How Do I Avoid Foreclosure:Where Do I Start? Part 5
A step by step process for distressed homeowners.
This is the fifth in a series of posts designed to be a step-by-step directory for distressed homeowners to use to try an avoid foreclosure.
We continue the discussion of various options that a distressed homeowner may have. Some of these options only apply to homeowners in very specific situations and will not apply to most; however, if you meet the criteria you should take advantage of any opportunity that presents itself.
This option may work if you can meet two critical criteria. First, you have to have sufficient equity in the property to be able to qualify for a refinance. In this market that usually means at least ten percent of the current market value. Lenders would like to see more. Second, your credit can not have been too badly damaged. Missed mortgage payments have a major impact on credit scores.
Few refinances result in a reduction in the monthly payment and/or a reduction in principal. Even if you do meet the two primary requirements, unless you have a chunk of cash to contribute to reduce the principal, higher payments will be the most likely result.
Also, unless the underlying hardship has been resolved, you may still have difficulty making the revised mortgage payment.
Homeowners who can prove that they can come close to affording their monthly mortgage payment may qualify for a loan modification. Lenders are sometimes willing to change the terms of a loan if the modification will keep the loan producing. The most common form of modification is an interest rate and payment reduction for a period of time, usually one to five years. At the end of the adjusted period the terms revert back to those originally set. Any short fall that the lender takes during the adjustment period is usually added to the principal. So in effect, the payments are reduced for a period of time and the term of the loan is extended to allow the borrower to repay the loan in full.
Lenders are very cautious when considering loan modifications and will require extensive documentation as proof that the borrower will be able to meet the entire commitment of the modification.
A note of caution to those considering a loan modification. Loan modification fraud is rampant in the marketplace. Exercise great care before you pay any individual or organization to represent you in an attempt to modify your existent mortgage. Those asking for payment in advance should be scrutinized even more carefully. The California Department of Real Estate publishes a list of individuals and organizations that are suspected of fraudulent activities and the California State Bar has published a list of attorneys who have crossed the ethics line. Dealing with individuals and organizations outside of California is even more dangerous. The link to the HUD web site below should be helpful.
Here are links to a few web sites with helpful information for less specific situations:
In future posts we will discuss other options people may use to avoid foreclosure. Those posts will be coming soon.
Feel free to contact Mike West, Realtor, CDPE, if you have any questions or need help.
(916) 337-0658 e-mail: Mike@BMikeWest.com
How can I get the best deal on a home? Where do I start? Part 3
It is essential that you understand some of the pitfalls of mortgage loans when making the determination as to which is the best loan for you. You should be very familiar witheach loan program you are considering.
In the rather lengthy Part 3 we discussed several loans, how they work and someof the pitfalls related to each. Naturally, you should discuss these loans with yourloan consultant in detail. Make sure you are completely comfortable before makingthe decision.
This post will address four other loan types. Each is backed by the State or Federal government.
The first is an FHA loan. There are specific requirements that both the borrower(s)and the property must meet before the loan will be approved. The objective is toprotect the borrower from selecting a “money Pit” property. The home must haveall of its appliances and fixtures and there can be no safety or security problems (broken windows, doors or locks). The FHA loan program is more restrictive than aconventional loan. For this reason some sellers do not like offers that are dependanton FHA financing. When faced with two identical offers, one backed by conventionalfinancing and the second backed by FHA financing, seldom will the FHA offer beaccepted.
One major advantage to the FHA buyer is that the minimum down payment requiredwith an FHA loan is presently 3.5%. Indications are that that will soon be increased. Estimates are that it might go up to 5%. Either way, the amount of cash required to buy a home with FHA financing is lower that it is with almost any other option.
As with any other loan where the borrower does not have 20% equity in the property there is an additional charge for Private Mortgage Insurance. This PMI helps protect the lender in case of default. It does nothing for the buyer/borrower except help them get the loan. Mote that in the last quarter of 2009 over 17% of all FHA loans were in default. The government is becoming much more cautious.
The second type of government backed loan is a VA loan. In order to qualify for a VA loan you have to be on active duty in the military or have been honorable discharged. A veteran can only have one VA loan at a time. There are also limits to the size of a loan that the VA will back.
As with the FHA loan, there are minimum requirements that a property must meet and restrictions on what a borrower can be charged. Therefore, it costs a seller more to accept a VA loan. However veterans are buying homes every day with VA financing.
Cal Vet Loans
California has a stated back program for veterans who were California residents before entering the military. The tend to be a little less restrictive than the VA about property condition. They can also be more forgiving of a vet with a so-so credit history. With a Cal Vet loan Cal Vet is on title with the borrower. Some borrowers don’t like that. However, if it is the only way you can qualify to buy a home you can take it or leave it.
The last government backed loan we will discuss it he USDA program. It is designed for borrowers who want to buy property in rural areas. It will not work for city dwellers. All of El Dorado County, most of Placer County and some areas of Sacramento County (Galt) will qualify. The USDA will finance 100% of the purchase price plus a lump sum PMI payment of a little over one percent of the purchase price, collected up front. Borrower credit scores have to be good and property condition must be acceptable.
This is an excellent program for borrowers who have a good salary but do not have much for a down payment. One problem with the program is that it runs out of funds on a frequent basis and you might have to wait for the next government round of funding to get your loan.
Stay tuned for the next Blog in this series.
New First-Time Home Buyer Tax Credit For California Buyers
Great news for California first-time home buyers.
On Monday, March 22, 2010, the California State legislature passed AB 183, providing $200 million for home buyer tax credits. The Governor is expected to sign the bill into law this week. Part of a package of four bills passed at the request of the Governor, AB 183 is designed to help stimulate the economy and create jobs. It allocates $100 million for qualified first-time home buyers who purchase existing homes and $100 million for purchasers of new, or previously unoccupied, homes.
In order to qualify the eligible taxpayer must close escrow on a qualified principal residence between May 1, 2010’ and December 31, 2010. Additionally, if a purchase contract is executed prior to December 21, 2010, they may qualify for the tax credit if they do close escrow before August 1. 2011.
This credit is equal to the lesser of 5 percent of the purchase price or $10,000, taken in equal installments over three consecutive years. In order to qualify for the full $ 10,000 the home must sell for at least $ 200,000. Under AB 183 purchasers will be required to live in the home as their principal residence for at least two years or forfeit the credit (i.e. repay it to the state).
It would be prudent to be at the head of the line with your purchase contract. Even $200 million dollars is not going to last long!
El Dorado Hills Town & Real Estate
El Dorado Hills is located along the western border of El Dorado County from Folsom Lake to the north, and stretching south to Latrobe. It borders Cameron Park and Rescue to the east and Folsom on the west. Sacramento is just a short commute to the west and Lake Tahoe is only an hour to the east, with vineyards, rivers and ski slopes along the way.
A master planned community started in the early 1960s, the original developer planned a series of residential villages separated by open space to facilitate outdoor recreational activities with small commercial centers in each village and a larger, growing Town Center shopping center just south of Highway 50. The area between Folsom Lake and Highway 50 remains mostly residential. The area south of Highway 50 is a mixture of residential and commercial with a number of business parks.
In 1995 the Parker Development Company purchased 3500 acres and started developing Serrano El Dorado, one of the largest master planned communities in Northern California. It is known for its innovative use of recycled water for irrigation. Each home has a potable water system and a recycled water system for the landscape. The result is reduced costs for resident’s landscape irrigation.
The El Dorado Hills schools are excellent and there are many parks, hiking trails and, of course, Folsom Lake for your boating pleasure. The El Dorado Hills Community Service District is in the process of resurfacing the community pool with completion expected in time for this years swimming season. El Dorado Hills also contains the award winning Serrano Golf Course.
With a population reported to be in excess of 42,000, EL Dorado Hills is the most heavily populated community in El Dorado County. Since El Dorado Hills remains unincorporated exact numbers are difficult to obtain. El Dorado County and the CHP provide Police services. This avoids any city taxes and the issue of incorporation is a frequently disputed election issue.
El Dorado Hills offers a wide range of residential real estate options. There is a manufactured home park just south of Highway 50, several apartment complexes, condo complexes and two senior (age restricted) developments. However, most of the community is dedicated to single family homes that are available to all ages. Home sizes, age, styles and prices vary widely, and there are usually homes available to meet every taste and budget. Settings for your idea home can range from golf course lots, to those with lake and/or mountain views. Homes with mature landscaping, water front settings or gated access can all be purchased. Although modest homes are available, most exceed 2000 square feet with the largest at 10,500 square feet.
Many community activities are scheduled throughout the year. The community Easter Egg Hunt is held on the Village Green for the children, the annual Passport Weekend offers participants a sampling of hors d’oeuvres to complement the award-winning local wines, free concerts are held at the Serrano Visitor center along with outdoor movie showings.
El Dorado Hills provides an ideal setting for the lifestyle that you select and provides an excellent place to raise a family.
El Dorado Hills School Rankings
How can I get the best deal on a home? Where do I
start? Part 2
Once you have made the decision that you would like would like to own a home you should start your research. There are literally thousands of property search web sites that you can use. You can select any of them but don’t put the cart before the horse.
The prudent move is to address the financing BEFORE you do the shopping. Most good real estate related web sites have a calculator to let you calculate what the payments on any particular property are going to be. Unfortunately, it is not that simple. Most of them calculate payments for people with the very best credit record and with an ideal down payment. Congratulations if you are one of the very small percent of buyers who can actually qualify for those loans. Most of us can not.
For a moment, put yourself in the lender’s place. If you were going to loan your hard earned cash to a buyer what kind of buyer would you accept? What kind would you reject? As with any investment, the greater the risk the greater the reward.
Since most loans are sold on the secondary market, Freddie Mac and Fannie Mae are the largest government sponsored players, most lenders use these corporation’s guidelines for their loans in order to make it easier to sell the loans.
There are also portfolio lenders, those that keep and service their loans for the entire term of that loan. They usually have a niche market and specialize in a specific kind of loan, one that allows them to maximize their investor’s return.
In any case, you as the borrower are going to have to meet lender guidelines in order to qualify for any loan. There are several key factors, or cornerstones of any loan. Each is discussed in some detail below:
First, the borrower’s credit score and credit payment history: There are three major credit repositories, Experian, Trans Union and Equifax. Each apply their version of the FICO formula to create your credit score (Fair Isaac Corporation mathematical formula applied to your reported credit history. The goal of this score is to predict the likelihood of your having a 90 day late mortgage payment in the future. Scores range from 350 to 850. Buyers with scores under 500 can not qualify for a home loan. It is difficult to qualify for a loan if your score is under 620. People with scores over 740 have less trouble if all other factors in their loan scenario are in line with lender guidelines. In general, the higher the credit score the lower your interest rate and payment.
Late payments, especially late mortgage payments have a negative impact on your score. Foreclosures, bankruptcies, judgments and tax leans are also major problems on your credit report.
The second key factor is your debt-to-equity ratio. There are two ratios here. The first is the ratio of your total housing costs as a percentage of your gross income (income before taxes and deductions). The second is the ratio of all reported debt—minimum payments only—of your credit card, charge card, vehicle loans. student loans and other reported debt, along with your housing costs–principal, interest, taxes, homeowner’s insurance and Home Owner’s Association Dues, if applicable—as a percentage of your gross income.
Lenders like your ratio to be a low as possible. Most people have little trouble with this factor if their ratio is under 38%. Some lenders will allow up to 55%, but with a higher risk the cost of funds is much higher. You also have to be comfortable with the payment and the effect it will have on your lifestyle.
The third factor is the debt-to-equity ratio. The percentage of the value of the property the loan or loans will represent. The larger the buyer’s down payment, the safer the loan is for the lender. Most lenders want a buyer to put 20% or more down, resulting in an 80% loan-to-value. The cost of funds increases sharply as this ratio increases. The increases come in exactly 5% increments, so a ratio of 80.1% to 85% comes with a higher interest rate and payment; a ratio of 85.1% to 90% is higher yet; a ratio of 90.1% to 95% costs even more. Loans for ratios over 95% are much more difficult to obtain in the post “mortgage meltdown” market. A few are available for a very few borrowers, but the cost is usually very high.
The final factor is the subject property itself. The lenders are loaning money to the borrower, but the collateral is the home. Every purchase loan application must be accompanied by a property appraisal. The appraiser must determine the market value of the property and that appraisal must be acceptable to the lender. If a buyer agrees to purchase a home at a price over market value they will have to pay the difference out of their own pocket as part of the transaction before the lender will approve and fund the loan.
If you are still reading you must be really interested in making a purchase. This can all be very confusing.
The easiest way to wade through the process is to select a loan consultant, discuss the process with them, provide them with the requested documents and have them get you pre-qualified for a loan amount. Once you are armed with that information, you will know what price range in which to shop and what kind of a bite the payment is going to take out of your wallet.
If you are serious, your loan consultant can verify your financial data and get you pre-approved for a loan. It will not take very long. A pre-approval letter carries considerable weight when it is added to a purchase offer on any home. Many sellers even required one before they take an offer seriously.
As a senior loan consultant and REALTOR, I would be happy to help you navigate through the process.