August, 2009

The new flurry of activity is triggering bidding wars and energizing the property market, which historically is slow at the end of summer. As a result, more homes recently are getting their full asking price. Some experts, however, worry that with the deadline quickly approaching panic buying may become an issue, which may be followed by another drop in sales late this year.

Despite the jump in sales, banks appear to be tightening standards for all types of lending now. According to Bloomberg News, the latest report from the Federal Reserve says banks expect to maintain strict criteria on lending until at least the second half of 2010. The report suggests that lenders and borrowers were wary of taking on more risk until the US economy showed clearer signs of recovering. Since the survey, economists have raised their outlook for growth as data suggested home sales and manufacturing were stabilizing. The Fed also said last week, that the economy is “leveling out.”

None of the 51 banks surveyed said they eased standards on prime mortgages, while 39 said demand for mortgages was about the same, moderately stronger or substantially stronger.

Mortgages and foreclosed homes
When purchasing a foreclosed home through an auction, or from a bank, the mortgage approval isn’t any different than a regular purchase other than the fact that you don’t have a property picked out. The process consists of applying with your lender, obtaining approval with a loan amount you are comfortable with, bid on a property at an auction, and after winning, providing a cashier check as a deposit, and 30 days is given to close on the property. But — especially with auctions — make sure you get a mortgage pre-approval. Finding out after you’ve provided a deposit, that in order to qualify for a mortgage you needed 25% down and not 10%, will cause you to lose your deposit check if you don’t have the larger down payment.

The process of “paying down” a mortgage
Most mortgages these days don’t have any penalties for pre-payment, and that means you can pay ahead on your loan any time you want. Paying down a mortgage with a fixed rate simply pays the balance and the payment stays the same; but if you have a adjustable rate or what’s called a hybrid, when you make an extra payment, it will be recast, re-amortized, and your monthly payment will go down.

And, just think — if you are able to make one extra payment per year and it can be done at once or a little extra every month, on a 30 year loan, you are going to have a savings off your principal amount, and save interest as well.

David’s website is www.cdreed.com

First, let’s look at discount points. Borrowers can offer to pay a lender discount points in order to reduce the interest rate on their loan. This way, they obtain a lower monthly payment in exchange for an up-front fee.

For each point purchased, the loan rate can be reduced from 1/8th to a quarter of a percent, although the lender will probably put a limit on the number of points you can buy.

Now this may seem like a great idea, but is it really such a bargain? Well, it depends on how long you plan to stay in the home. The longer you stay, the more valuable those pre-purchased points are. There will be a specific point in the timeline of the loan where the money spent to buy down the interest rate will be equal to the money saved by making reduced loan payments. Selling the property or refinancing prior to this break-even point will result in a net financial loss, while keeping the loan for longer than this break-even point will result in a net financial savings.

The longer you keep the property financed under the loan with purchased points, the more the money spent on the points, will pay off.

If you do end up splashing out on a couple of points, the good news is, they may be tax deductible for the year they are paid, but there are quite a few requirements to fulfill, including itemizing your deductions. If it’s a refinance mortgage, then you can deduct points over the loan period.

The other type of points you might run into are origination points. Typically, origination points are used to pay for the costs of obtaining the loan in the first place, it’s the loan officers’ compensation, if you will.

It is up to the individual lender whether or not they charge origination points and, unfortunately, they don’t provide the borrower with any valuable benefits and are not tax deductible, so you’re therefore probably better off trying to get a loan that doesn’t require you to purchase these kinds of points. Although all points are an up front fee paid to the lender at closing, there are different ways to look at points and their meaning, so make sure you look at the bottom line and not the number of points.

Before making a final decision, look over all details of the offer so you know what you’re paying for, and what you’re getting in return.

Knowing what points are and what they’re for, can save you money and hassle, and knowing is half the battle.

It’s less expensive to rent than it is to buy.
This may be true for some people, but not for all of us. Each month, you write a check to your landlord and you get a place to live, but you don’t own it, and you’re not building equity. You’re also likely to see your rent increase every couple of years or so, rather than having a fixed payment with a traditional mortgage. And while it’s true you’ll be paying for maintenance on your home, you’re paying for it now in your rent.

You have to have a big down payment.
Another myth, busted! The FHA offers loans with as little as 3.5% down, and with reasonable interest rates. And with all the new incentives and programs out there, you may not have to come up with anything at all! Many states are monetizing the $8000 federal tax credit for new homebuyers, so you can use it up front as a down payment. The FHA also allows you to use gift money from relatives as part of your down payment, something many other loans do not allow. Obviously, the more you have saved up for a down payment, the better off you’ll be — and the more house you’ll be able to afford. But don’t let having less than twenty percent keep you from looking for a loan.

If you’re self-employed, it’s impossible to get a mortgage.
While yes, it can be tough for the self employed to get a loan, it is not impossible. The biggest thing to remember is: DOCUMENTATION. Your lender will need at least two years of tax returns, and maybe more. Have all your income documented, because it will make it much easier for the lender, and for you, too. Admittedly, there have been far fewer “low-doc” or low document loans available recently, because they were heavily abused during the housing boom. But it is still possible to do. Talk with your REALTOR®, and with your lender — it will likely take you longer to get approved, but be persistent.

You need to find a house before you apply for a loan.
Absolutely not! It’s a much better idea to get your financing first, and then look for a house, because then you’ll have an idea of what you can afford. Having your financing already settled also makes you more attractive as a buyer because you’ll be ready to close much more quickly. You’ll also have more negotiating power, in the event of a bidding war. And in some cases you MUST have your financing pre-approved, such as when buying a foreclosure or a short-sale.