buying a home
Foreclosure begins when a property owner defaults on the mortgage of a property, mainly due to financial difficulties or the inability to keep up with the mortgage payments. In the event a property succumbs to a foreclosure, it's likely that the property has not been maintained as it should have been. This means perhaps the roof is in dire need of repair, there could be a damaged foundation or the landscaping has been severely neglected, or a number of other maintenance or repair issues may exist.
Some foreclosure homes may only need a fair amount of TLC. The amount of repairs needed or required for the foreclosed property may greatly reflect on the asking price. A major fixer upper may be offered at a lower than normal price, whereas a property in fair condition may go for a price just below the market value.
When a mortgage lending institution decides to foreclose on a property, they will file a notice of default which becomes a public record for all buyers who are interested in locating foreclosed properties for purchase. There are many places buyers can look to find foreclosed properties such as: various web sites on the Internet, real estate agents or brokers and real estate magazines.
Once the buyer locates a foreclosed property they are interested in, the buyer can assess the public records and check for any liens on the property. Most liens that are placed on foreclosed properties are for unpaid taxes. Interested buyers should also check the values of the neighboring properties before entering into a contract to make sure they would be getting a fair market value.
Novice buyers may be interested in checking out bank owned foreclosure properties. These bank owned foreclosure properties may prove to be at lower risks to the novice buyer. With bank owned foreclosure properties, there are usually no tenants to evict, no liens against the property and no past due taxes.
Some lending institutions may be eager to sell their foreclosed properties and may offer to finance the foreclosed property to the buyer at a low market rate or with a small down payment. If the lending institution has already done an appraisal, the interested buyer may not have to pay an additional appraisal fee. Most lending institutions that are eager to sell a foreclosed property may also include title insurance that generally removes most of the risks that come with buying properties early on in the foreclosure process.
The more experienced buyer may decide to find a pre-foreclosure property owner about to go into default and offer to buy the property for a portion of the difference between the property equity and the market value. This may be an acceptable offer to a property owner who doesn't want to end up losing all of the equity that has been invested in the property. Some pre-foreclosure property owners may offer bargains to a persistent buyer. This is mostly because at this stage, credit collection agencies are constantly hounding the property owners, who would in turn want to resolve these issues to avoid any further harassment.
Buyers may sometimes find that contacting the owner of a pre-foreclosed property can be difficult. Usually by this time, the property owner may not have any electricity or a telephone. Sometimes these pre-foreclosed property owners may also be difficult to deal with directly, due to a drug or alcohol addiction that put them in their situation in the first place. Some owners may also be hostile to the buyer or unpleasant to deal with because they are bitter and frightened about losing their home and perhaps they have no other place to go. Some of these owners may even see the buyers of their foreclosed properties as their mortal enemy and may do some extra damage to the foreclosed property before evacuating the premises.
Many foreclosed properties are normally sold at prices close to the assessed value. Depending on what city or neighborhood the buyer is interested in, what the neighboring property values are, how long it has been on the market and what amount of work needs to be done to the foreclosed property will greatly reflect on the asking price.
We'd love it if you would voice your opinion on this article on buying a foreclosed home.
Inspections of foreclosed homes present a particular challenge. Often, there is no source of water, no source of electricity, and no source of heat or air-conditioning. These conditions inhibit a full and comprehensive inspection of the home. Of course, the primary aspect of the home inspection is still the verification of the structural integrity.
Typically, bank owned properties are sold as is and the bank is typically unwilling to have non-functional systems made functional for the home inspection. Therefore, buying a home in foreclosure under these conditions is similar to buying a used car without the opportunity to drive the car.
Typically, foreclosed homes as well as homes sold in a short sale have deferred maintenance resulting in degraded conditions in the home. Foreclosed homes often have defects not typically found during a typical home inspection. These defects include pipe leaks which may result in the growth of mold/mildew, cracked, broken and clogged pipes, non-functioning water heaters, non-functioning heating systems, and non-functioning air-conditioning systems. Other problems more likely to be found are do it yourself expedient repairs which can sometimes result in hazardous conditions such as electrical hazards.
Finally, in foreclosed homes there may be removed components or even intentionally damaged components. Therefore, the inspection of a foreclosed home, or a home being sold in a short sale, is even more important than the inspection of a home under normal conditions. The fact that bank owned properties are not typically open for price renegotiation based upon issues found during the home inspection is not a wise reason for relinquishing your right to have a home inspection.
Getting a mortgage just keeps getting tougher, and many homebuyers are getting rejected for loans they could easily afford.
The issue: Tighter standards from Fannie Mae and Freddie Mac, the government entities that back mortgages made by banks.
A quarter of all mortgage loan applicants get denied for loans, according to the Federal Reserve. Many other potential homebuyers never even try to get loans.
Here are some of the reasons banks must turn down borrowers for mortgages:
Too few of the condos in your association have been sold
For Fannie/Freddie lenders to approve a mortgage to finance purchase of a condo, a large majority of the units — 70% — have to be already sold or under contract to individuals. Before 2009, the threshold was 51%.
If more than 30% are still owned by the company that built the complex or sponsored its conversion from rental units, the mortgage will be denied, no matter how qualified the buyer is.
Your debt is too high
Fannie and Freddie have also increased their emphasis on income relative to debt.
If someone's total debt payments exceed 45% of income, the mortgage will be denied. In 2009, the limit was 55%.
Using that as a hard and fast rule can penalize very qualified buyers, ones who should be able to meet their debt obligations.
Take, for example, a couple who wants to buy a second home as a rental. Two mortgage payments could easily push them past the 45% threshold, even though they'll have rental income and home equity.
The 45% rule can also hurt small business owners who have had a couple of bad years. Their incomes may be down relative to their debt, but they may have plenty of cash to keep from defaulting on a mortgage.
Missed payments on credit card debt
Fannie and Freddie also have gotten stricter in how they factor in missed payments on credit cards, auto loans and other debts in which the balances do not have to be paid off every month.
They used to be okay with a missed payment or two. Now, one missed payment will hit your debt-to-income ratio, because banks will add 5% of your outstanding loan balance to the debt part of the calculation.
That would be an extra $1,000 on a $20,000 student loan balance, for example.
The wait after foreclosure is extended to seven years from five
Some borrowers lost homes to foreclosure but then diligently rebuilt their financial health. Despite high credit scores, ample assets and income and steady employment, lenders are not allowed to finance their Fannie/Freddie mortgages if their foreclosures happened any time within the past seven years.
Before spring last year, the wait time was five years.
Of course, there may be other factors that cause a lender to deny you for a mortgage, but these are the basic deal-killers.
Talk to a lender and get pre-approved before even starting the home search process, and you may save yourself and your real estate agent a lot of wasted time if you're not going to qualify any way.
Tags: buying a home, home loans, mortgages
Owning versus renting is both a financial decision and an individual one. Arguably, renting provides more flexibility and freedom, the freedom to move when one wishes (depending upon lease terms of course) and where one wishes. As a renter, one has little or no real responsibility for repairs, maintenance, and other costly and time-consuming aspects that home ownership can bring. Ownership offers it's own advantages, including tax benefits and growth of equity.
A renter has little control over the property. While home ownership has its costs, it has its advantages as well. Owning a home provides the opportunity to gain equity in the property, which historically has contributed the largest portion of a families net worth. Consider that as a renter, one is essentially paying the landlord’s mortgage without the benefit of increased equity. Costs of ownership are potentially countered by tax benefits, depending on an individuals financial situation. While home ownership typically requires a large initial investment, significant responsibilities, and ongoing maintenance costs, for some people it can provide a feeling of stability and can help to strengthen one’s credit profile.
In a rational market, mortgage interest plus property taxes plus maintenance costs will roughly equal rent. However, with the impact to housing markets over the past few years, many experts cite that housing has dropped so much that the debate of owning versus renting is currently leaning toward home ownership. When housing prices are suppressed and interest rates low, it bears mentioning that while rents can typically increase year after year, the mortgage costs of a fixed-rate mortgage will remain unchanged over the term of the loan. The financial considerations are simply an analysis of the related cost of owning versus renting. One of the considerations that needs to be factored into the decision is the value of alternate investments that a renter may be able to put any excess funds into. If money spent on maintenance and paying down equity is invested wisely, can an alternative equity be created, and if so is it greater than the equity gained via the real estate market and home ownership?
To determine a preferred scenario, one should evaluate the local rental market to establish current rental rates, and also compile the estimates to consider the complete cost of ownership. Far too often, people neglect to include all the cost associated with a house and just focus on the mortgage. Remember that ownership costs can be any expenditure associated with possession and maintenance of the property.
Once the data is in hand, it is more likely that an informed decision can take place. Remember the financial and emotional magnitude of the decision to rent or own is a highly personal one. It is important to analyze the costs and financial benefits of both renting and owning to determine which is best for one’s own situation. The emotional benefits of either, be it the flexibility of renting or the stability of owning also need to be weighed, and in fact, may be the more critical factor for many.
If you have questions about how to best determine whether owning or renting is best for your individual situation, contact us. We'll be happy to sit down with you and go over the pros and cons of both to see which scenario would work best for you.
Tags: buying a home, owning a home, renting a home
If you’re in the process of buying a home for the first time, you’re probably wondering about what you can do to help make the mortgage closing process smoother. To do this, it’s important to understand your role as well as your mortgage lender’s role is in the home-buying process.
Your Mortgage Company’s Role
Your mortgage lender’s role is to make the home buying process as easy as possible. Your banker or loan officer has to ensure you understand all the terms and conditions of your loan before you close on your mortgage.
Your Role
Buying a home is a very complex and exciting and sometimes stressful process. Communication is very important and the easier it is for your mortgage lender to reach you, the smoother the loan process will be. Be sure to let your banker or loan officer know your availability to avoid miscommunications.
Also, make sure you let your mortgage lender know everything that could affect your eligibility for a loan (e.g. other properties owned, actual hours worked, sources of income, etc.) so they can serve you better.
Mortgage lenders grow through referrals, and they want to make sure you’re happy and satisfied with your experience so you tell your friends and family about it. If you have any suggestions, let them know! Any reputable company will be open to hearing about your thoughts.
Mortgage Closing Expectations
Typically it takes about 35 to 50 days from the time of signing an application to closing. If you’re interested in purchasing a short sale or a bank owned property, the closing date may be affected and it may take longer to close your loan.
Third Party Vendors
Keep in mind that mortgage lenders work with third party vendors who also impact the loan process, such as appraisers, title companies, real estate agents, etc. This means that sometimes the process may get delayed as further information is needed from them to close your loan.
Closing Costs
One great feature of VA loans and FHA loans is that the seller may actually cover closing costs. For other types of loans, the closing costs can be rolled into the mortgage. If none of these situations apply to you, you may need to have funds available to bring to closing to cover closing costs, taxes and insurance. These costs mentioned are in addition to your down payment, of course.
Some things that may be included in your closing costs are:
- Appraisal
- Flood Certification
- Tax Service
- Title Services
- Lender’s Title Insurance
- Owner’s Title Insurance
- Transfer Taxes
- Real Estate Agent Fees
- Filing Fees
- Prepaids or Escrow Reserves
- Pest Control Inspection
We hope this article helped you learn more about the roles and expectations of the lender and client during the mortgage closing process. Whenever you have a question do not hesitate to contact your mortgage lender. If you are just getting started in the process of shopping for a new home, contact us!
