What Do I Need To Know About Buying a Short Sale Property?

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Realtors get asked this question a lot. And the answer is simpler than people might think. Aside from the fact that the sellers are in a distressed situation, the process itself is not too much different than a regular home purchase. The main difference is that the bank(s) holding a lien on the property will have to be involved in terms of final selling price since the home will sell for less than what is owed on the property. By definition (according to the National Association of Realtors) a short sale is “a sales transaction in which the seller’s mortgage lender agrees to accept a payoff of less than the balance due on the loan”. So naturally the bank would want to evaluate whether or not the offer that has come in on the property is an acceptable one.

How is a Short Sale Different from a Standard One?

The process itself entails the usual – the seller lists the home at the selling price they have come up with under consultation with their Realtor, potential buyers view the property and then an offer or offers come in on the property. The seller then evaluates any or all offers and then makes the decision to accept (or reject) them. Once accepted, the seller than takes it to the lender.

This is where the process deviates from standard home purchase procedures. Once received by the bank, the offer is passed through to the institution’s loss mitigation or compliance department.

What Happens Once My Offer Reaches the Bank?

Keep in mind that at any given time, a loss mitigation officer or loan negotiator may have several hundred short sale applications on their desk. Not only do they carefully study all comps on the property and evaluate whether the short sale carries value to them in the long run, but they also have to contend with the sheer volume of these transactions lately.

The outcome can be one of several things. First, the bank can choose to accept the offer given. They can also choose to come back with a counteroffer. Finally, if after careful evaluation the reviewer decides that the loss is too much, they may opt to reject the offer altogether.

What Can I Do As a Buyer To Help the Process?

The single most important thing that a buyer can do to help the process along is to remain patient. Once the agreement of sale is signed and sent to the bank, the process begins and it can take a painstakingly long amount of time. Realtors are often unable to obtain updates on short sales that are in progress because of how slow the process is at times. Maintain an open line of communication with your agent but also be realistic in your expectations. If your expectations are reasonable, it will help to ease any frustration for you and Realtor as you both wait for a response to your offer.

Another very useful tool when buying a short sale property is to be working with an agent that is well versed in short sales. There are many different aspects to this type of transaction as compared to a traditional sale and by working with an agent with experience in the field you can save a lot of time, energy and money in the long run.
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Remember, as things take a while to come full circle – it is essential that you keep your eye on the prize. Though a bit more tedious than normal home purchases might have been, you will undoubtedly be getting a great deal and the patience required in doing so is very well worth it!

Exploring the Main Differences That Makes a Short Sale a Better Choice Than a Foreclosure?

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Just a couple years ago, most people usually thought they had to give up their home in a foreclosure when they faced a financial stonewall.  However, since then the phenomenon of short sales has been on the rise, leaving homeowners a bigger, better and brighter option for the present and future.  In this article, we explore the comparative differences between the two so you can gain an edge when deciding which is better for you.

Purchasing Power

After walking away from your mortgage through a foreclosure, you can expect to feel the negative impact of it for five years, in terms of being able to purchase another home.  Even then, like a bankruptcy, a foreclosure is something you will perpetually have to report no matter how long it has been since the home went into foreclosure.  

Though these days you see a lot of talk about the financial and credit impact foreclosures have on homeowners, the unseen part of it is something to be dealt with.  Going through this process can leave a lasting emotional hole in people who otherwise were law-abiding citizens, going about their normal lives when all of a sudden they are faced with severe financial hardship and must resort to extreme measures.  That, or if the value of their home has dropped well below the amount they paid for it and they see very little hope for the future.

Short sales are much simpler.  They will affect your purchasing power for a mere two years, often just the amount of time it takes to get back on one’s financial feet.  Not only that, there is no requirement to report a short sale transaction.

Credit Outlook

There are two main areas that are of concern when it comes to your credit – your credit score and your credit history.  In case of a foreclosure, credit scores drop a whopping 200 to 300 points.  This can have a significantly negative impact on your ability to purchase big-ticket items or secure loans in the future.   Not to mention it takes years to rebuild a credit score that has dropped that low.   In terms of credit history, a foreclosure remains visible on your credit report for anywhere from ten years or more, rendering each future potential lending transaction either useless or very hard-pressed at getting approved.  The overall impact you will see on your credit will be for about three years.

Short sales are far easier on your credit outlook, in that the point drop is only about 50 on average and the transaction itself will impact your credit profile for as relatively little as 12 to 15 months.  The one thing to keep in mind is that if you have defaulted on any payments or if you already have a weak credit profile, the post-short sale point drop on your credit report can be more than just 50.  Also, there is no formal reporting or declaration of a short sale on your credit report like a foreclosure although the transaction will show up as either settled or not paid in full.

Amount Still Owed

Usually there is a gap in the amount owed after owners walk away from a property and the bank assumes responsibility.  In case of a foreclosure, given the amount of processing time and resultant vulnerability and exposure of the property, the value can and often does drop greatly after vandalism and from sitting there unused.  The Deficiency Amount (also called Judgment Amount) is the difference that remains after the bank calculates what was owed on the property at the time of foreclosure and when they sold the home. Because of this vandalism and vulnerability, the amount of value drop is far more than with a short sale, when the homeowners are still residing in the property during processing.  The bank has the legal right to pursue homeowners for the amount difference.  

Short sales differ in that not only is the deficiency amount much less but also, your Realtor can negotiate a waiver of that amount so you don’t have to pay for it.

New Changes to the HARP Loan Program Means More People Getting Much-Needed Help

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The announcement made recently by the Federal Housing Finance Agency about proposed changes to the Home Affordable Refinance Program (HARP) could mean that many more homeowners will get much-needed assistance during this difficult economic time.  Homeowners that are underwater have traditionally turned to HARP loans to help them refinance their homes, being able to keep them rather than losing them to foreclosure.  Here are the main differences between the old and the new programs and how they will potentially affect homeowners going through times of strife.

No More Glass Ceiling for HARP

With the old program there was a limit to how much borrowers could borrow with respect to thehome’s loan to value.  This posed a problem for many people that owed far more on the home than it was valued – given the steep decline in housing values during the past two or more years. 

New changes to the program will allow homeowners to refinance no matter how foregone the situation is with respect to more money owed on a property than its market value.  The elimination of the 125 LTV ceiling for fixed-rate Fannie Mae or Freddie Mac backed mortgages is by far the most impactful proposed change to the program.  This change will quite possibly help millions of people avoid undergoing foreclosure. 

Fewer Fees or Better Yet, No Fees For Some

As per the current HARP loan process, risk-based fees are assessed and applied to loans to protect the lender.  Considering borrowers’ credit profile, the lower the credit scores, the higher loan to value and that translates to greater risk to the lender.  Fees that are traditionally associated with this risk are a huge burden for buyers.

With the expected new HARP guidelines there will be no more risk-based fees for homeowners that refinance their home into short-term mortgages and fewer fees for others.


No Longer A Need For a Property Appraisal

The cost of getting an appraisal done on a home can get quite expensive and adds up when you factor in all the other costs of getting into a new home.  Most home purchases entail having an appraisal done on the home – at the buyer’s expense. 

The changes that are looking to be implemented soon for people seeking assistance through HARP will include eliminating the requirement of a new property appraisal.  The only thing that buyers need to be wary of is that there must be a reputable AVM estimate in lieu of the appraisal.

The Absence of Warranties That Put Lenders In a Stronghold
Lenders are at a huge risk when borrowers default on their loans and as a protective measure Fannie Mae and Freddie Mac guarantee those loans but not without a long list of warranties that protect the creditor.  At present, refinance loans that have these warranties or stipulations on them cause lenders to comb through each application very carefully before considering an approval.

With the proposed changes taking place, the warranties will be waived, reducing secondary exposure to lenders of buying back the loan in case of default or even indication of default.  The change will make it far easier for homeowners to obtain the refinance loan they seek to help get them out from underwater. 

More Time For Homeowners to Get Afloat

The HARP loan program began in April of 2009 and after an extension in March of this year (2011) the deadline was extended to June 30, 2012.

According to the list of projected enhancements to the program, the program’s deadline will be extended to December 31, 2013 – giving more homeowners more time to avail this opportunity.

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Now that the new proposed changes have taken effect, there are a few important points to remember. First, not only does the HARP loan apply only to homeowners that have a mortgage owned by Freddie Mac or Fannie Mae, the mortgage being refinanced must have been obtained on or before May 31, 2009.  Second, this applies only to homeowners who have not previously refinanced their home.

It is also important to note that these are projected changes – and they can change at any time contingent upon policy at Fannie Mae and Freddie Mac.

Staying On Top of Mortgage Interest Rates

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With all the changes going on in the real estate industry – almost on a daily basis – it makes perfect sense to want to stay ahead of the game and know what the interest rates are doing on the market.  One way is to search online, where countless generic interest rate calculators will tell you nothing more than a range that you can go by.  But if you want a more accurate reading, one of the best-known industry secrets is to use the ten-year Treasury bond as a gauge.  By tracking the ten-year Treasury note, you get an insider’s view of how interest rates are moving.

How Do You Calculate the Current Interest Rate?

The formula is very simple.  Determine what the ten-year bond is at – and simply add two hundred basis points to that number to find out the current interest rate.  So for example, if the ten-year note were at 200 basis points, then you would add 200 more to get to 400 – which translates to a 4% interest rate.  When you notice the bond going up – you can safely assume that so will interest rates.  Conversely, when the ten-year bond note goes down, the same thing will likely happen with interest rates.

What Other Factors Affect Interest Rates?

Keep in mind that while this is a great way to stay on top of interest rates, it does not translate to the exact rate you might receive on a loan.  Other factors that determine what the interest rate will be include things like the borrower’s credit score and profile, the amount of down payment put on the house, the type of loan (FHA, conventional, other) and also the loan to value. The price of mortgage bonds, of course, indicates interest level activity as well. On a general level, interest rates are also largely determined by the unemployment outlook as well as consumer confidence.

How Does This Benefit Most People?

One of the best things about knowing where things seem to be headed is of course if there are any questions about the interest rates you may see advertised you can confirm actual rates with this tool.  If you see something that does not look right or need better accuracy, this is the way to go to base where the market needs to be.  It is important not to consider the ten-year bond price – rather it is the yield that indicates interest rate levels.
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This technique is ideal for almost anyone. Consumers, buyers, sellers, Realtors and financial planners – all utilize the ten-year Treasury bond as a measuring tool to be able to gauge in advance how the market might be performing in terms of interest rates.

Savvy Mortgage Shopping –Three Key Questions To Ask Lenders

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For many potential homeowners looking to buy a home, especially in today’s market, once they find themselves sitting in front of their loan officer they have no idea what to ask.  Oftentimes they succumb to whatever is told to them rather than realize that they should inquire in great detail about the products and services available.

To help homebuyers obtain the best mortgage possible in the market today where there are a host of options being offered to consumers, here are three very essential questions to ask.  Being prepared will yield excellent results, a great interest rate and a mortgage that will most likely be tailored to meet your specific situation and needs.

What Types Of Loans Are Being Offered?

Believe it or not, despite the tight mortgage lending practices the industry is going through nowadays, the mortgage lending industry is very busy.  With more than several options offered to most clients it is essential that homebuyers know what their choices are.  It is important to ask whether the lender is offering an FHA or conventional loan; is the application for a jumbo loan or is it an Adjustable Rate Mortgage (ARM)?  There is also the possibility that there is an interest-only mortgage on the table.  All these options will result in different interest rates directly impacting your monthly, annual and overall bottom line.

How Much Will It Cost To Borrow From This Lender?

Lender fees are a major component when it comes to comparing one lender to the next.  Borrowers should ask up front what it would cost to borrow the amount they are considering for the home purchase.  When all aspects of the loan are factored in, including the appraisal fee, credit report fee, documentation and recording fees, application processing and other miscellaneous fees – what is the total amount?  If the lending fees seem exorbitant then it may be a good idea to shop around for at least a few other quotes on the same amount and same product type for an accurate comparison.

Are You Paying Discount Points To Get a Low Rate?

Many homebuyers that are lured by super low interest rates but have not read the fine print end up being shortchanged in terms of overall value of the loan.  Where lending fees and initial costs may cost several thousand dollars for a rate of 3.5% for example, you may be paying more than you need to in order to obtain that low rate.  It is very important to ask the lender if you are paying discount points in exchange for the low rate you are getting on the mortgage.  If that is the case, once again it is a good idea to shop for more options.

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The best move any prospective homebuyer can make is to be prepared with as much knowledge as possible.  It is important to obtain that information from reputable sources rather than relying on questionable sources.  Talk to preferred lenders that have worked with others in your social and professional circles.  Engage in conversations with industry experts.  Research quality sources online to find out what is happening in the mortgage industry at present.  The more you know about the process, the less chance there will be that you will miss out on the best opportunities out there!

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Taking Care of Those Who Take Care of Us – New Benefits of VA Home Loans

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One of the ways the US government takes care of its own military personnel, both active and retired or honorably discharged, is to provide VA home loans with significant benefits over traditional home loans.  This week there have been some new changes to the program that make it even better for our military service men and women to become homeowners.  First, here is some information about the program and eligibility. Then we will share the new benefit that was just announced October 1, 2011.

What Are the Benefits of a VA Home Loan?

The primary benefit of a VA home loan is that there is no required down payment. The loan can be financed up to 100%. Even better, there is no limit on the seller’s assist; therefore, it can cover the full closing costs. Another major advantage is that the VA guarantees the loan and does not require monthly mortgage insurance, an expense that can add up to $200 or more each month on top of the mortgage payment.

The primary difference from a traditional loan is that a VA requires a funding fee for the loan. (Disabled veterans are exempt from the funding fee if they receive disability benefits.) The good news is that this too can be financed into the loan and the factor for the funding fee has just recently reduced!

If you already have a VA loan, you can take advantage of the VA Interest Rate Reduction Refinancing Loan (IRRRL). You may use this program up to 90% LTV to lower your rate and term, take cash out of your home, or even refinance from an existing VA ARM loan to a fixed rate. An IRRRL may be done with little or no money out of pocket by including all costs in the new loan.


New Benefit Announced and Effective October 1, 2011

One of the requirements of the VA loan is that the homeowner must pay a funding fee that amounted to 2.15% of the loan amount.  This figure was drastically reduced on October 1, 2011.  The fee is now 1.40%, adding up to significant savings to the homebuyer.  Not only that, if a five to ten percent down payment is made the funding fee is reduced even more to 0.75% of the total loan amount. And if the borrower puts more than 10% down, the factor is only 0.50%.

Keep in mind that the funding fee can be financed into the loan, meaning almost no money out of pocket to be able to move into your home.
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To apply for the loan you will need a certificate of eligibility.  Specific requirements are available on the official US Department of Veterans Affairs website on the FAQ page.  This loan is a great way to give back to our veterans so if you are reading this and you know someone who is in the military or is retired military personnel be sure to share this with them.  When you factor in the low prices on homes these days plus the great interest rates that can be locked in for 5 – 10 – 30 years, this is an opportunity that you or they simply cannot afford to miss!

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Roll In Your Renovations or Rehab on a Home Right Into the Mortgage

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Many buyers these days are on the prowl and ready to seize the amazing opportunity out there to buy homes at astronomically low prices and at incredibly low interest rates.  Yet with the current inventory expected to drop as we approach the cooler months, how can they find the perfect home?

There is great news for those prospective buyers who come across the almost perfect home that requires just a few changes to make it the one.  What’s more, if you are already in a home that needs some major repairs, you can refinance the property AND get some work done on the home without having to pay for the repairs out-of-pocket.  Homeowners typically use this loan for major renovations or repairs like fixing a leaky roof, replacing a furnace, redoing bathrooms and more.

Put Little Money Down Then Fix The Property Up

People who choose to finance with FHA loans are already enjoying a host of benefits – and rolling in home renovations, repairs and rehab into their loan is one of the top advantages of financing with FHA.  Not only are they able to purchase a home with very little down – as low as 3.5%, but also they can avail the opportunity to transform the property into exactly what they want it to be.

Keep in mind that the borrowed amount of a 203(k) loan must be at least $5,000 in order to qualify but even a small bathroom shower stall installation costs starting at $2,000 so the bills can add up fairly quickly.

How the 203(k) Loan Works

A potential buyer finds a home valued on the market at $250,000 that would be perfect if only it had an updated kitchen and renovated bathroom. The homebuyer and their realtor would then conduct a marketability analysis to determine the extent of the improvements, rough cost estimate of the work, and expected market value of the property after completion of the rehabilitation. Once a sales contract has been signed with the provision for securing 203(k) financing, the buyer would then apply for the 203(k) loan, which is a loan federally insured by the US Department of Housing and Urban Development (HUD). The potential buyer and their mortgage consultant would discuss the property and the proposed improvements, the costs of the renovation, and any necessary contingency reserve to determine the total amount necessary for financing. Next, the buyer will consult a contractor to prepare a work write up and request an estimate for their proposed renovations and repairs.

For a standard 203(k), the buyer, HUD consultant, and appraiser will meet at the property to inspect and review the proposed changes, the contractor’s estimate and anything else that would impact the appraiser’s estimation.

One of the best features of the FHA loan is that a borrower is able to finance as much as 96.5% of the value after renovation. Where under normal circumstances, the home appraiser would determine the value on properties in the area and the sales figures from the previous 6-months for similar homes in that same area, with a 203(k) the appraiser determines the current value of the property and takes into account all of the renovations to determine an after-improvement valuation.

Where Do We Live During Renovations?

Homebuyers are legitimately concerned about where they will reside while construction takes place. As part of their purchase and rolling in the cost of renovating a property the 203(k) loan accommodates living expenses if the borrowers are unable to inhabit the home for the duration of renovations.  Up to six months of mortgage payments can be rolled into the loan which creates an opportunity for homeowners and buyers who cannot otherwise afford these changes to a home while carrying a mortgage payment.  At end of the construction period, their home will be worth much more AND they will have been able to afford the mortgage payments during that time.

A Closer Look At Our Example

On our example of the $250,000 home, let’s say that we need about $35,000 to renovate the kitchen, a bathroom plus have some exterior landscaping done.  When you roll in $35,000 to the current cost of the home $250,000, plus the six months of mortgage payments on that loan at about $16,000, the amount needing refinanced is $310,000. The appraiser determines the after-improvement value to be $310,000, and you have a home that you can finance for with a minimum down payment of only $13,495 (3.5%). When the loan is closed, the proceeds designated for the improvements and repairs are placed into a Rehabilitation Escrow Account by which the homeowners request draws to pay for the construction and improvements during the renovation process. You can purchase and finance the creation of your dream home for as little as 3.5% down – without having to shell out any additional funds up front for renovations!
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If you are looking for the perfect home and think you just may have found it, save a few changes – talk to your Realtor about the possibility of a FHA 203(k) loan.  You may be able to get everything you dreamed of  without breaking the bank!

For further information please click here! >>

Realtors please check out Gateway's 203K program here! >>

Loan Limits Have Been Reduced!!

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Just this week, FHA announced they will be lowering loans limits across the country! So, what does that mean...is that good or bad? Unfortunately, this is going to hurt the market place in these high cost living areas. If your going to be purchasing or refinancing using an FHA loan, the amount FHA is willing to cover is decreasing. For example, in some counties, if you needed a loan for $350,000, FHA will now only cover $323,000. To put it simply, you wouldn't be able to get that loan. The down side is that many people currently use FHA to finance their home purchase, and this will essentially remove FHA as an option. If you're a seller, and you have buyers looking at your home, they may no longer qualify through the FHA program, and will need to seek alternative financing options.

If you don't want to be subject to these new loan regulations, you need to have your loan in process and underwritten by a DE underwriter by September 30th...that's only 29 days away. Want to know if you are affected by this change? Check out HUD's FHA Mortgage Limits page and see where your county's new loan limits will be set.