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.

“(Home) purchase applications are now almost 12 percent above the level one month ago, even after adjusting for typical seasonal patterns,” Michael Fratantoni, MBA’s Vice President of Research and Economics, said in a statement. “HARP volume continued to grow as a share of total refinance volume, reaching roughly 30 percent of refinance activity in the last two weeks. Typical HARP loans had loan-to-value ratios above 90 percent, indicating that lenders are reaching out to underwater borrowers.”

The increase in mortgage applications for purchase came as the Bureau of Labor Statistics reported that the unemployment rate improved. The unemployment rate fell in 45 states, setting the national unemployment rate for the U.S. at 8.3 percent.

But despite this positive economic news, mortgage rates have remained near record lows. The average for a 30-year fixed-rate mortgage is 3.89 percent, and the 15-year loan sits at 3.2 percent. For purchasers shopping for a good deal, home prices fell to the lowest levels since the housing crisis began, according to the most recent S&P/Case-Shiller Home Price Indices, indicating that the time may be right for shoppers to go in search of real estate deals.

Mortgages helped by employment

Jay Brinkmann, MBA’s Chief Economist and Senior Vice President for Research and Education:

“Mortgage performance continued to improve in the fourth quarter, reflecting the improvement we saw in the job market and broader economy,” Jay Brinkmann, the MBA’s chief economist, said in a statement. “The total delinquency rate and foreclosure starts rate decreased and are back down to levels from three years ago.

“A major reason is that the loans that are seriously delinquent are predominantly made up of loans originated prior to 2008 and this pool is steadily growing smaller as a percent of total loans outstanding. In addition, employment is the key driver of mortgage performance and the mortgage delinquency rate is actually falling faster than the unemployment rate is declining.”

The MBA survey also found that the percentage of mortgage loans in foreclosure at the end of the fourth quarter was 4.38 percent, down from 4.64 percent the previous year. Total delinquency rates and foreclosure starts fell from the previous quarter for most types of home loans, including prime fixed, prime adjustable-rate mortgage (ARM), sub-prime fixed and sub-prime ARM. FHA loans, however, saw an increase in delinquency and foreclosure rates.

Is help for mortgages on the way?

Finding the right help can be a game-changer if you are struggling with paying a mortgage on time. Whether you are hoping to refinance a home loan or think you may be eligible for help through the government’s recent settlement with mortgage loan servicers, it is important to check out all options that may be available to you. Talk with your mortgage lender or a housing counselor to find out what you can do to save your home.

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.

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.