Mortgage Lowdown

- By Mini Singh

Not long ago, home buyers were competing with one another and bidding way over the asking price to snatch up homes on the market. Just a few months and a bubble burst later, it is officially now a “buyer’s market.”

A few quick figures:

• The number of completed home sales dropped 12.7% from the same period a year before.
• The median price paid for a home dropped 1.2%, the first drop in home prices in many years.

All this means that people who were earlier closed out of the home buying market because of inflated prices driven by speculative investing (you didn’t think all those “house flippers” were bringing the price of homes DOWN did you?) can now afford to buy their own home.  But because so many new homebuyers have no previous experience in homebuying, we have compiled this list of 43 essential tips and resources for new home buyers:

YOUR PLAN OF ACTION

1. First things first — You need a budget if you ever hope to save for that home you want to own

The media, along with the illusion of abundance created by our credit cards have led to a culture where impulsive spending has become the norm. We don’t think twice about picking up that fancy outfit or those cool shades. And of course we have to have those latest CDs and DVDs. And we end up losing out on the opportunity to save for things that are really important — such as saving for that home we want to own.
Read this step-by-step article about budgeting basics.
And here’s a free Homebuyer Online Education Course.

2. Educate Yourself — Knowledge is Power

Use resources such as the U.S. Dept. of Housing and Urban Development’s (HUD) first time home buyer programs. “These programs are designed to help first time home buyers weigh the benefits of renting vs. buying. The programs teach first time home buyers about the different mortgage programs that are available, the value of a home inspection, and what to expect at closing, including calculating your closing costs.”

3. Know Your Rights

As a home buyer, and as a mortgage borrower, you have certain rights — don’t let anyone intimidate you into believing otherwise.  “You have the RIGHT to know the reason if your loan was turned down.” Read the complete list.

4. What Information must the Seller Provide Me With?

In most states, it is mandatory for the seller to provide you with the Real Estate Transfer Disclosure Statement. This is a pre-printed form that lists many features or conditions about the home, the land, and the area where the home is located.

After I had fallen in love with a house, my spouse enquired about any legal complications, and the seller promptly told us about the building violations that would definitely complicate the deal. He did not volunteer this information earlier, but did not withhold it once we asked. So ask questions anyway.

5. When is a Good Time to Buy? OR Should I Wait to Buy in a Down Market?

If you think you should wait for the market to go down before you buy that home, then you need to remember that it’s impossible to time the real estate market. It is wiser to make your home buying decision on factors other than your predictions of how the market will move. (American Home Guides)

Suppose you decide to wait - among other things, look at interest rates when taking the decision about waiting. “If interest rates are near an all-time low and beginning to inch upwards, waiting could cost you more than you would think. You might not be able to afford to buy a home at any price.”

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–By Priya Jestin, Staff Writer

As if the mortgage market didn’t already have its fair share of problem areas, now we have one more. Did you know that over 17 percent of all borrowers who take out limited-documentation or no-documentation mortgages have income they do not report on their tax filings? A recent report in the Washington Post brought to fore this dark truth of the mortgage market.

When you apply for a limited or no documentation mortgage you are supposed to state your income and assets to the loan officer. But, and here’s where the catch lies, you don’t have to show detailed proof of that information for the lender’s files.

Another thing that attracts people to this form of mortgage is that there is no income verification, no asset verification, AND you don’t require much documentation either to qualify. Fine, such terms can make any applicant drool and want such a loan. But what’s in it for the lenders? Better rates and compensation for the loan originator!

So, is it any wonder that this segment is growing by leaps and bounds? A survey sponsored by Inside Mortgage Finance, a Bethesda trade publication 39 percent of all low-doc borrowers this year are salaried wage earners. And this is roughly the same percentage as self-employed borrowers.

Mortgage companies do acknowledge the fact that taking on such undocumented clients could pose a big risk to them. But the lure of higher rates and fees lulls them into believing that these risk factors can be controlled. But what is worse is that these policies could encourage people to keep their income off record and thereby save on taxes.

–By Priya Jestin, Staff Writer

Real estate prices have been rising at a steady rate and have caused heartburn for more than just a few people. Many people belonging to the middle class are seeing their affordable first-home dreams going up in smoke. This rise in real estate prices has led to one more thing — mortgage fraud.

The fraud is being conducted from the most basic level — right from the appraisal stage. Fraudulent methods are used while appraising a property, which in turn inflates real estate values. Once these fraudulent values are entered into real estate multiple listing systems, they are used by legitimate appraisers for determining market values.

A recent study by FinCen shows that in the decade spanning 1996 to 2006, mortgage fraud increased about 1,400 percent! Moreover, the first quarter of 2006 showing a 35 percent increase in mortgage fraud activity over the first quarter of 2005. The report identified automated loan processing, sub-prime lending, and mortgage broker loan originations as prime “vulnerabilities” associated with suspected mortgage fraud.

If you find a loan that seems almost irresistible, then tread carefully. Such loans usually come with caveats that are invisible initially but will drain you of your money slowly. Here are a few tips to help you understand how to get away from sub-prime loans:

If it’s too good to be true, then it ISN’T true: Your lender may make you an irresistible offer. Don’t accept it if you cannot afford the home. Tax advantage or not, remember: Always bite off only as much as you can chew. Never more.

Sell it: This is a painful and difficult decision to make. But if you have been forced into a corner thanks to that sub-prime loan you took and have no option left, you must not let sentimentality come in the way. If you can no longer afford your home, try to sell it before your lender forecloses. You may find that in the brief time you’ve lived in that house, property prices have appreciated, allowing you to repay your loan and still have some money left over.

–By Priya Jestin, Staff Writer

There’s one good thing about bad news — more often than not, it sends you some form of warning before arriving. No, I’m not joking. If you look hard enough, you’ll find a pattern just about everywhere — from natural storms to stock market crashes. Well, I’m dealing with neither but with something more closer home — foreclosure. It is important to know the warning signs of foreclosure to prevent it from happening to you. So, what exactly are these signs?

Is your house worth less than what you owe? I know this sounds odd especially when house prices are not exactly crashing. But this is a very real possibility. The risk of foreclosures is very high if you’ve taken a loan in excess of 80 percent of your home’s purchase price. The problem is that you are stretching your budget well beyond your means. And in the event of a fall in prices, you could be badly stuck.

Exotic Mortgages: I think I’ve written more and enough about Adjustable Rate Mortgages, other exotic loans and the risks associated with them. For a short period of time, monthly payments are quite low and bearable, and then the problems begin.

Behind on mortgage payments: This is one of the biggest indicators of a coming problem. There could be many reasons like loss of job, illness, death in the family — of the earning member. Just about anything that contributes to reduction in income could adversely affect your payment capacity.

You can address all these factors. But time is of essence. It is important to contact a skilled lawyer before foreclosure starts.