Real estate short sales have become more common in the tough housing market of the last few years.  A short sale is an attempt to sell a home instead of the bank taking it back by foreclosure. This sale can partially salvage the homeowner’s credit rating and lift the stress of large mortgage payments. If you’ve been house hunting over the last year, chances are you’ve run across at least one piece of real estate classified as a short sale.

The entire process of the short sale is based on the premise that the bank will take an immediate loss, approve the sale, and eliminate the high expenses of foreclosing, clearing, and reselling a home. This is a big chance that the prospective home buyers are taking. There are some things that they can do to in order to lessen the chance for disappointment of unapproved short sales:

The price is set by the agent & seller, not the bank:

The agent and seller often set a low asking price in order to attract buyers. The bank generally has no knowledge of the asking price. The bank has to approve what an acceptable offer would be. The lack of awareness in regards to price by the bank often leads to a longer process than anticipated. The bottom line is that the buyer needs to remain patient and understanding throughout the entire process.

One bank loan is better than two:

Having to deal with and get approval from two different banks is obviously a lot more difficult to get short sale clearance. Neither the agent nor the buyer can control this It simply depends on the bank or banks involved.

Make low ball offers at your own risk:

Remember the bank is typically unaware of the seller-set price during a short sale. When low ball offers arrive at the bank, they are often rejected, with little or no feedback for the prospective buyers. It may also take a considerably long time to hear back even on good offers due to the sheer volume of transactions lenders are overwhelmed with these days.

Knowledge of recent home sales:

The selling agent must be aware of recent home sales in the area to give prospective buyers a clearer picture of the properties that are selling. This will help the agent and seller when they seek approval of the asking price by the bank. Checking recent home sales will also give the buyer a better understanding of what the sales price of homes in the neighborhood are.

Don’t put your eggs in one basket:

In many cases, short sales are not “short.” It can be a very long process. A buyer must keep their options open and continue to actively look at other properties. Buyers must keep positive. The right property will come along. As long as the proper contingencies are in place, most areas allow an individual to have multiple offers out at any given time.

Sellers with multiple properties or healthy financials may not qualify:

If a seller owns more than a handful of properties or has a high net worth, they will most likely not be eligible for a short sale. In certain scenarios, the seller will be asked to pay the difference of the sale.

“Approved” prices are quickest:

An “approved short sale” has a price that has already been approved by the bank. Short sales are not always timely; however, making an offer on an “approved short sale” can be a much faster process.   These types of short sales are some of the most highly desirable.

Each bank is different:

In short sales, the bank has all the power, and each one has a different idea of what the most appealing buyer is.  One bank may prefer buyers with large down payments while another just wants the highest price. Most buyers want to know if the bank will give a lower price for an all cash offer. This is difficult to predict; they will not know until they make an offer.

Renovations are not happening , but credit is:

Any improvements that are necessary on a home, even if they are required for a loan, will most often not be done. Generally credit is issued and the buyer must take on the responsibility for any of the repairs.

The window is awfully small:

A short sale has little or no leniency in regards to the closing date compared to a traditional sale. Exceptions are rarely made and the buyer must close on time. It is imperative that all loan paperwork get completed immediately after opening escrow. If an issue is uncovered that could cause a delay, a request for an extension should be made immediately. If the request is made early enough, many banks will grant an extension. Don’t just assume it will happen.

Short sales can be a great opportunity to find your new home at a competitive price. They can also be a major headache that lasts for months. It is important to have a good understanding of the many factors that lead to a successful deal; or hire someone who does.

Buying a foreclosed home can be a great way to get a deal on real estate but it can be daunting if you’ve never done it before.  Here are a few tips to consider when you’re thinking about buying a foreclosure.

Know Thy Neighbor – Remember, when you buy a home, it’s like getting married. You’re not just getting a spouse, you’re getting the in-laws and all of the crazy dysfunction that goes with them. Get to know your neighborhood a little. Drive through it at different times of the day. You’ll get a feel for traffic patterns that could disrupt your work day. You’ll also find out if the quiet neighborhood has any issues at night. Check out house sales online and peek at the sex offender registry to keep your children safe.

Due Diligence is Key – The longer a house has been vacant, the more issues there will be. If it was empty during the winter months, pipes may have cracked. That’s just one of many issues that could be present without you even being aware of it. It is imperative that EVERY buyer, regardless of the property, get a private home inspection.  This type of pre-caution will keep you from buying the “Money Pit.”

Let the Games Begin – In many areas of this country, banks holding foreclosures on their books want to do one thing at all cost – get those properties off the books. Buyers in those places can get great deals with prices up to 20% off the already reduced prices. Imagine getting home for 65-70% of the market value…

These types of deals are not normal in all markets around the country. Banks that hold these properties in some markets act just like any other seller. They want market value, or as close to it as they can get for these properties. If you buy a house for close to market value and then find you need to put thousands of dollars into the home because of an issue that was uncovered, you may end up paying more than if you looked at other homes outside of foreclosure.

Ready, Set, Go!!! – Local banks are more inclined to work with buyers who already have pre-approved financing. While nothing is ever guaranteed, the chance of that financing falling through, compared to someone without pre-approval, is much lower.

Ready, Set…Wait??? – While the institutions want you to have all of your ducks in a row, their fowl won’t be so tidy. Buyers must be aware that they are dealing with a corporation with a chain of command, and not a single homeowner who can make quick decisions. Patience is key.

This is not an exhaustive list, but I hope these tips help you if you decide to look at a foreclosure for your next home purchase. There are gems out there in many neighborhoods. With the right financing and realtor, anything is possible.

The first time home buyer tax credits in 2009 didn’t really interest us that much since we’ve owned our home for just under ten years now.  However, the latest version of the bill now includes a tax credit through 2010 for homeowners who have lived in the same place for five of the last eight years consecutively.

This new home buyer tax credit will give you a credit up to 10% of the cost of your new home, with a cap of $6500.  I’ve had a busy week and hadn’t given much thought to new bill yet until my wife called me up at work yesterday.

New House Fever

My wife’s been wanting to move into a new house for a few years now and has been contributing to a “moving fund”.  The issue is that she has her eye on a bigger house but I don’t want our house payments to increase any. The planner that she is, my wife opened a separate account and has been putting away money to fund an eventual purchase of a house upsizing.  Our family has grown since we bought our house and future plans project additional growth so we may need the space someday.

Based on home sales in our area and the estimated cost of a new home, she had in mind about how much she needed to put away before we could start looking at houses.  A tax credit of $6,500 would accelerate her schedule by almost a year so she was pretty excited when she heard about the new law.

Since the home buyer tax credit is a dollar for dollar reduction of taxes and is refundable, you could look at it as knocking $6,500 off the purchase price of a home we would buy.  We would still be short of the total figure she was trying to save up but the “free” $6,500 is rather enticing.

Home Purchase Timing

The latest version of the law says that we would need a contract on a house before May 1^st of next year and that the sale would have to close before July 1^st.  While Obama did extend the first time home buyers tax credit with this bill, the general consensus is that there won’t likely be another extension.

That means we’d have to find a house by May of 2010, which gives us about 6 months of searching, planning, and maneuvering our finances before we’d have to pull the trigger. According to the bill we could file an amended tax return for 2009, claiming the tax return for 2009 so we would potentially “see the money” sometime in 2010.

Are the Home Buyer Tax Credits Working?

In one night, our family went from talking about buying a house two years down the road to suddenly considering purchasing a home by next May so I’d say that the home buyer tax credits are having an impact.

Of course at this point it’s just talk so we don’t know if we’ll actually go through with it but my wife signed up for new home alerts from several real estate websites last night and we we spent about an hour talking through some of the details so momentum is building.

I’m not a big fan of moving, it takes time and money and the whole process of home searching and buying can be quite stressful.  Plus I really like where we live now so I’m not really jumping up and down about buying a new house.  But life has a way of shifting when you least expect it to.  Thanks a lot Obama for signing the bill and pulling the rug out from under me, you’re going to give me a ulcer : )

If you or your parents have lived in your home for many years and have built up a lot of equity in the property you may have heard about or considered a reverse mortgage as a potential source of income during retirement. There seems to be a wide divide in opinions on whether reverse mortgages are a wise way to leverage equity in a home or a detrimental financial move for living out the golden years.

According to financial advisor Paul Escobar of U.S. Wealth Management, when it comes to reverse mortgages, “Seniors and their advisors should consider them, especially when their sole income and asset is their house.” Today we’ll take a look at how a reverse mortgage works and the benefits they have to offer retirees and seniors.

What is a Reverse Mortgage

A reverse mortgage is the direct opposite of a traditional mortgage because the mortgage lender makes monthly payments to the homeowner. A reverse mortgage is an option available to homeowners that are 62-years of age or older that own a primary residence free and clear of any mortgages or liens. The home also has to have a sufficient amount of equity—what is deemed as sufficient varies by the lender.

There may be other requirements from the lender but credit does not play a role in the qualification process. When homeowners qualify, the mortgage payments can be taken as a lump sum or in monthly installments. Since the amount of the reverse mortgage is based on the amount of equity, interest rate and the borrower’s age, the amount of the mortgage can vary.

Reverse Mortgage Benefits

While all reverse mortgage holders have their own reasons, there are some popular reasons that seniors opt for a reverse mortgage. Jason Roberts of Frost Lending Group points out that the fees for a reverse mortgage are similar to a conventional loan and the interest rates for reverse mortgages are generally lower. He’s helped a range of clients with reverse mortgages—some couldn’t pay for their basic needs, while others had a decent amount of savings but wanted to eliminate their mortgage payment. 

Retirement

Medical Expenses 

Increased cost of living, rising healthcare costs and a decreasing income do not necessarily work in harmony, but is the situation that leads many retirees to a reverse mortgage. Rather than forcing retirees to choose between paying their living expenses and paying for medicine and healthcare, the extra money that reverse mortgage provide allow seniors to pay for all of their needs—medical and daily living.

Home Accommodations

Some retirees use the money from reverse mortgages to make necessary modifications to their home. It may be widening doorways to accommodate the use of a walker or wheelchair or building a ramp to get up and down the stairs. Reverse mortgage payments can cover these costs.

Extra Money

With more time to travel and participate in leisurely activities, money from a reverse mortgage can provide extra spending money. It pays for trips, vacations or activities such as golf and days at the spa. It is an added bonus that allows them to enjoy some of the luxuries in life.

Go Debt Free

With another source of income for normal living expenses, many retirees use reverse mortgages to reduce or deplete debt. Without debt, the reverse mortgage money becomes additional cash flow that can be applied to other expenses.

After a discussion in her own mind and with her daughters, 77-year-old Francine Trevins opted for a reverse mortgage on her Manhattan loft. Francine says she has a wonderful life now because she is relieved of the “burden of a mortgage.” Her only concern is outliving the mortgage amount.

When it’s Right

Whether a reverse mortgage is right is different for each person. Talk with your financial advisor, tax consultant and estate attorney to go over the specifics of your situation. Don’t make a decision on what someone else has done because situation-specific reasons why reverse mortgages work or not vary too much.

Some of the questions you want to answer:

• Is there family you want to leave the home to?
• Do you have sufficient income to live out your retirement years?
• What plans do you have for retirement? Continue to work part-time? Travel?
• How old are you?
• Is there equity in the home? Is your home paid off?
• Do you have other sources of income?

Reverse Mortgage Dangers

Even the experts agree that there are drawbacks to reverse mortgages in some situations. In a future article we’ll take a look at the potential dangers of reverse mortgages and what to look out for.

The costs of selling a house may not make or break your decision to sell whether you’re relocating, trading up, or buying a smaller home.  However, the costs can run into the thousands of dollars so they’re something you don’t want to overlook.  The first thing you need to consider if you are thinking about selling your house is why you want to sell it.

Unless you live in a cave, then you know it’s not a good time to maximize the amount of money you can make from the sale of your house. Are you looking to move up in size of house? Do you need to move for a job change? Or do you simply want a change of scenery? Make sure you are moving for the right reasons, because the sale of a house can be a costly endeavor.

Sales Agent Commissions (2% to 10% of the purchase price)

Depending on the value of the home, typically the seller ends of paying the selling agent’s commission and the buying agent’s commission. An agent can charge whatever they want for a sales commission, but typically 2% to 3% of the purchase price is normal. The agent may charge less for higher value homes and more for lower value homes.

By the way, if your agent brings in a buyer, you don’t save money, the agent just makes more commission. If a selling agent brings in the buyer as well, they charge a buyer’s agent commission as well as their selling agent commission.

Selling For Sale By Owner

If you choose to sell your home yourself, it’s not as tough as sales agents and brokers will make it out to be with the power of the internet. If you have a knack for utilizing the power of the web and you are willing to price your home at a reasonable price, you can sell it on your own. You will need to pay for some marketing efforts, but you can potentially save thousands of dollars selling on your own.

My wife and I found the buyer to our first home, a condo in Gainesville, FL, from a free ad on Craigslist. The problem that most for sell by owner (FSBO) sellers run into is that they price the property too high, and they don’t get any bites. You can use sites like Trulia and Zillow to help you find comps in your area to price your home correctly.

Property Inspection (typically $250 to $500)

Sometimes sellers will pay for an inspection as a concession to the buyer. It’s sometimes thrown in as a negotiation technique to sweeten the pot for the buyer. This is a nice gesture to pay for the inspection, especially if you are eager to sell the house quickly.

Home Repairs (varies)

Unless your home is pretty new, many property inspections turn up some issues that need to be resolved. You can choose to have the improvements made or sometimes the buyer  will agree to  do it themselves if you knock some money off the asking price.

Closing Costs ( about 1.5% to 2% of sale price)

The fees you pay for the lenders to handle all the paperwork when you hand over your house to the new owners aren’t cheap.  You can negotiate with the buyer on who pays the closing costs but in a “buyer’s market” you probably won’t have much success with that.

Moving Costs (varies)

After you sell your house, you obviously have to find somewhere new to live.  Be sure to factor in the cost of packing up and moving all your stuff and any days off of work you’ll need to move.  To help compete in a tough real estate market, we’ve actually heard of realtors who actually provide you one days use of a moving truck if you use them to sell your home.

We’ll cover some more financial considerations on selling your house in the days ahead. You can also read some of  the tips from our series on buying a home, with details on home inspection tips, split loans, down payments, interest rates, and mortgage pre approval.

The struggling economy has left many people facing the potential of foreclosure and has created a wave of scam artists that are taking advantage of the fears of desparate homeowners. The Federal Trade Commission is on a mission to help stop foreclosure rescue scams around the country.

Here is the FTC Chairman Jon Leibowitz’s warning about avoiding foreclosure scams:

“These con artists see the high foreclosure rates as an opportunity to prey on people in distress,” FTC Chairman Jon Leibowitz said. “They promise to rescue homeowners in troubled financial waters, but after they take their money they throw them an anchor instead of a lifeline. People facing foreclosure should avoid any company or individual that requires a fee in advance, guarantees to stop a foreclosure or modify a loan, or advises the homeowner to stop paying the mortgage company.”

It’s a sad article, it tells of people who paid companies a fee to stop foreclosure and then lost their homes because the company never had the intention or ability to help the homeowners.  As part of their campaign against the scams the FTC created the public awareness video below where they talk to homeowners who have faced foreclosure and had to deal with the decietful companies.

Buying a house is never easy and you’ll likely come across some snags during the process. One of the most common problems that can delay closing on a real estate deal is a home inspection full of problems.

Home Inspections

I recommend that everyone get a home inspection.  I thinks its always worth paying for since you want to know exactly what you are getting when you put your signature on a six figure deal.

Home inspections typically cost anywhere from $250 to $500. Most home inspectors can do a termite inspection as well, but they’ll charge a little extra for it. I also recommend inspecting for termites no matter where you are or what type of construction the house is.

If you personally know someone in the real estate business, ask them for a referral for a good, thorough home inspector. Another option is to check out Angies List reviews of local inspectors. There is a small fee for the service but here are some Angies List promo codes.

You must prepare yourself when the inspector comes back with his report. Remember that no house is perfect (even new construction), and some home inspectors take it upon themselves to talk you out of the deal. In a weird way, it’s their job to make you re-think what you are doing. Your job as the homeowner is to analyze what defects are minor and major. Here are some deal breakers:

• Foundational issues. Is the foundation sinking? Are the footings properly installed? How many cracks are in the foundation?
• Major termite damage. Unless the seller is willing to pay for the repairs, this damage is costly.
• Major plumbing or electrical issues that will cause walls and/or floors to be ripped open. Is the plumbing and electrical up to code?
• Roof issues. Is the roof older than the seller thought? Does it have more wear and tear than its age indicates? A new roof is a big expense for a new homeowner.
• Major mold growth. If you have over 100 square feet of mold growth in a particular area, or multiple rooms are affected, I would stay away from this property, unless you already planned on ripping out drywall.

You may get the inspection report back with a 100 red flags, but 95 of them might be minor stuff. Make sure you can filter out what is a deal breaker, and what can be fixed easily by you or the seller. Don’t let a home inspection ruin the deal unless there are major red flags like the ones specified above.

Tomorrow we’ll finish out the series on home buying by taking look at closing costs.  You might also want to check out the posts on mortgage pre approval, mortgage interest rates, down payments, and home equity lines of credit.

Buying a home is a dream of many families, unfortunately, not everyone is in the position financially to buy the house of their dreams. A big hurdle to many families is coming up with money for a down payment. Yesterday we talked about how a low down payment on a home can effect how much private mortgage insurance you have to pay. Today we’ll take a look at two methods people use to buy “above their pay grade” and how they can be financially dangerous.

80/20 Split Loan

Some people get the housing itch after they get married, but they don’t have any money to use for a down payment. Others just don’t want to tie up cash in real estate, so they try to get a “no money down” loan. I will guess that there are no mortgage companies that will give someone a 100% single-mortgage loan, but instead, they will split the loan into two different mortgages.

The first mortgage will be your 80% of the purchase price, and the second mortgage will cover your 20% down payment for the remaining amount of the purchase price. These were very common in the early 2000’s and the housing boom, because so many people had housing buying fever. These loans are very hard to get right now, and I don’t recommend them to anyone. The second mortgage will be a horrible interest rate, and paying two mortgages isn’t fun.

If you have house fever and you don’t have much to put down, wait until you can save up 4 to 5% for a down payment, then apply for an FHA loan. They’ll loan up to 96% of the purchase price with a stellar credit history, low debt ratio, and high income. This is a great option for young professionals with high incomes that haven’t had much time to build up a pile of cash.

HELOC: (Home Equity Line of Credit)

Some people buy houses with the intent of fixing them up, adding on square footage, or just upgrading the kitchen and bathrooms. But very few new homeowners, have much extra cash after the down payment to put money towards home improvements or upgrades. Mortgage companies offer HELOCS to allow homeowners to borrow against their home’s equity.

So let’s say you bought a house for $200,000, and it appraises for $250,000. The mortgage company could allow you to borrow up to 50% of that “equity”, or $25,000. I don’t like these loans at all, because equity and home appraisals are so subjective. A house is only worth what someone is willing to pay for it, and HELOCS make it very easy to get upside down on your home loan.

For example, if you took the $25,000 HELOC, and you need to move two years later due to a job transfer, but now you can only sell the house for $215,000. Now you are $10,000 upside on the home. HELOCS are also considered as an additional lien against the home, so if the lender of that HELOC could technically foreclose on your home for non-payment.

These are a few things to consider when going through the home buying process. The bottom line is to be prepared when buying a home. Save up as much money as possible without jeopardizing your basic needs. The more you put down on a home and the more “equity” you start out with, the better shape you’ll be in. Don’t let your new home turn into a burden. Do everything you can to make sure it is a blessing.

Buying a house can be confusing if you don’t have someone you trust explaining the process to you. Fortunately for my wife and I, my my mother-in-law is a real estate agent and my dad is a real estate broker, so we haven’t had to play the guessing game with our first two property purchases.

Mortgage lenders and real estate agents sometimes try to push different programs on buyers that may not be in your best interest. So let’s take a look at your down payment and how it effects private mortgage insurance.

Private Mortgage Insurance

This is an insurance policy that the mortgage company will force you to pay on a monthly or yearly basis that covers them in the event that you don’t pay back the loan. All mortgage companies will require you to pay this if you don’t start out with at least 20% equity in the home.

That means you either need to contribute either 20% or more for a down payment, or the combination of your down payment and equity from a higher appraisal value than the purchase price equals 20% or more. The premium typically runs about $100 a month for a $200,000 to $300,000 house.

You basically have three choices when it comes your down payment for a real estate purchase if you plan on getting a partial loan for the property:

20% down or more: You’ll be eligible to apply for a conventional loan from lenders such as Bank of America, Citi Group, and Wells Fargo with prime interest rates. You’ll also avoid paying private mortgage insurance. This is the most ideal down payment to make, if you are able to save up a 20% or more down payment.

10% to 20%: You won’t avoid PMI, but you’ll still qualify to apply for a conventional loan through traditional lenders and credit unions.

10% or less: You’ll pay private mortgage insurance, and you’ll have to apply for loans through wholesale lenders and programs such as an FHA loan that is backed by the federal government and allows as little as a 4% down payment if you have a good, clean credit history.

You can still get a prime interest rate with little money down if you have good, stable income and clean credit. The only problem is that these loans are harder to qualify for nowadays. The sub-prime mortgage meltdown has put many wholesale lenders out of business, and the ones that are doing well have drastically tightened up their underwriting guidelines.

This post is part of our home buyer series.  We started off by looking at mortgage pre-approvals and next we’ll take a look at a few different types of loans.

Once you’ve been pre-approved for a loan and found a house you want to buy the next step is determining the type of mortgage to use and when to lock in your interest rates. Due to the real estate decline and sub-prime mortgage meltdown, lenders and brokers are more careful with how they lend, what they lend, and who they lend to. You’ll need to consider the following when choosing a mortgage:

Interest Rates

About two months ago, the rates were at an all-time low. You could get an interest rate for less than 5%, which is crazy, but it happened. Now, you’ll see interest rates somewhere between 5.5% and 6%, which is nothing to cry about. This is purely my opinion, but I would lock in the rate as soon as possible, because with inflation rearing its head in the future and energy prices going back up, the interest rates will most likely continue to rise.

Points and Origination Fees

A mortgage point is equivalent to 1% of the loan amount, so if the price is $200,000, a mortgage point is $2,000. You can buy one of these points to buy down your interest rate, typically .25% for every point. A point is basically pre-paid interest. You pay mortgage interest up front. I wouldn’t suggest doing this, because the interest rates are so low right now.

An origination fee is usually charged by brokers, and it is a processing fee. Again, I wouldn’t deal with a broker that charges an origination fee. But be aware that if you don’t pay points or origination fees, many brokers will offer you an interest rate above prime, typically .25% above the prime interest rates.

Which Mortgage Is Right For You?

Stay away from interest only and adjustable rate mortgages. Ask anyone currently going through foreclosure if an adjustable rate is a good idea. People were buying houses with teaser rates of 1 or 2 years, then their rates were jumping up drastically, and the monthly payments were more than homeowners could afford. An interest only loan will never pay down the principal, so why own a home if your not going to gain any equity?

With rates as low as they are, I think fixed rate mortgages are your best option. A 15, 20, or 30 year fixed mortgage is the best way to go. If you know that your income will increase in the near future, consider getting a 30 year mortgage, because you can always pay a 30 year mortgage like a 15 year mortgage in the future. It will amortize the same. Don’t spend the extra money to refinance into a 15 year mortgage.

Next, we’ll get deeper into the down payment, private mortgage insurance, and second mortgages.

Erik Folgate is a personal finance writer and social media consultant.