Current historically low interest rates have contributed to a significant improvement in the housing market over the past few months. It was good news for housing when
data for pending home sales showed an unexpected 5.9% jump in May, 2012 vs. April, 2012. Many have taken this as a signal that interest rates are nearing their bottom, and will likely begin to increase over the next several months. In addition, while some area markets are stabilizing, the S&P/Case-Shiller Index of Property Values showed that the decline in home prices during the month of April, 2012 was at its lowest since November, 2010, indicating that although home prices are starting to stabilize and are soon expected to increase, they are still down even as the housing market sees some improvement.

“Investors are quickly swallowing new foreclosure supply, limiting shadow inventory and creating a floor for home prices,” Goldman Sachs analysts Joshua Pollard and Anto Savarirajan wrote in a note to clients. “We expect any further decline in inventory to serve as a platform for price appreciation, further aiding sales.”

"Shadow Inventory" refers to real estate properties that are either in foreclosure and have not yet been sold or homes that owners are delaying putting on the market until prices improve. Shadow inventory can create uncertainty about the best time to sell (for owners) and when a local market can expect full recovery. Also, shadow inventory typically causes reported data on housing inventory to understate the actual number of properties in the market. The fact that Shadow Inventory is being limited in combination with the foreclosure supply being reduced is an indication that the supply of real estate properties is truly declining.

This would certainly suggest that there will probably never be a better time to either buy another home or refinance your existing home. If you are considering going forward with either anytime in the near future, you should contact your mortgage loan officer to help assess your current situation and determine which options are available to you.

In February, 2013, Americans bought existing homes at the fastest pace in three years, as mortgage interest rates, remaining near record lows, continued to drive a housing market revival.

The median forecast of 77 economists surveyed by Bloomberg for existing-home sales called for an increase to a 5 million pace.   This was supported by data from the National Association of Realtors, which showed that purchases increased 0.8 percent to a nearly five million annualized rate, the most since November 2009.

Higher housing demand, combined with limited supply, is driving increased property values, resulting in gains in household confidence and wealth, which in turn are helping increase consumer spending.  The figures corroborate the Federal Reserve’s view that labor conditions are on the mend and residential real estate is picking up along with the broader economy.

Consumers’ views of the economic outlook brightened in March.   “Americans are growing more confident about their own financial and economic situations,” said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. “A quicker pace of employment growth, a modest wealth effect, and what looks to be a decline in gasoline prices has likely bolstered future expectations on the economy.”

“The fundamentals that usually drive housing activity, such as job growth and interest rates, those are favorable, and they suggest that we should continue to advance,” said Michael Moran, chief economist at Daiwa Capital Markets America Inc. in New York, who correctly forecast the February pace.  Still, “the inventories are said to be tight in many markets, and that’s holding sales back to a degree.”

Gains in home prices added $1.4 trillion to household wealth in 2012, and further appreciation this year will boost net worth by as much as $1.7 trillion, according to forecasts by Lawrence Yun, the National Association of Realtors® chief economist. The increase will lift consumer spending by anywhere from $70 billion to $110 billion in 2013, he predicted.

Resales, tabulated when a contract closes, accounted for about 93 percent of the residential market in 2012, when a total of 4.66 million previously owned houses were sold.  That was the most since 2007 and up 9.4 percent from 2011.

The strength in demand has bolstered sales of new properties as well.  Lennar Corp., the third-largest U.S. homebuilder by revenue, said orders rose in their fiscal first quarter.  “Current market conditions are driven by strong demand resulting from low interest rates and attractive home prices, which have led to very affordable monthly payments, compared to increasing rental rates,” Chief Executive Officer Stuart Miller said in a statement on March 20^th of 2013.  New orders, deliveries and backlog have “shown strong increases,” he said.

According to Zillow®, home values nationwide rose for the 16^th straight month in February of 2013 to a Zillow Home Value Index of $158,100.  In further support of the claims that the housing market is indeed recovering, the 30 largest metropolitan areas across the country covered by Zillow recorded both annual and monthly home value appreciation in February.

Below is a sampling from the Zillow Home Value Index for those 30 areas for the twelve months ending in February of 2013:

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• New York City, Boston, Miami- Fort Lauderdale, and Atlanta increased by an average of 5.7%

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• Chicago, Pittsburgh, and Cleveland increased by an average of 2.6%

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• Dallas-Fort Worth and St. Louis increased by an average of 4.6%

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• Los Angeles, San Francisco, Las Vegas, and Phoenix increased by an average of 17.8%

Bottom Line
It is extremely important for all people who are planning to buy a home in the near future to continue to keep in touch with your mortgage loan officer for advice and suggestions on how to be sure you stay on track for home ownership.

As most of us are already aware, homeowners get significant tax breaks that are not available to renters; however, tax laws are continually changing.  While accurate at the time of this writing, it is critical that the taxpayer verify the information provided herein with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

Mortgage interest rates are still near record lows, and home prices are still well off the peak prices of just a few years ago, so if you do not currently own your own home, now is an excellent time to become a homeowner.  

Mortgage Interest and Points Deduction
The U.S. tax code allows homeowners to deduct mortgage interest from gross income, which results in lower taxable income.  Additionally, some of the closing costs you paid when you purchased your home (e.g., origination points or discount points), may be deductible as well.  This may apply to mortgages on first and second homes as well as home equity loans, regardless of how the proceeds from the home equity loan are spent.

Property Tax Deductions
The U.S. tax code also allows homeowners to deduct real estate property taxes from gross income, which, like mortgage interest, results in lower taxable income.

Itemizing Deductions
Increasing total deductions to the point where it is advantageous to itemize them is another advantage that often results from home ownership. When you file your taxes, you have two options when claiming deductions that will lower your taxable income. You can claim a standard deduction, which is a flat amount determined by your filing status, or you can itemize your deductions.  If you are a homeowner, itemizing your deductions, including your mortgage interest and property taxes, often results in a lower amount of income that is subject to taxes.  This is especially advantageous during the first few years of your mortgage when you are paying significantly more each month in interest than you are in principal.  This can save you a substantial amount each year in federal and state income taxes. 

Example
If your mortgage payment consists of principal, interest, and property taxes of $1,200 per month, you will pay $14,400 in total payments over the course of a year.  If annual property taxes of $1,800 ($150 per month) are included in that payment, the remaining $1,050 monthly payment consists of principal and interest.  Since the majority of your house payment is interest in the first years, you will have easily paid at least $8,600 in interest during that year.  This interest payment, combined with the property tax paid, gives you $10,400 in home ownership-related deductions.  If you are in the 28% incremental tax bracket, this will either reduce your taxes by or provide you with a refund of more than $2,900 as a result of owning a home. You could easily have paid $1,200 each month in rent during that same period and would have no tax advantage whatsoever.  Any tax advantages as a result of being able to deduct some of the closing costs when you purchased your home would be in addition to this.

Preferential Tax Treatment Upon Selling
Another major advantage of home ownership is that, in most cases, you don’t have to pay taxes on any capital gains (profit) you make when you sell your principal residence, provided you (and your spouse, where applicable) have lived in that house for at least two of the previous five years.  The law, which was introduced by President Clinton, allows you to exclude from taxes up to $500,000 in capital gains (profit) from the sale of your principal residence for married taxpayers filing jointly and up to $250,000 for single taxpayers or married taxpayers who file separately.  This exclusion also covers the sale of a parcel of land adjacent to your house, unless it’s used for business.

These full exemptions can only be claimed once every two years.  Even if you don't meet the requirements for the above full exemptions, you may still be able to claim a partial exemption if you are forced to sell before you meet the two-year residency requirement due to some qualifying unforeseen event such as a job change, illness, death of a spouse, divorce, disaster, war or some other hardship.

For qualifying unforeseen circumstances, you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early.  For example, if you only live in your home a year (half the two-year requirement) before you are forced to sell because of some qualifying unforeseen event, you can exclude from taxes up to $250,000 (half the exclusion) in capital gains if you are married and file jointly or $125,000 for separate and single filers.

If you are fortunate enough to receive more profit on the sale of your home than the allowable exclusion, that "excess" profit will be considered long term capital gains, provided you owned your home for more than one year. Long term capital gains receive preferential tax treatment compared to ordinary income or short-term capital gains.

The New 2013 Real Estate Tax
A new 3.8% tax, which was passed in the final days of negotiating the Affordable Care Act that has come to be known as Obamacare, took effect at the beginning of 2013, and is intended to help fund the costs that will be incurred as a result of Obamacare.  It’s a 3.8% tax on certain profits made on selling real estate.

This new tax will NOT affect all Real Estate transactions, but it may effectively impose a tax on some interest, dividends and rents (less expenses), and capital gains (less capital losses).  The tax will only be applicable to married couples filing jointly with Adjusted Gross Income (AGI) higher than $250,000 and to single taxpayers and married couples filing separately with AGI higher than $200,000, although being in those high income brackets does not necessarily mean that you will be paying this tax.  Certain investment income above these income levels might be subject to the 3.8% tax on a portion of that income. Whether the tax applies or not depends on many factors having to do with the kind and amount of the total income the taxpayer(s) receives.

The $500,000/$250,000 exemption on capital gains from the sale of a primary residence is still in effect.  This means that profits from the sale of a primary residence under $500,000 for most married couples filing jointly and under $250,000 for most single taxpayers or married taxpayers filing separately are still exempt from the capital gains tax.  Just to be clear, it's capital gains (profits), not the sale proceeds.

The new tax adds an additional 3.8% surtax to those transactions if you exceed those exemption amounts for all applicable capital gains, but only for those taxpayers whose AGI exceeds the $250,000/$200,000 AGI levels outlined above, and only for the amount that exceeds the $500,000/$250,000 exemption.

Again, tax laws are continually changing.  While accurate at the time of this writing, it is critical that the taxpayer verify the information provided herein with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

Bottom Line
When you consider that you can often finance a home and keep your monthly payments to approximately the same amount you pay in rent each month, it's still true that you can really come out ahead with home ownership.

Housing Starts
Housing starts rose to their highest rate in more than four years in October of 2012.  U.S. builders started construction last month on the most housing units since July of 2008.  The Commerce Department said that builders broke ground on homes in October at a seasonally adjusted annual rate of 894,000. That's a 3.6 percent gain from September.  The median forecast of 82 economists expected groundbreaking to slow to an 840,000 pace.  Housing starts are 87 percent above the annual rate of 478,000 in April of 2009, which was the recession low, providing more evidence that the housing market has decisively turned around after an unprecedented collapse that landed the economy in its worst recession since the Great Depression.

The recovery, marked by rising home sales, prices and building activity, is being driven by pent-up demand, record low mortgage rates, and a lower risk that property values will keep falling, and is expected to continue to attract buyers.  In addition, permits for the construction of single-family homes also advanced to the highest level in four years.

A steady rise in the number of U.S. households, which fell during the 2007-2009 recession as financially strapped Americans moved in with friends and family, is also supporting the housing sector.  Economists at Goldman Sachs estimate that household formation -- the net increase in the number of households each year -- will increase to a 1.2 million rate in 2013 from 1 million currently.  They forecast housing starts rising from the current monthly rate (894,000) to 1 million by the end of next year and 1.5 million by the end of 2016.

The Federal Reserve has targeted housing as a channel to boost U.S. growth, announcing in September that it would buy $40 billion in housing debt per month to keep down borrowing costs.  "It seems likely that, on net, residential investment will be a source of economic growth and new jobs over the next couple of years," Fed Chairman Ben Bernanke said recently at the Economic Club of New York.

Builder Confidence
Builder confidence rose to its highest level in six and a half years, according to a survey by the National Association of Home Builders/Wells Fargo. Their index of builder sentiment rose to 46 this month, up from 41 in October. It was the highest reading since May 2006, just before the housing bubble burst.

The index has been rising since October 2011, and has surged 27 points in the past 12 months, the sharpest annual increase on record.

Home Sales
Sales of previously occupied homes rose 2.1 percent to 4.79 million in October, the National Association of Realtors said.  Sales are near their highest level in five years, excluding temporary spikes in 2009 and 2010 when a homebuyer tax credit boosted purchases.

A key factor fueling the gains is a gradually improving economy, which has increased the number of people looking for homes.  At the same time, fewer homes are available for sale, which is helping to push up prices.

As mentioned previously, mortgage rates have hit all-time lows; at the same time, rents are rising, making the purchase of a single-family home or condominium more attractive.

The Federal Housing Administration, or FHA, was established during the Great Depression with the primary objective of making home ownership possible for more people.  FHA mortgages are backed by the Federal Housing Administration in case you default on the loan.  The FHA does not actually lend people the money to buy a home – the FHA guarantees the loan, so if a borrower defaults on his mortgage, the FHA will reimburse the lender.  Mortgages obtained on the private market without FHA help are known as "conventional" mortgages.  With a conventional mortgage, lenders do not have the same guarantee.

Fannie Mae and Freddie Mac are also government sponsored enterprises (GSEs). Their objective is to provide stability and liquidity to the U.S housing and mortgage markets. These GSEs also do not lend directly to borrowers, but they help to ensure that the banks and mortgage companies have funds to lend at affordable rates. These types of loans are typically conventional loans.

In the past, FHA was viewed as an alternative form of financing for those with credit problems. However, because the conventional guidelines have become extremely restrictive, many people with excellent credit but lacking the 5% down payment to meet the conventional requirement are turning to FHA loans for home financing.

Conventional and FHA loans are similar, but there are important differences.  While this article addresses the primary differences between FHA and Conventional loans at the time it was written, changes to both programs are continually being made.  It is recommended, therefore, that you contact your loan officer in order to determine the best program for your situation.

The U.S. Department of Housing and Urban Development Web site (www.hud.gov) can help you find HUD-approved counselors in your area who can answer your specific questions regarding FHA loans.

Credit History
The FHA tries to help those with no established credit history and those with a less-than-excellent credit history.  The credit qualifying criteria for a borrower are not as strict for an FHA loan as for a conventional loan.  Also, borrowers who do not have an established credit history or credit score, or have a reasonable explanation for a few "credit problems", may still be eligible to qualify for an FHA loan if they can show a history of on-time payments with utility companies or other companies.

People with an excellent credit history will typically find it easier to qualify for conventional loans than those with shakier credit histories.  There is no credit score above which you are guaranteed to qualify for a conventional loan, but a score of 720 is generally considered excellent credit.  If a score is below the minimum standard, the borrower will be denied qualification, or may be offered a sub-prime loan with a higher interest rate.

The FHA uses a credit score of 620 to determine whether you can qualify automatically for a loan, but a credit score below 620 does not necessarily disqualify you, as it might with a conventional mortgage.  The minimum credit score that most lenders will allow on an FHA loan is 580.

Down Payment
The FHA requires a down payment of at least 3.5% for its guaranteed loans, though some lenders may require you to put down more money.  The minimum down payment on a conventional loan is 5% - 10%, although some lenders require down payments of as much as 20 percent.  On a positive note, the larger down payment means you will probably gain equity in your home more quickly with a conventional loan.  For a down payment of 5% to 10%, most lenders are requiring that the borrower have a minimum credit score of 720.

For an FHA loan, you might not have to come up with the down payment yourself.  It can be a gift from a family member or friend, although it cannot come from anyone who would benefit from the transaction, such as the home seller.  A conventional loan may require you to pay the down payment out of your own funds.

On a conventional loan, the seller can pay up to 3% of the purchase price toward the buyer's closing costs; however, they can only pay the non-recurring costs. They are not allowed to pay the recurring costs such as taxes, insurance or pre-paid interest.  On an FHA loan, the seller can pay both recurring and non-recurring costs.


Debt-to-Income Ratios
FHA loans have higher limits for debt-to-income ratios than conventional mortgages, meaning your monthly mortgage payment can take up a larger percentage of your monthly income.


Loan Limit
A drawback to FHA loans is that there is a maximum loan amount set.  The FHA sets limits on mortgage amounts by county, meaning that areas with higher real estate prices will have higher FHA loan limits.  If you want to buy a home that is above the FHA limit in your area, you will either have to make a larger down payment or try to qualify for a conventional, subprime, or other type of mortgage.  In general, conventional mortgage lenders do not place limits on the amount they will lend.

Mortgage Insurance
The biggest disadvantage of FHA loans is the mortgage insurance premium (MIP).  The FHA gets the money it uses to reimburse lenders when borrowers default from the borrowers themselves.  People who take out FHA loans with a down payment of less than 20 percent must pay insurance on the mortgage.  Speak with your loan officer regarding the requirements for removing the MIP.

Conventional loans may require insurance as well, which is called private mortgage insurance (PMI), but the rates will usually be lower than the FHA MIP rates.  In addition, on a conventional loan, you generally pay premiums for a shorter time, because of your larger down payment, and you pay premiums only until you reach 20 percent equity in your home.  Speak with your loan officer regarding the requirements for removing the PMI.

Other Considerations

1)  FHA loans are assumable, i.e., you can transfer your loan to the new owner if you sell your house, which allows the new owner to take over your FHA loan without having to incur the cost of obtaining a new loan.  In order to assume the loan, the buyer must meet the current credit standards for the loan.  This feature can make it easier to sell your home.  Your loan officer can explain the current rules for assuming an FHA mortgage.

It's very likely that interest rates will rise after the economy recovers, and having an assumable mortgage can be a great benefit for you if you decide to sell your home and the interest rates are several points higher than they were when you opened your mortgage. In addition to increasing the likelihood that your home will sell more quickly, it's not unreasonable to expect that homes with FHA financing will command a premium sales price in the resale market over the next seven to ten years.

2) There is also an Energy Efficient Mortgages program that allows homeowners to finance adding energy-efficient features to new or existing homes as part of either their home purchase or FHA refinancing.

3) Another benefit of an FHA loan is that a non-occupant co-borrower is allowed to co-sign on the loan.  The income of both the borrower and co-borrower will be combined and used for qualifying.

On a conventional loan, the owner occupant must qualify at the established debt ratios unless higher ratios are approved by the Automated Underwriting System.

4) Many loan products, including conventional loans, have pre-payment penalties, whereas FHA loan do not have such penalties.  In fact, FHA loans can be easily refinanced under the Streamline program.

 

By purchasing a home, you are moving in the direction of increasing your financial security; you are actually taking part in an investment that can appreciate similar to stocks or bonds.  When you first purchase your home, your down payment is your only stake.  With adequate maintenance, a home will usually increase in value each year.  And, of course, improvements to make the home more comfortable for you, will typically also add to the equity.  Equity is the difference between the market value of the property and the amount of the mortgage.

Probably the biggest advantage, though, is the fact that the principle you pay on the mortgage is like putting money in the bank, in the form of equity.

Building Equity
Since interest rates on home equity loans are generally lower than interest rates on most other types of loans, many people use home equity loans to pay down short-term, higher-interest debts, resulting in a savings for the homeowner.  Another advantage of doing this is that interest paid on home equity loans is usually tax deductible.

Like any investment, the real estate market fluctuates.  However, if you're in it for the long term, the value of your property is likely to appreciate over time, and contribute to your overall wealth.

When you purchase a home with a fixed-rate mortgage, except for relatively minor adjustments due to rising costs of insurance or property taxes, your payments will remain the same over the entire life of the loan, even as the housing market fluctuates.   As a renter, you would be likely to see rent increases in the range of 4% to 6% per year.   Such annual increases would result in rental rates that double every 12 to 18 years.  Clearly, owning your own home can result in significant savings.

One possible use for all these savings could be to make additional principal payments and therefore build equity in your home even more quickly.

Another benefit of building this equity is that it can help you make home improvements, invest in other properties, trade up to a nicer house, or finance major purchases such as a college education or a new car.

Tax Benefits of Home Ownership
While accurate at the time of this writing, it is critical that the borrower verify the information provided regarding tax benefits with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

When tax time rolls around, you have the benefit of being able to deduct the interest paid on the mortgage throughout the year, and if you have paid discount or origination points, you are able to deduct these as well.

When you decide to sell your home you probably won't have to pay tax on the proceeds (assuming it's your primary residence).  If you've lived in your house for two of the past five years, up to $500,000 (if you're married and filing jointly) or $250,000 (if you're single or married and filing separately) of your profit from the sale of your principal residence will be tax-free.

Conclusion
Clearly, owning your own home can be an excellent investment and a great way to increase your overall wealth.

 

Homeowners get significant tax breaks that are not available to renters; however, tax laws are continually changing.  While accurate at the time of this writing, it is critical that the borrower verify the information provided herein with either the Internal Revenue Service or an accounting professional for advice on your particular tax situation.

Mortgage Interest and Points Deduction
The U.S. tax code allows homeowners to deduct mortgage interest from gross income, which results in lower taxable income.  Additionally, some of the closing costs you paid when you purchased your home (e.g., origination points or discount points), may be deductible as well.  This may apply to mortgages on first and second homes as well as home equity loans, regardless of how the proceeds from the home equity loan are spent.

Property Tax Deductions
The U.S. tax code also allows homeowners to deduct real estate property taxes from gross income, which, like mortgage interest, results in lower taxable income.

Itemizing Deductions
Increasing total deductions to the point where it is advantageous to itemize them is another advantage that often results from home ownership. When you file your taxes, you have two options when claiming deductions that will lower your taxable income. You can claim a standard deduction, which is a flat amount determined by your filing status, or you can itemize your deductions.  If you are a homeowner, itemizing your deductions, including your mortgage interest and property taxes, often results in a lower amount of income that is subject to taxes.  This is especially advantageous during the first few years of your mortgage when you are paying significantly more each month in interest than you are in principal.  This can save you a substantial amount each year in federal and state income taxes.

Example
If your mortgage payment consists of principal, interest, and property taxes of $1,200 per month, you will pay $14,400 in total payments over the course of a year.  If annual property taxes of $1,800 ($150 per month) are included in that payment, the remaining $1,050 monthly payment consists of principal and interest.  Since the majority of your house payment is interest in the first years, you will have easily paid at least $8,600 in interest during that year.  This interest payment, combined with the property tax paid, gives you $10,400 in home ownership-related deductions.  If you are in the 28% incremental tax bracket, this will either reduce your taxes by or provide you with a refund of more than $2,900 as a result of owning a home. You could easily have paid $1,200 each month in rent during that same period and would have no tax advantage whatsoever.  Any tax advantages as a result of being able to deduct some of the closing costs when you purchased your home would be in addition to this.

Preferential Tax Treatment Upon Selling
Another major advantage of home ownership is that, in most cases, you don’t have to pay taxes on any capital gains (profit) you make when you sell your principal residence, provided you (and your spouse, where applicable) have lived in that house for at least two of the previous five years.  The law allows you to exclude from taxes up to $250,000 in profit from the sale of your principal residence for single taxpayers, or married taxpayers who file separately -- $500,000 for married taxpayers filing jointly.  This exclusion also covers the sale of a parcel of land adjacent to your house, unless it’s used for business.

These full exemptions can only be claimed once every two years.  Even if you don't meet the requirements for the above full exemptions, you may still be able to claim a partial exemption if you are forced to sell before you meet the two-year residency requirement due to some qualifying unforeseen event such as a job change, illness, death of a spouse, divorce, disaster, war or some other hardship.

For qualifying unforeseen circumstances, you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early.  For example, if you only live in your home a year (half the two-year requirement) before you are forced to sell because of some qualifying unforeseen event, you can exclude from taxes up to $250,000 (half the exclusion) in capital gains if you are married and file jointly or $125,000 for separate and single filers.

If you are fortunate enough to receive more profit on the sale of your home than the allowable exclusion, that "excess" profit will be considered long term capital gains, provided you owned your home for more than one year. Long term capital gains receive preferential tax treatment compared to ordinary income or short-term capital gains.

Bottom Line
When you consider that you can often finance a home and keep your monthly payments to approximately the same amount you pay in rent each month, you can really come out ahead with home ownership.

 

When it comes to making that move, either into buying a home for the first time, or moving up into another home, you'll need to establish a solid plan for yourself.

Determine Your Financial Situation
You need to determine whether you have enough money saved up to cover the down payment and the closing costs, and whether you'll have enough income to cover the new mortgage payment and all of your other bills. This will determine the price range of a home which you're capable of buying.

Once you have a realistic target in mind, you can start working toward an actual goal. This involves three views:

1. Your income -- This includes all income, from all sources, less any taxes you’ll owe on that income.
2. Your assets -- This includes only highly liquid assets – in other words, money in checking and savings accounts, stocks and bonds, mutual funds, etc. It does not include assets held in IRAs or 401(k)s.
3. Your liabilities -- This includes credit card debt as well as monthly payments, such as automobile loans, or alimony payments.

This will enable you to determine how much you can afford right now as a down payment, and how much you can afford as a monthly mortgage payment. The difference between where you are now and where you want to be is what you need to work on.
Your loan officer will be happy to help you determine your monthly mortgage payment. As a Nestablish customer, you can also use the free Nestablish mortgage calculator, which is specially designed to determine the total monthly payment a buyer can expect, by taking into account mortgage insurance, real estate taxes, HOA assessments, homeowners insurance, and other factors. This is a great way to determine your price range, based on your budget and your ability to pay the mortgage each month.

There are two steps to take in order to get from where you are now to where you want to be:

1. Increase your savings, if necessary, for the down payment. Figure out exactly how much extra you need, how long you have until you actually want to purchase a home, and simply divide the total you need to save by the number of pay periods you will have between now and then. For example, if you need to save $5,000, are paid bi-weekly, and you want to buy a home in one year, you will need to save approximately $200 each pay period.
2. The second step is to figure out by how much you need to reduce your regular monthly spending in order to be able to afford the monthly mortgage payment. Start by creating a budget, and grouping your spending into categories such as eating out, entertainment, utilities, etc. Then figure out where you can cut back. For example, ask yourself how much you are spending on gifts. Consider making some presents instead of buying them. Are you spending a lot on phone calls or your cell phone bill? Try to call during cheap or free rate times, and take a close look at your cell phone bill to determine whether you can cut back on some of the features for which you are being billed; use e-mail more.

It is never easy to cut back, but sometimes the only way you’ll be able to afford the home you really want is if you figure out where you are right now, and make the adjustments that will get you to where you want to be. If you already have a mortgage payment, simply increase the amount you allocate to make your current payment to the amount of the predicted monthly mortgage payment, and save the difference.

You should also calculate your debt-to-income ratio, which shows the amount of your income that goes toward paying your debts. The higher your ratio, the less likely you will qualify for a home loan. This can help you determine whether you can get a mortgage before you spend time searching for your home. If your debt-to-income ratio is more than 36 percent, you should think about getting out of debt, or at least reducing your debt immediately.

Please visit the following blog posting and read the article titled "Calculating Your Debt Ratio" to find out how to calculate your debt ratio:
https://blog.nestablish.com/home-buyers/debt/.

Review Your Credit
Your mortgage lender will obtain copies of your credit report and credit score to determine how much they're willing to loan you. It makes sense to conduct your own credit review, long before you submit your first mortgage application. Please visit the following blog posting and read the article titled "Credit Scoring Models" to find out how to get your credit score and your free annual credit reports:

In a previous post, we suggested paying bills down by paying all bills on time, and by paying more than the minimum amount due on the bill with the highest interest rate.  While this is an excellent strategy, it is only one of many that can be used to pay down your debt.  In this post we will present several other good strategies for getting your debt paid down.

Do not Acquire New Debt
When trying to pay down your debt, do not apply for new credit cards or loans until you have brought your finances back in order.  Also, during this time, avoid using your credit cards when you're making a purchase.  Instead, use cash, checks or debit cards to pay for a purchase.  It's difficult enough to pay down credit card debts even when you're not accumulating new debt.

Balance Transfer
Consider transferring the balances on high interest credit cards to a card having a low interest rate.  You may be able to consolidate multiple credit card payments into a single payment.  In case you don't have a low interest card, you may want to look for one.  You may even get a card with a 0% introductory rate.  However, you need to check the duration for which the introductory rate would remain at the low rate.  If it's quite long, then you'll probably have enough time to pay off a good chunk of your credit card bills at the low rate of interest. That could save you a lot of money in interest charges.

If you request a balance transfer, ask your creditor if they charge a fee for the transfer. Request that the fee be waived as a one-time courtesy.

Before you act, however, be sure to examine the offer closely.  If the interest rate after the introductory period is higher than the rate you're paying now, you may have to switch again at that time.  Be aware that banks have caught on to the charge card hoppers who switch from card to card to take advantage of the low introductory rates.  Many of these offers now stipulate that if you transfer balances from the new card within a 12-month period, the normal interest rate will be applied to all outstanding balances retroactively. That could result in wiping out all or most of the benefit of the balance transfer.  Be sure to read the fine print.

Pay Off the Lowest Balance First – The “Snowball” Effect
A tactic many employ is to pay smaller bills off first, then take that payment savings to attack other bills.  Here’s how it works -- start with the account having the lowest balance and make extra payments (pay more than the minimum) toward it every month.  Continue to pay the minimum amount due on other accounts.  As soon you pay off the account with the lowest balance, move on to the account with the next lowest balance and repeat the same process.  While this approach may not get all your bills paid off as quickly as directing the additional payments to the card with the highest interest rates, it can provide the reinforcement you need in order to continue making the additional payments by seeing your accounts paid off more quickly.

Use Savings and Investments
It sometimes makes sense to make withdrawals from your savings and investments and use the proceeds toward debt repayment, particularly when the after-tax return on the savings or investments are lower than the after-tax interest rate expense on your debt.  With most savings accounts currently paying extremely low interest rates and most other investments earning very low or even negative returns, this is often the case now.   As an example, if you are in the 25% tax bracket and you are paying interest rates of 15%, unless the return on your investments is more than 20% before taxes, it may make sense to use those funds to pay down your debt; and these days, very few savings or investment accounts are earning anything near 20%.  Using those funds to pay off that debt is essentially the same thing as earning that 20% return without any risk on your part.  In general, the higher the interest rate on your debt, the more attractive using savings and investments to pay off your debt becomes.

Borrow from Your 401(k)
If you have a 401(k) plan you may be aware that most such plans have a feature that lets you borrow against the retirement account.  Interest rates are usually much lower than the rates on credit cards.  Thus, 401(k) plan loans may be a good source of funds for paying down debt.  Another benefit to this approach is every penny in interest paid on a 401(k) loan goes directly into the borrower's 401(k) account, not to the administrator of the account.

But there are drawbacks to borrowing from your 401(k).  The loan and interest will be repaid with after-tax dollars, and the interest you paid will be taxed again when you withdraw money from the 401(k) years later.  Additionally there are other potential issues you should be aware of such as limits on terms, repercussions if you leave your employer, etc.  We recommend speaking to a CPA if you’re seriously considering this approach.

Borrow Against Your Insurance
If you have life insurance with a cash value, consider taking out a loan against the policy to apply toward reducing your debt. The interest rate on such a loan is typically well below the commercial rates.  In order to avoid a benefit reduction, however, be sure to repay it as soon as you are able.  If you were to pass away before the loan is paid off, the outstanding balance plus interest would be deducted from the face value of the insurance, and only the remaining balance of the benefit would be paid to the beneficiary.

Borrow from Family or Friends
Perhaps you have family or friends who could provide you with a loan.  If so, there's a good chance that they would be willing to give you a very favorable interest rate.  They may even tolerate a late payment or two.  But you should always have a written agreement, in which the interest rate and repayment schedule are clearly spelled out in order to avoid any misunderstandings.  Also, be sure to strictly adhere to that schedule

Change Your Lifestyle: If you're thinking of using credit cards to cover your daily expenses (such as gas, utility bills and groceries), it's probably time to change your lifestyle.  Find a part-time job, use public transportation as much as you can, and consider relocating to a less expensive home, before resorting to using credit cards for your daily expenses. You may also be able to sell some of your old items online in order to earn some extra cash to help repay credit card bills.

Renegotiate Terms with Your Creditors
If you've done all you can, i.e., savings and investments are gone, you don't have anything left in a 401(k) to borrow against, and you've borrowed all you can from friends and relatives, what's left?  Seek legal protection?

Let your creditors know your situation. Tell them that if you are unable to renegotiate terms, you'll have no other recourse but to declare bankruptcy.  Ask for a new lower repayment schedule and/or request a lower interest rate.  Your creditors want to receive payment; faced with the possibility that you may seek legal protection, they will do what they can to protect themselves against a total loss.  It's worth a try.  If you don't wish to do this yourself, there are organizations that can help you do it.

When you succeed in paying off your accounts and the balances reach zero, consider contacting your creditors to close the accounts one-by-one.  However, if you're thinking of buying a home or a vehicle, or making other major purchases in the near future, avoid closing the accounts because it will reduce the length of your credit history and reduce your credit score. This in turn, will adversely affect your chances of qualifying for a loan with the best possible terms and conditions.  So, depending upon your financial goals, you may not wish to close your accounts immediately after you've paid off the balances.  Just avoid incurring more charges on those accounts until you're in better control of your finances.

Making your money work is a very important aspect of saving money and building wealth. One way to facilitate this is by setting up an online savings account. For the most part, online savings accounts function in the same way as normal (brick-and-mortar) bank savings accounts. However, in the case of online savings accounts, you do not ever have to visit a bank physically in order to transact business. Online savings accounts offer a number of advantages -- in the past few years, millions of people have signed up for them. As you might expect, there are also disadvantages of online savings accounts.

Advantages of Online Savings Accounts

• The single biggest advantage of dealing with an internet-only bank is that since they do not have to deal with the expense of having branch locations, they generally have lower costs and are able to pass on their savings in the form of higher rates of return on savings accounts, usually significantly higher rates, than brick-and-mortar banking institutions.
• In addition to the interest rate, another important factor to consider when you compare savings accounts is minimum balance requirements. Some banks require consumers to keep a minimum balance in an account to avoid any type of maintenance fees or other service fees. In addition, some banks also require that a minimum deposit is required to open an account. For some banks, this amount can range from several hundred to several thousand dollars. Although this is not a major obstacle for some people, it may be more than some people are able or willing to deposit. This is especially true if the savings are intended to be for short-term rather than long-term use. Online savings accounts typically require much lower minimum opening and ongoing balances (some have no minimum balance requirement) than traditional savings accounts in order to avoid fees; and fees are generally much lower for those who do have fees.
• There are a number of ways to deposit funds into your account. A check can be mailed in to the bank or the ACH (Automated Clearing House) debit facility may be used, which allows one to transfer funds from an existing account without having to make a trip to the post office or the bank. It is extremely easy to transfer funds between an existing account in a brick-and-mortar bank and an online savings account.
• Many online banks also provide the ability to send free demand drafts or money orders online, free electronic funds transfer, and bill payment. 24-hour access for services or transactions and consolidated statement of accounts add to the convenience of online savings accounts.
• You don’t really need to be particularly computer savvy to operate an online account; and the higher interest rates and convenience are often worth the effort of learning to understand the computer better. The interfaces in general are very easy to use.
• With so many choices, it shouldn't be hard to find an online savings account that meets your needs. There are online savings accounts that not only offer a competitive interest rate, but also require no minimum balance. If you have a lot of money to invest, you might want to look at one of the savings plans that requires a higher balance in order to avoid fees, but also offers a higher interest rate than do the plans with no minimum balance requirement. Spend a little time doing some homework, and with some informed savings account comparisons you may be able to find just the right banking institution for you.

Disadvantages of Online Savings Accounts

• Many people hesitate to sign up with internet-only banks because they are intimidated by the internet. If you still feel nervous about making online purchases, then internet banking may not be for you. 
• After the initial sign-up with an internet-only bank, you usually have to wait several days for a direct-deposit verification.
• It can take a few days to transfer money from your brick-and-mortar bank account to your online bank account and vice versa.
• Even though online banks use the highest online security standards, you are transmitting sensitive information over the Internet. If your username and password are stolen, someone could have access to your account information. Users need to be aware of phishing scams and other scams to protect themselves. In addition, hackers, viruses, stolen passwords and system malfunctions can potentially interrupt access to your online funds for days. Traditional brick-and-mortar banks are generally less susceptible to such attacks, and require documented proof of identity to grant account access. Identifications such as licenses and passports are much harder to counterfeit or duplicate than computerized passwords.
• Online bank accounts are usually only accessible by means of electronic devices, such as a smartphone, computer, tablet, or ATM. In the event you find yourself with a dead battery, a power outage, a broken computer, etc., accessing the funds in your online bank account can be extremely difficult, if not impossible.
• Keeping funds in a brick and mortar bank account normally allows individuals much quicker access to cash than do internet-only banks in the event of an emergency. Having a bank account with a nationwide chain of brick-and-mortar banks can also allow you immediate access to funds when traveling via ATMs, often without fees, or with relatively small fees.
• Many online banks are not directly affiliated with ATM networks, which results in many ATM transactions being accompanied by large fees. Many online banking customers are required to pay a withdrawal fee to both their online bank and the physical institution whose ATM they are using.
• Customer service for online banks is often outsourced to call centers or automated phone systems, which can be frustrating to interact with and difficult to understand. Online banking customer service often has lengthy hold times, particularly during times of system malfunction when many customers are calling in. Traditional brick-and-mortar tellers allow for easier face-to-face communication when you have questions or concerns. Additionally, consultants and loan officers at brick-and-mortar banks can more easily offer individualized advice to customers in a way that online banks cannot.

No Longer an Advantage of Online Savings Accounts

• A few years ago, online savings accounts also had the advantage of being able to conduct many more of the transactions typically performed by users than brick-and-mortar institutions without the need to use mail or physically go to the bank. Traditionally, banks fixed working hours during which they operated and people had to travel all the way to the bank from wherever they lived to open accounts, make deposits, withdraw money or for any other banking needs. Any emergency need for banking, except for ATM transactions, had to wait until morning when the bank opened.
• Things are different now. With the increase in competition, many brick-and-mortar banks have also begun to offer online banking services, as well as all the associated transactions, to afford as much convenience as possible to their clients, as a way to attract new customers or retain existing customers. With the advent of the internet, customers can transact their business via accounts with brick-and-mortar banks while they sit in the comfort and convenience of their homes.

A typical real estate purchase transaction varies somewhat with the various state laws and regional customs and is quite complicated, requiring high levels of understanding about the process.  Knowing what is involved can help both buyers and sellers by taking a lot of stress and guesswork out of the process.  The following steps are usually involved in such a transaction:

1. Prearranging Financing

The buyer will usually prearrange financing.  A loan preapproval makes the process go quickly and smoothly, while at the same time letting the buyer know the limit of his financing, and hence, the maximum price of the property he can purchase.  Most real estate agents prefer to have your preapproval in hand prior to showing you property.  Don’t take this as a negative; understand that if you’re financing your new purchase, today’s mortgage market is much more restrictive than mortgage markets were in the past.

2. Finding a Property

A buyer typically will meet with a buyer's real estate agent to represent his interests, but sometimes will contact the selling agent directly from the listing.  Working with a buyer's real estate agent can help you determine locations, past property values, and price ranges that would fit within your buying power.

Researching a property prior to scheduling a viewing will save you time and money in the long run by narrowing down properties in which you will have the highest level of interest, and weeding out properties that will not meet your needs.  Real estate agents have resources available to them that the average buyer does not have.  They can help you by preparing a complete market analysis of only those homes within your search area that meet your search criteria and provide professional guidance on which properties would be the best fit and why.

3. Making an Offer

Once a property is found, the real estate agent will prepare an agreement to purchase the home, based on your criteria and buying power, ask you to sign it, and then submit it, along with earnest money, to the seller's agent for review.    A good real estate agent will guide you on making an aggressive offer based upon the property itself, the location of the property, recent sales of similar properties in the area, and other relevant criteria, while ensuring that the offer is not so aggressive as to insult the sellers of the property, thus prompting an abrupt "no" as an answer.

The seller's agent will then prepare an estimate of settlement costs for their seller and submit the offer along with an estimate of the charges and proceeds that the seller will receive. This estimate will often be the determining factor on whether or not the seller accepts the offer on the property as is, or whether they would like to counter.

4. Counter and Acceptance

Expect to receive a counter offer on the property.  With an aggressively placed offer, the seller will often counter with their best price as well as the best deal on the property in question; sometimes, however, more than one pass is required in order to reach agreement.  Once you have reached agreement, you can begin the next phase of the purchase, which is acceptance of the counter offer.

Once the counter offer has been accepted, the contract will be taken to the pre-selected title company to open up escrow on the property. This begins the process of transfer of ownership from the seller to the buyer.  At this time, the contract is also presented to the lender for the buyer to begin the final work-up of the loan and make the necessary closing preparations.

5. Inspections and Appraisals

Once the sales contract has been accepted by the seller, the buyer typically has ten days to have the property inspected and appraisals performed.  This is commonly known as the option period.   Findings during the inspection and appraisal can result in requests to have defects corrected or adjustments made to the selling price.

If the seller is unwilling or unable to make adjustments based on this information, the buyer is not obligated to complete the purchase during the option period and can walk away from the purchase at that time. If a proper inspection is not performed, the buyer becomes obligated to the transaction, based on the accepted offer, regardless of the condition of the property.  At the end of the option period, if all aspects are agreed upon and accepted, the transaction will move forward.

As part of the appraisal, the property is often surveyed to ensure its description in the title is accurate.  If the appraised value of the property is not equal to or higher than the purchase price, the loan will not be approved, often resulting in further negotiations over the selling price, or requiring the buyer to make a larger down payment.

At the end of the option period, once repairs have been agreed to and other items addressed from the inspection and appraisal reports, the transaction moves into a pending status.

6. Pending and Closing

During this period, the buyer arranges for homeowners insurance as required by the lender, which is often paid monthly as a portion of escrow payments to the mortgage lender.  If the buyer has not had the property inspected, the insurance company may require inspection of the property to ensure compliance with electrical and fire codes.  This sometimes requires updating electrical wiring, plumbing, adding smoke detectors, etc.  Distance to the closest fire hydrant, and qualifications of the local fire department are often factors in determining whether the property can be insured and at what rates. The mortgage lender may or may not require flood insurance and/or earthquake insurance.

The title company searches the records of the office of the recorder of deeds, usually found in the county courthouse, to find any documents that may address the property being sold.  The previous mortgage holder will have a lien, unless the mortgage has been paid off, which would also be recorded in the recorder's office records.  The title company checks to see that the title is clear of any outstanding liens and brings the title up to date. In some states, title abstracts summarize the complete ownership history of the property.  Finally, most lenders require title insurance, which insures against an undetected claim such as a long lost relative who claims to have inherited an interest in the property.

During this time, the lender processes all final documents for the transaction and prepares them for the title company. The title company will act as an independent third party to the transaction and will prepare all of the deed and finalized loan documentation for the buyers and sellers of the property. Once all documents have been received by the title company, the buyer and seller are clear to close on the property and can schedule a closing appointment.

Closing appointments typically take between one and three hours, depending on the details of the transaction.  Once the closing is completed, the lender will wire the funds to the title company to complete the purchase, and the title company will disburse the amounts accordingly to the seller and to the new owner of the property and/or the lender.   At this point, the title is transferred from seller to buyer, the buyer will receive the keys, and the transaction is considered closed.

Finally, the title is recorded in the recorder's office by the title company.

Your credit report contains information about where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy.  A good credit rating is very important.

If you've ever applied for a credit card, a personal loan, or insurance, there's a file about you.  Companies that gather and sell this information are called Consumer Reporting Agencies (CRAs).

To find the CRA(s) that have your consumer report, search online under "credit" or "credit rating and reporting".  Since more than one CRA may have a file on you, contact each one until you have located all the agencies maintaining your file.

The most common CRAs are the three major credit bureaus: Equifax, Experian, and Transunion.  CRAs sell information to actual and potential creditors, employers, insurers, and other businesses in the form of a consumer credit report.

Businesses inspect your credit history when they evaluate your applications for credit, insurance, employment, and even leases. They can use it when they choose to give or deny you credit or insurance.  Sometimes things happen that can cause credit problems: a temporary loss of income, an illness, even a computer error.  Resolving credit problems may take time and patience, but it doesn’t have to be an ordeal.

Your credit report can influence your purchasing power, as well as your ability to get a job, rent or buy an apartment or a house, and buy insurance.  When negative information in your report is accurate, only the passage of time can assure its removal.

A credit reporting company/CRA can report negative information for seven years and bankruptcy information for ten years.  Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.  There is a standard method for calculating the seven-year reporting period. Generally, the period runs from the date that the relevant event took place.

There is no time limit on reporting information about criminal convictions, information reported in response to your application for a job with an annual salary of more than $75,000, or information reported because you’ve applied for more than $150,000 worth of credit or life insurance.

Anyone who takes action against you in response to a consumer credit report supplied by a CRA, such as denying your application for credit, insurance, or employment, must give you the name, address, and telephone number of the CRA that provided the report.  If you ask for it, the CRA must tell you everything in your report, including medical information, and in most cases, the sources of the information.  The CRA also must give you a list of everyone who has requested your report within the past year (two years for employment related requests).

There is no charge for a copy of your report if a company takes adverse action against you, such as denying your application for credit, insurance or employment, and you request your report within 60 days of receiving the notice of the action. Otherwise, there could be a small charge (typically less than $10) for a copy of your report.

For most people, buying a house is the largest purchase they will ever make.  But the potential payoff is huge -- a home of your own, a place for your children to grow up and, in the absence of another rare major market reversal, a good long-term investment.

One way to help ensure you get the most house for your money is to buy a foreclosed home.  The housing market has been glutted with foreclosed properties because of the recent recession, and many of the houses present discounted opportunities for savvy buyers.

On the surface, buying a foreclosed home appears to be as straightforward as buying a home in the traditional real estate market.  However, the foreclosures market is considerably more complex and requires buyers to proceed cautiously in order to buy a foreclosed home at a discounted price.

Get Preapproved for the Loan

This is the time to get your financial house in order. You’re planning to borrow a lot of money, and it’s important to do everything you can to make sure that your loan goes through without any issues.

Work with your loan officer to get preapproved for a mortgage loan.  If necessary, your loan officer can suggest ways in which you can improve your credit score and can suggest resources that will help you improve other aspects of your financial situation.

In most cases, the buyer of a foreclosed property has no more trouble getting preapproved for a loan than would a buyer in a traditional transaction.  Some lenders, however, are more cautious, and if the home was left in bad shape by the previous occupant, the lender might not be willing to lend on a property that’s in disarray.

Title insurance ensures the title to the house is free of any additional claims and is required on all purchases that involve a loan.  While it's not required if the sale is cash only, as is often the case in foreclosures, buying the insurance is still the prudent thing to do.  Your loan officer or real estate agent can advise you on this.

Begin Your Search with Information

Legal aspects of buying foreclosures varies by state and some states require steps which are far outside traditional buying practices.  Foreclosures are legal proceedings and are treated as such.  For example, in certain states the lender must actually bring suit against the borrower in order to get a court order to sell the property.  Granted this is on the selling end, but the legal aspects can certainly present hurdles to buying the home as well.  Rather than just jumping into auctions and foreclosure listings, buyers should do a bit of research on what is required in their state for a foreclosure sale.

People typically buy foreclosed homes directly from the lender, though some are sold at auction.  In either case, be sure to find a knowledgeable real estate buyer's agent.  Listing agents work for the bank -- you need a real estate agent with experience in buying foreclosures in your corner.  Some agents have special training to work with foreclosed properties.  As an example, the National Association of Realtors offers short sale and foreclosure certification (a short sale occurs in lieu of a foreclosure, when the lender allows a homeowner behind on payments to sell the house for less than the loan balance).  While certification isn’t mandatory, it is a good indicator that the agent has been formally trained on foreclosures.  With foreclosures averaging one out of every five home sales nationwide recently, there are very few agents that do not have at least some experience with foreclosures.

Focus Your Search for Foreclosed Homes

When you begin actively searching for foreclosed homes, do so with clear criteria in mind.  Especially in areas where prices rose the highest during the high-performing years of real estate, home values have fallen significantly as a result of the huge number of foreclosures coming onto the market.  In these areas, it is particularly easy to become overwhelmed with the sheer number of choices when considering a property. Knowing what you’re looking for ahead of time will make the search far more productive for you and your real estate agent.  Prepare two lists – one containing the "Must-Have" features, and one containing the "Nice-to-Have" features, and provide your real estate agent with a copy.  These lists can save both you and the agent a lot of time and effort.   Of course, you must also determine a price range for your home search.

In areas where foreclosures are rampant, you may have other options when it comes to seeking properties coming onto the market.  You can ask your real estate agent to focus the search on properties in a certain subdivision, or even on a certain street to ensure you’re getting the location you want.  You can aid in this search by continuing to gather information about the area.  If you’re watching an area closely, you might be able to buy a home from the original owner before foreclosure proceedings begin, but in these cases, be aware that you may have to tackle the liens that are often on the properties as well.

Seeing the Home

When you have found a property that meets your criteria, try to get an inspection in order to determine its condition.  The vast majority of foreclosed houses will be vacant, which usually makes it easy to tour the house and hire an inspector to determine what work is needed to bring it up to your standards.  Occasionally the house you’re interested in buying won’t be vacant, and often the owner or renter isn’t too happy about leaving.  The occupants might have to be evicted, which will likely add time to the process; and then there is a chance that when they leave they will damage the house.

Even if there is no intentional damage, many properties that have undergone foreclosure spend years in bad states of repair.  Often, the previous owners of foreclosure properties, struggling to make mortgage payments, didn’t have funds to perform much, if any maintenance.  There are often substantial cosmetic repairs and replacements needed.  In some cases, there are major structural problems as well, as a result of years of neglect.

In many cases, even if you get an inspection, you won't be able to get agreement for any improvements to be paid for.  Foreclosed homes often are sold "as is"; but knowing what improvements are needed ahead of time, will almost certainly be worth the effort, and help you to make the right decisions about the property.

If you’re looking for a property in really good condition, plan on a more difficult and lengthy search.

Making an Offer on a Foreclosed Home

Occasionally there is flexibility on the price of a foreclosed home, but with the already reduced listing price, there is usually not much room for negotiating when it comes to price.  Unless the home is priced higher than the comparable sales in the marketplace, plan on paying close to the asking price.  Your real estate agent can help you determine these values.

If you are unable to get an inspection before making a contract offer, be sure any offer you make is contingent on a satisfactory home inspection; that way you’re covering yourself for any surprises in the event there are significant problems that don't show up with a tour of the home.

Once you’ve gotten preapproved for the loan, found the house, and made an offer, there will be a wait for a response from the lender that now has possession of the house, which can take longer than a non-foreclosure transaction would take.  Additionally, in some cases, you might be competing against cash investors with deep pockets and intimate knowledge of the process who plan to resell or rent the house, which could further delay a decision.

If the lender does decide in your favor, it often wants to get the property off its books as soon as possible, so you may have to move quickly in closing the sale.

And finally – hopefully at a bargain price – the house is yours.

You've decided that at some point in the future, you want to own your own home, but you're not yet ready to do so.  Saving for a down payment on a house is no simple thing but it is certainly possible, especially if you have a plan.  While saving for a down payment cannot be accomplished overnight, it can be done in less time than you may think; and the sooner you begin saving, the sooner you'll be able to reach your savings goal with less strain on your budget.

Down payment requirements vary, depending on loan types; for example, FHA requires a minimum 3.5% while conventional financing requires 5% or more.  That often translates into at least a ten thousand dollar savings that is needed in order to make a good down payment on a house.  While saving that kind of money may seem unrealistic, especially when the interest rates offered by banks are as low as they currently are, contributing regularly to a savings account, as well as sacrificing in order to put as much money away as possible, will definitely have been worth the effort when your interest rate is lower and you will not be required to pay mortgage insurance.

Emergencies will happen, but you should plan for such emergencies with a separate account rather than the account that is reserved for your down payment.

Typically, when people think about saving for a down payment, they understand that every penny counts, but we normally will head to our local bank to open a savings account.  Today, that can be a short sighted option, with so many other possibilities open to us.  Using a higher yield savings account can help you add to your savings even faster by taking advantage of higher rates offered at some banks.  In addition, these accounts provide a great way to protect your down payment funds because of their backing by the Federal Deposit Insurance Corporation (FDIC).

Many of us are familiar with online bank accounts, as most of our regular banks offer them these days.  Not many people, however, are familiar with those banks that offer higher yield savings accounts online that are not directly tied to brick and mortar locations.   Some savings accounts are entirely online, and, therefore, do not incur the costs that a local bank may charge to maintain a savings account.  Also, having a higher yield savings account that is maintained online allows you to easily track your savings and watch it grow; and the psychological impact of seeing your down payment account continue to grow can be a great incentive to contribute even more to the account.

Other advantages of online higher yield savings accounts are that most of these accounts do not have minimum balance requirements and they also do not have minimum deposit requirements (which your local bank may in fact have).  Be sure to check for FDIC insurance on your deposits and conform to all requirements before you select a higher yield savings account in which to put your down payment funds.

An online search for "High Yield Savings Account" will identify many sources for such savings accounts.  Be sure to thoroughly research all that you consider using.

As you save additional funds, continue to check out alternate accounts to be sure that you're always getting the highest possible interest on your deposits, which will help grow your down payment account even faster.  Stay the course -- you will eventually get to where you want to be.

A closing tip: Consider having a certain amount transferred automatically each month from your checking account to your higher yield down payment savings account.  This is forced savings and something that can help your account grow even more quickly and painlessly.

If you have limited credit history, or past or current credit issues, you may have a problem qualifying for credit cards.  It is possible to get an unsecured credit card, even with bad credit, but it can be very difficult to do so.

If you don't qualify for an unsecured credit card, a secured credit card can be a smart choice.  Some advantages of secured credit cards are that most of them feature easy approval and some can help build, rebuild, or re-establish credit by reporting your account activity to the three major credit bureaus.   Additionally, if you make on-time minimum payments to all of your creditors and maintain your account balances below the credit limits, it is likely the company will eventually qualify you for an unsecured credit card.

Secured credit cards require that you provide a cash collateral deposit, which becomes the line of credit for your account, i.e., the amount of the cash collateral is your credit limit.  For example, if you put $500 down, you will have a line of credit of up to $500.  Such cards are guaranteed by your funds, which act as a security deposit in case you default on the loan with the credit card company.  You will be sent a bill each month for charges that you've made to the card.  Once you get upgraded to an unsecured card or otherwise cancel the account, the amount you deposited up front gets refunded back to you, less any money you might owe on the unpaid balance.

There are often fees associated with these credit cards such as setup fees, annual fees, and plan change fees.  Please read the terms and conditions for each card when applying. Also, it’s critical that you verify that your account history does in fact get reported to all three major credit bureaus.  In addition, be sure to look for low interest rates.

Many of these cards offer helpful features, such as email and text messages to let you know you're approaching your credit limit and to remind you of your upcoming payment due dates.  Also, most have knowledgeable customer service representatives to assist you with questions or concerns.

A "short sale" generally means that a home is being sold for less than the owners owe on their house.  In many cases, the house is "upside down" in value, meaning the owner owes more money on the house to one or more lenders than it is currently worth.  Short sale homes don't necessarily have anything wrong with them; their owners simply choose to sell for one reason or another.  The following provides information about how to go about purchasing a short sale house:

Do not attempt to make a short sale purchase without representation by a qualified, licensed real estate agent with experience in short sale properties. An agent with experience in this area will be able to better help you navigate the short sale market and work with the sellers and their bank when the time comes.  Discuss any issues and/or questions with your agent before proceeding.  For your protection, it may also be advisable to obtain legal advice from a competent real estate attorney and discuss short sale tax ramifications with an accountant.

Be sure you have the required loan approval before making an offer.  You don’t want to miss an opportunity due to poor financial planning.

Work with your real estate agent to find homes that are being short sold by the owner.   Focus on properties where the owner owes a large amount on the loan and is in pre-foreclosure.   The owner does not need to be in default, i.e., to have stopped making mortgage payments, before a lender will consider a short sale.  However, if the owner is not paying their mortgage and owes more than the house is worth or would sell for, that property is a prime candidate for a short sale.  Short sales are required to be listed as such in the agent comments of the property listing that's posted to the Multiple Listing Service, so your agent will be able to identify these properties.  In addition, a seller must disclose if the home already IS a short sale or likely WILL BE due to the market value.  Remember, the listing agent represents the seller's interests, not those of the buyer.

One of the biggest complaints from buyers is that a short sale can take 60 days or more to close after an offer has been made.  When you find a property, even though the lender will probably require an "as is" sale, it is critical to view it and conduct a home inspection so you know what repairs will need to be made.  The bank wants the best offer, and the cleanest one, i.e., with a minimum of contingencies, so if you decide to make an offer, typically, the only contingency should be that the short sale be approved by the lender, with a set time frame for approval.

Work with your agent to ensure that all the necessary paperwork accompanies your offer.  Be aware that the owner has the right to reject your offer if he feels it is too low to present to his lender.  Even though a seller may accept your offer, it will ultimately be subject to approval by the lender.

The lender will probably send out an appraiser to evaluate the property in light of recent sales; in order to minimize their loss, they are also looking to determine market value, so don't expect that every short sale will be a great deal.  The owners and their agent may know the appraised value and what the bank is willing to take, but are not obligated to tell you.  There is a good chance that there will be more than one offer for a short sale home, so your offer will need to be as close to the appraised value of the property as possible.

Be sure you know your absolute highest price and be ready for counter offers from the lender.  If your offer is rejected, you can make another offer; however, do not waste time making offers with very small increases -- you may lose the sale.  Make a fair market offer.  A fair market offer still means you are likely getting a good deal and saving a lot of money on your purchase.  As an example, if the home is appraising at $300,000, the lender will likely take close to that, so if your offer is within roughly $25,000 of the appraised value, there should be a reasonable chance that your offer will be accepted by the lender.  Once your offer has been accepted, if your finances are in order, you should be able to close on the home within 30 days.

According the Public Broadcasting Service, credit scoring models did not exist before the 1970s. Instead, lenders and loan officers used personal judgment, such as a person's appearance, job, street address, etc. when assessing a loan application. Unfortunately, human judgment is not nearly as reliable as a mathematical model based on verified data in determining credit risk.

Fair Isaac Corporation (FICO) is the creator of the most widely used credit scoring model. The calculation of the actual FICO score is a closely guarded secret, but the Fair Isaac Corporation offers a general idea of how it works.  Payment history, such as late and on-time payments, makes up 35 percent of the score.  The amount owed, which includes the number of accounts, makes up 30 percent.  According to FICO, length of credit history, new credit accounts and the types of credit accounts used make up the remaining 35 percent.

Those with more than one type of debt will generally have a higher score than those with only one type.  For example, a mix of installment and revolving debt will show you can manage a car payment and credit card debt, resulting in a higher credit score.

Each of the three primary credit bureaus, Experian, TransUnion, and Equifax, scores your credit differently.  You need to know all three of your scores in order to know where you stand.  Lenders use all three credit scores to assess a person's credit worthiness.  Knowing all three of your credit scores puts you in a better position to negotiate the best rates possible.

Please visit the following Federal Trade Commission web site to learn how you can request a free copy of your credit report from each of the three primary credit bureaus once a year: https://www.ftc.gov/bcp/edu/microsites/freereports/index.shtml.  There are small fees if you would like to see your actual credit scores.

Here are some suggestions for improving your credit scores:

Monitor your credit reports and correct errors.

Look not only for negative events on your record, but also examine the credit limits to make sure they're accurate. If the credit limits appear lower on the report than they actually are, that has the potential to hurt your score.

Pay bills on time and keep card balances low

Your payment history, and the amount you owe on your accounts as a ratio of the amount of credit to which you have access, are important components of your score. Your credit score will be adversely affected if the reported balance on one or more of your cards is near the account's limit.

Take on new credit only when you need it

Some credit cards come with great offers, including a percentage off your bill if you sign up for one at the cash register. If you accept, make sure you're getting a big enough benefit to make it worthwhile.  Taking on additional credit could end up hurting your score.

As always, talk to your loan officer or credit professional PRIOR TO making changes which may affect your credit to ensure you’re making the right choice to increase your credit scores.

All across the United States the housing market has an abundance of distressed homes for sale. A home sold under distress conditions refers to both short sold and foreclosed home sales. Potential home buyers should understand the differences between these types of sales as they impact the buying process in a number of ways.

As implied, short selling refers to selling a home for less than what is owed. In order to complete this type of transaction, the seller must get the mortgage holder to issue a reduced pay off amount. The primary reason a mortgage holder may issue a reduced pay off is if they believe the homeowner has the potential to go into the foreclosure process. The mortgage holder would prefer to avoid the foreclosure process as it is costly and it tends to drive the property value down even more, resulting in an even greater loss.

Property Condition – Short Sale Pro, Foreclosure Con
Most of the time a person short selling their home will still reside in the property. In the case of a foreclosed home, the seller is the mortgage holder; typically, the prior owner either abandoned the property or was evicted. Normally it is better to have a person residing in the home at the time of or just prior to the sale, as they will still need items such as plumbing and electricity to work properly in order to stay in the home. A foreclosed home on the other hand, may have been empty for many months, and issues with utilities or appliances can be created from lack of use. In addition, a homeowner being evicted from their property is more likely to have a lack of regard for the property’s upkeep, knowing they will have to move out.

Transaction Time – Short Sale Con, Foreclosure Pro
The short sale purchase process is typically much longer than the process when purchasing a foreclosed home. Whereas buying a foreclosed home can fall into normal timelines of one to two months, buying a short sell house can drag on for much longer, sometimes taking upwards of six months. The reason for the increased timeline is that the bank has to decide on whether it would benefit from issuing a reduced pay off. As such, they examine items such as the likelihood of the customer going into complete default and whether other options, such as loan modification, would be better. Additionally, the bank has to determine what they believe the property is worth, whereas a foreclosed home has already had some type of valuation done.

Getting Value – Short Sale Pro, Foreclosure Pro
Typically, the sale of a home under distress will lead to a reduced price in comparison to the traditional non-distressed sale. Regardless of whether you wish to purchase a home being sold short or a foreclosure, getting a home inspection done is absolutely critical in order to understand potential issues with the property you intend to purchase.

The Home Affordable Refinance Program (HARP) is now in its second version, 2.0. The question is who may this benefit and why was a second version rolled out?

Let’s answer the latter part of the question first. The original HARP didn’t do much to help folks in states such asArizona,California,Nevada, andFloridawhere home values were hit the hardest. Under the old program, lenders were limited to loaning up to 125% of the value of the property (LTV). This guideline immediately prevented millions from potentially qualifying.

So what’s different in HARP 2.0? The major difference is the removal of the loan-to-value restriction.  In other words a homeowner could be leveraged to 200% or more against their home and still qualify; there simply is no loan-to-value limits in the 2.0 version.

What does this program do? In essence, this program is a rate and term refinance program designed to let homeowners take advantage of today’s lower interest rates. This applies to people with fixed rate mortgages simply looking to lower their rate, those who have adjustable rate mortgages (ARMs), those with interest only loans, or those who simply want to move to a shorter term.

The program is available only for homeowners whose current mortgage is owned by either Fannie Mae or Freddie Mac. Additionally, the mortgage had to have been taken out on or before May 31, 2009.

It’s important to note that this isn’t a program to help those who are way behind on mortgage payments. The program requires that there have been no late mortgage payments (late payments meaning 30+ days behind) within the last 6 months and a maximum of one late mortgage payment in the last 12 months. Anyone who doesn’t meet these requirements should still speak to his or her mortgage servicer and ask what assistance may be available.

While technically released now, HARP 2.0 won’t be offered widely until March, 2012.  At this time, the Automated Underwriting System (AUS) is being updated to accommodate the program changes. Since most lenders lean heavily on these computer systems to assist with underwriting, most are waiting until the new update has been released.

If you believe that you or someone you know may benefit from this program, the best thing to do is to consult a lending professional.

To determine whether Fannie Mae or Freddie Mac owns your loan, you can go to the following web sites:

Fannie Mae: https://www.fanniemae.com/loanlookup/

Freddie Mac: https://ww3.freddiemac.com/corporate/

 

When interest rates drop you’ll often hear the term “streamline” in mortgage advertisements. For many homeowners there is a real opportunity to take advantage of lower interest rates; so let’s examine closely what streamlining is all about and how it may benefit you.

The process of streamlining refers to the refinancing of an FHA loan. FHA rolled out the streamline loan process in the early 1980’s and according to guidelines they “are designed to lower the monthly principal and interest payment on a current FHA-insured mortgage...” If your current loan is not an FHA loan, you’ll need to speak to your lending professional to see if there’s a similar program for the type of loan you have.

The term streamline refers to the reduction in the amount of documentation and underwriting required to be performed by the lender. Additionally, many FHA loans can be refinanced without the need of an appraisal! Obtaining the original FHA loan typically requires thorough documentation of income, assets, and credit. This dramatic reduction makes the mortgage process much easier on both the homeowner and the lender. The result of the reduced paperwork on the lender’s behalf often times results in lower costs to the homeowner as well.

Streamlines can be summarized as follows:

• The required documentation and underwriting is less than a regular FHA loan
• There may not be a requirement for an appraisal
• The borrower must save more than 5% of their current principal, interest, and monthly mortgage insurance in order to qualify
• The new loan amount cannot increase substantially if the no appraisal option is used

Minimum 5% Savings

The litmus test FHA places on streamline loans is the borrower must see a drop of at least 5% of their current principal, interest, and mortgage insurance in comparison to their new payment. As an example, let’s assume the following:

Principal and interest payment: $850
Homeowner’s insurance: $75
Real estate taxes: $200
Mortgage insurance: $150

The minimum savings required in this scenario is $50 a month which is principal and interest of $850 plus $150 for mortgage insurance multiplied by 5%. As you can see the homeowner’s insurance and taxes are excluded in this calculation.

Determining Streamline Loan Amounts – No Appraisal Option
The maximum amount of the new streamlined loan allowed by FHA without an appraisal is the current outstanding balance minus the refund of the up front mortgage insurance premium on the current loan plus the new up front mortgage insurance premium. Additionally, the outstanding balance may include accrued interest due for the month. Here’s an example of determining the new streamlined maximum loan amount:

Current balance: $100,000
Accrued interest due: $500
Up front MI refund: $600
New up front MI: $999
New maximum loan amount:$100,899

To arrive at this amount you take the $100,000 balance, add the $500 of accrued interest due, subtract the $600 refund to get $99,900. The new up front MI (as of early 2012 up front MI is 1%) is 1% times $99,900 or $999. Since up front MI can be financed, you add $999 to $99,900 to arrive at the $100,899 maximum loan amount without an appraisal.

As you can see there are a lot of benefits to streamlining an FHA mortgage. Remember the 5% rule is the minimum savings required; many people save a lot more than 5%, which can equate to hundreds of dollars a month in savings. Contact your lending professional to find out if a streamline loan is available to you.