting on the mortgage loan. By definition the mortgage loan is secured by the value of the home, which means if the homeowner doesn’t pay the loan, the lender has the right to take the house.

Once a loan is in default, the mortgage lender will eventually attempt to recover the outstanding balance owed on the mortgage loan by taking the property and selling it to pay off as much of the loan as possible. The mortgage lender kicks off this process by filing a public Notice of Default.

What are your options after a Notice of Default has been filed?

There are several things that you can do after the foreclosure process has begun.

  1. Pay off the default. If you can find a way to pay off the default amount during the pre-foreclosure period, doing so could allow the mortgage loan to be reinstated. Work with your lender to establish a payment schedule.
  2. Sell the property. You could choose to sell the property during the pre-foreclosure period and put the proceeds toward the mortgage. Given the current economic conditions, it may be tough to sell your home at the market value.
  3. Short sale. If you are underwater on a mortgage loan you won’t earn enough from the sale to pay the full amount owed. In that case you might have to consider a short sale.
  4. Loan modification. Explore HAMP (Home Affordable Mortgage Program) and HARP (Home Affordable Refinance Program) loans to see if you qualify for a loan modification or a refinance with government assistance.

More about short sale

A short sale occurs when the mortgage lender agrees to accept less that what is owed on a home mortgage. Generally, you have to prove that you are experiencing extreme financial hardship to qualify for this type of deal. Be prepared to provide a lot of documentation for your financial woes. It’s also a good idea to line up a buyer before approaching the bank to request a short sale.

What if you do nothing?

If you do nothing after the foreclosure is started, the mortgage lender can take the property. The lender would then sell the house to recover as much as it can. The lender would be responsible for any repairs or maintenance needed to get the property in shape to sell. But mortgage lenders are not looking to manage properties, so most would rather find an alternative to having to take ownership. Armed with this information, being upfront with the lender about your situation and reaching agreement on a payment plan may make it possible for you to remain in your home.

Should you file for bankruptcy if you’re behind on a mortgage loan?

October 29th, 2010

Who files for bankruptcy? People of all ages, races, occupations, and socio-economic levels. According to the American Bankruptcy Institute (ABI), U.S. consumer bankruptcy filings rose 11 percent during the first nine months of 2010. The credit crisis, falling home values, and job losses have forced many people to take the desperate step of bankruptcy. Medical debt is also a huge factor.

Bankruptcy filings rise

“While the 2005 bankruptcy overhaul law aimed to reduce filings, overall consumer debt and continued financial stress have led to consumer bankruptcies climbing back to pre-BAPCPA levels,” ABI Executive Director Samuel J. Gerdano said in a statement. “We expect that there will be nearly 1.6 million new bankruptcy filings by year end.”

Mortgage loans and other debts

If you’ve fallen behind on your home loan and other bills, you may feel like there is no choice but to file bankruptcy to get rid of debt. Consider the following things when deciding whether filing for bankruptcy makes sense.

A Chapter 13 bankruptcy would allow you to set up a plan to repay some debts, but you need to have a steady income. The repayment plan would last for three to five years. If you are really struggling to make mortgage payments, a Chapter 13 filing could help stop foreclosure so you can stay in the home and catch up on payments. The bankruptcy judge also might allow a mortgage loan modification.

Liquidating Assets

Many people who have lost their income end up filing a Chapter 7 bankruptcy. Chapter 7 would allow you to liquidate assets to pay off debt. The bankruptcy judge might allow you to keep some basic assets that are necessary for living. You may be able to stay in your home, but that depends upon whether there’s any equity in it. If you have too much equity, the house may need to be sold to pay off debt. Chapter 7 is usually a faster process than Chapter 13.

Bad Credit Rating

Filing for any type of bankruptcy is going to send your credit score plummeting. The bankruptcy will show up for 10 years and can affect everything from getting another home loan, to applying for credit cards, to getting a job. You must talk with a credit counselor before filing for bankruptcy, so look for someone who can really explain the process and help you make the right decision.

Many Americans say owning a home is a priority

October 22nd, 2010

Despite continuing struggles in the housing market, a majority of Americans still believe that buying a home is a good investment. A survey by the National Association of Realtors found that 68% of those polled strongly believe that buying a home is a good financial decision.

Job security and mortgages

The survey measures how affordable housing issues affect consumers and found that concerns about job security were at the highest level in eight years. About 70% of those polled said job layoffs and unemployment were a big problem in their area. The job situation makes it tough for many people to qualify for a home loan or get approved for a refinance.

Even with the tough conditions, 39% of renters say owning a home in the future is one of their highest priorities and 24% say it is a moderate priority. Only 21% of renters said owning a home is not a priority. If you’re among those who currently rent but believe that home ownership is in your future, here are some things you can do to prepare yourself.

  • Pay off all debt.When it comes time to get a mortgage, you’ll want to have the lowest debt-to-income ratio and the best credit score possible. Pay off credit cards, student loans, and other debt while you are still renting. After those debts have been paid off, put the money you that used to go toward those payments into a savings account. The more money you save for a down payment, the better position you’ll be in when you’re ready to compare mortgage loans.
  • Research the ins and outs of getting a mortgage. Read newspapers, magazines, books, and online sources of information to learn more about buying a home. Many homeowners who made the mistake of applying for mortgage loans without doing their homework are now facing foreclosure and other financial problems. Getting as much knowledge as you can about the home buying process will equip you to make smart choices when you finally get ready to buy a home.
  • Stay employed for as long as you can. Even if you have a job that you aren’t always thrilled about, it’s better to stay where you are than quit in this job market. If you want a job that pays more money, keep in mind that mortgage lenders usually base part of their decision to approve mortgages on how long you’ve been at your current job. They want to know that you have a stable work history and will repay money you borrow.

You can buy a home

A house can be an important piece of your plan to build wealth. Don’t let the current housing market discourage you from pursuing a dream to own a home.

Checklist for making an offer for a home

October 15th, 2010

Have you found a house you’d like to buy? If you’re on the verge of making an offer for home, use the following checklist to make the process as smooth as possible.

  • Get pre-approved for a home loan. If you’ve shopped for loan quotes from several mortgage lenders, choose one and get a pre-approval offer in writing. Having a commitment from a mortgage lender shows home sellers that you’re serious about making a deal. Try to get pre-approval before beginning a serious house hunt so you can quickly move on making an offer for a home. While bidding wars aren’t as common as they were when the housing market was booming, they still can happen.
  • Make sure your credit is tight. There’s nothing like a poor credit score to derail a home buyer’s plans to buy a home. Don’t wait until you are on a serious house hunt to start addressing debt and other problems dragging down your credit score. Start fixing problems with your credit at least six months to a year before attempting to apply for a mortgage. Be realistic about plans for paying down debt. Don’t expect to pay off $20,000 of debt in six months if you don’t change your spending habits.
  • Make sure you have a healthy down payment. The more money you have to put down on a home, the lower your mortgage balance is going to be. Also, sellers are more likely to accept your offer if you make a healthy down payment. Mortgage rates are at historical lows, so your dollars actually buy more house than a few years ago.
  • Don’t be afraid to ask for incentives. Some home sellers may be willing to chip in on the closing costs or let you keep certain items such patio furniture, a piano, or exercise equipment as part of the deal.
  • Don’t let your emotions take over. Even if you feel like you’ve found your dream home, don’t let yourself make poor decisions about a home when you see obvious red flags. Avoid making an offer for a home with serious issues you can’t afford to address, such as structural problems, or problems with plumbing or wiring. Remember, once you buy a home you’re responsible for repairs and maintenance. Get an inspection after your offer has been accepted so you’ll know exactly what you’re up against.

Buying a home can be exciting and stressful at the same time. But if you prepare yourself as much as you can before beginning a house hunt, you’ll be able to quickly make an offer and hopefully get the home of your dreams.

3 ways to cut your mortgage costs

September 10th, 2010

Buying a home is probably the biggest purchase you’ll ever make. Like most people you probably don’t have enough cash on hand to buy a property outright and need to obtain a mortgage loan, which means you are committing to many years of loan payments.

Most mortgage loans are set up to be paid out over a long period of time, such as 30 years, and the interest payments result in paying a whole lot more than the actual purchase price of a property. For instance, if you use a mortgage payment calculator to determine the amount of interest paid on a 30-year fixed mortgage loan for $200,000 at 4.5% interest, you’d pay $164,813.42 in interest over the life of the loan.

Cut Mortgage Costs

So what can you do to decrease the amount of money paid out of your pocket over the life of a home mortgage?

  1. Save up a larger down payment. This probably isn’t the first time you’ve heard this piece of advice, but you really can’t afford to ignore it. Using the scenario described above, assume that the down payment on the mortgage is 20%, or $40,0000. The total amount of interest paid out over the 30 years would be $131,850.74. Boost the down payment to 30% ($60,000) and the amount of interest paid would be $115,369.40. The more you put down the less interest you pay and the smaller the monthly payments are going to be.
  2. Property taxes and homeowners insurance add to monthly mortgage costs. Shop around for the best homeowners insurance policy you can find. Mortgage lenders require insurance premiums to be paid into an escrow account each month. Take time to compare different policies to find the best one for your situation. It may make sense to increase the deductible to have smaller monthly payments. You also may get discounts for being a long-time customer, having multiple policies, or not filing any claims over a certain period of time.
  3. Pay extra toward the principal. Even if you can only spare $50 extra to put toward a mortgage loan each month, do it. Paying down principal faster than the term of the loan can significantly cut your total mortgage bill. If owning your home free and clear of mortgage debt is important, focusing on reducing principal can help.

Refinance to lower payments

Also consider taking advantage of current mortgage rates to refinance out of a high-interest home loan. Decreasing your monthly payments could save hundreds of dollars a month, allowing you to keep more of your take-home pay. You also could refinance and continue paying the same amount each month to reduce principal quicker and cut the total amount of interest paid out over the life of the loan.

Are mortgages with no down payment making a comeback?

September 5th, 2010

Think no-down-payment mortgages are dead because of the housing crisis? Think again. The Affordable Advantage program run by Fannie Mae has allowed some home buyers to purchase a property with only $1,000 as a down payment. The mortgage loan program helps people with moderate incomes purchase homes, and housing grants can be applied toward the down payment.

Four states pilot mortgage program

Only four states are offering the mortgage loan program at this point: Idaho, Massachusetts, Minnesota, and Wisconsin. An article in the New York Times says the Wisconsin Housing and Economic Development Authority has issued 500 loans since March.

While it may seem risky to issue mortgages with low down payments, some housing experts seem to believe that the program’s requirements can cut the risk of homeowners defaulting. Only 30-year fixed-rate mortgages are available through the Affordable Advantage program. Risky adjustable-rate mortgage loans are not available.

Verifying borrower information

Homebuyers must have a credit score of at least 680 and live in the home purchased. Mortgage lenders also must verify the income and assets of home buyers, something that did not always occur before the housing crisis and contributed to a surge in sub-prime lending.

“In addition, we want to see what other lines of credit people have, and their performance. We look at their work history. We call their employers,” Kate Venne, spokesperson for the Wisconsin HFA, told the Washington Independent. The program helps borrowers if they become unemployed. Also, there is no requirement for mortgage insurance, which can bump up monthly fees.

Should you apply for a home loan?

If you live in one of the four states and are wondering whether or not to apply for a home mortgage through the program, here are some things to consider:

  • Are you really ready to take on mortgage payments and other expenses associated with home ownership? In addition to principal and interest, you need cash to cover homeowners insurance, property taxes, utilities, routine maintenance, and home repairs.
  • Would you rather save up a larger down payment to lower your monthly housing costs? Remember, the larger your down payment, the lower your monthly mortgage costs.
  • Do you need to clean up your credit to qualify for a home loan through the Fannie Mae program? Being on time with bill payments, reducing debt, and deleting outdated information in a credit report can help raise your credit score.

Finally, consider whether you are willing to buy a home in this economy. Housing prices and mortgage rates are low, making it a good time to buy a home. But home values could continue to fall even after you purchase a property. Honestly assess your tolerance for risk, as well as your commitment to staying in a home that could decline in value if the economy doesn’t improve.