Carnival of Real Estate

Welcome to the December 3, 2007
edition of the Carnival of Real Estate

Let's face it - it's a weird time to be in real estate. Foreclosures loom, property sits unsold, and nobody really knows what's getting better and what's getting worse.

You can't open a paper or click on a website without hearing about it, and consumers are downright scared and confused. This week's carnival focuses on things that can help us all in these uncertain times.

We have to begin this week with Joshua Dorkin's "Fish Story" posted at Real Estate Investing For Real. When it comes to foreclosure, we know the homeowners get angry. They yell at their real estate agents, they yell at their attorneys, and they certainly yell at their mortgage brokers. This family took their anger out on the entire world. Worth a read just for the chuckle. I'm glad it was you and not me in there, Joshua!

One thing is sure, there are still people making money in real estate. As Trevor Mauch explains in his post, Recent Survey on Self-Directed IRA's is great news for real estate wholesalers posted at The Real Estate Investing Brain, "for the savvy investor... even right now, real estate is the most sought after and solid investment… with all of the doom and gloom out there… this survey debunks the myth that the good ol’ days of real estate investing are done." I've been hearing from a lot of my investor clients who want to 'go shopping while property is on sale' and the idea of using a self-directed IRA is a smart one!

If there is a bright side to the subprime mortgage meltdown, it may be the re-emergence of FHA as a popular option for homeowners. BrandonL talks about the various options available through the FHA program in his blog, Different types of FHA Loans posted at FHA Mortgage Center Blog, saying, "Learn how to use an FHA mortgage to make your home loan safer and easier."

Remember, even though it seems - by listening to the media and reading the newspapers - that the entire country is spiraling out of control, real estate markets are local and not national. Doug Boggs talks about this in his blog and explains how people can find good deals if they don't buy into the fear and hype. Fear based or reality based... is posted at Boggs Development Group, LLC. Doug says "I have always stated that there is no such thing as a national real estate economy. I still believe this despite what seems to be happening throughout the United States, as reported in numerous newspapers, as well as, their television affiliate corporations. The perpetuation of fear through our news agencies gives me pause. It is too bad as there are some great deals out there for people who can see through the maze of media mayhem."

That concludes this edition. Submit your blog article to the next edition of
carnival of real estate using the carnival submission form.

Past posts and future hosts can be found on the blog carnival index page.

Technorati tags:

carnival of real estate, blog carnival.

---

Mortgage rates are low. Take advantage of them while you can!

Mortgage rates have dipped to the lowest point in the past 2 years. Fueled by the fear of an upcoming recession (a result of the soft housing market, mortgage meltdown, etc.) mortgage rates have continued to fall lower than many people had anticipated.

Now is the best time to refinance your current mortgage to save money. Many of you have an adjustable rate mortgage that will be adjusting in the next year – refinance to a fixed rate mortgage before your rate, and payment, increase.

• You may have a first and a second mortgage – roll them into one mortgage for savings and convenience.


• You may have higher interest debt such as credit cards – pay them off and save a ton of money.


• Or, maybe you have a large expense coming up (college tuition, automobile purchase, vacation, Christmas) – cash out some of the equity in your home to pay for these expenses at the lowest possible rates.

Whatever your situation now is the time to take action.

But, John, what if rates go lower?

I get this question from customers all the time. The problem is, we never know for sure what is going to happen with interest rates. If we knew for sure, we would all be retired by now by investing perfectly and making a fortune.

The truth is, you can save money NOW - but you may NOT be able to save money next month, or even next year. During the refinance boom a couple years ago, I had customers that did not want to lock into a 30 year fixed rate mortgage at 5.00% because they thought rates would continue to fall. Well, they lost the opportunity to refinance and have paid all that extra money for the past couple of years.

And remember, if rates go lower, you can always refinance again.

Won’t that cost me more money?

Yes, and no. If you refinance, there will be some closing costs. If you refinance a second time, you will have to pay closing costs again, but they will be much lower. And, if you continue lowering your rates and payments, it can make perfect sense financially.

The real fear should be NOT refinancing now and rates NOT getting any lower. If rates remain the same as they are now, and you wait a couple of months to refinance, you have LOST the cost savings for those couple of months by paying at your current payment. If rates go up, you have lost even MORE money because now you will have to refinance to a higher rate or, worse, not be able to refinance at all.

Also, if you refinance before the end of the year, you may increase your deductions on your income taxes for the year, thereby reducing the amount of tax you owe the government, or increasing the amount of your tax refund (check with your tax professional to see what you can or cannot deduct from your taxes).

What if the value of my home has fallen?

There will be situations where the value of the home has fallen to a point where you cannot refinance your home. There is nothing you can do about that now. But, by contacting your loan officer, he or she can at least let you know what is possible. Your loan officer can ask the appraiser for an opinion on the value of your home to see if it is worthwhile to have the appraisal done. And, at least you know for sure what is happening, rather than just wondering.

Give your loan officer a call so he can do a mortgage checkup to see if refinancing is right for you. Or, give me a call at 708-473-3788 or send me an email – I would be happy to help you.

---

HUD’s Ban on FHA Down Payment Assistance Programs on Hold

I recently wrote about HUD’s new rule that would eliminate the use of third-party down payment assistance programs to help people purchase a home.

On October 31, in AmeriDream, Inc. v HUD, the US District Court for the District of Columbia said that HUD acted against the wishes of the House of Representatives who had just passed a law in support of the program in July. The judge also ruled that HUD acted without supplying a reasoned analysis from its departure from its long-standing policy and failed to consider proposed alternatives. The court ordered a temporary injunction against the new rule.

Both sides will be presenting their arguments and the judge approved an agreement by both sides that they will try to end the case by February 29, 2008.

I will update this blog as the case progresses. This has been a great program that has allowed thousands of families to purchase a home. Please contact your US Representatives and Senators in support of this program.

---

Financial Relief for Military Servicemembers

What is the Servicemembers’ Civil Relief Act of 2003?

The Servicemembers’ Civil Relief Act of 2003 (SCRA), which replaced and updated the Soldier’s and Sailors’ Civil Relief Act of 1940, is a federal law that gives members of all branches of the armed forces important rights and protections as they enter active duty. It covers mortgage interest rates, foreclosures, rental agreements, evictions, civil judicial proceedings and income tax payments.

These protections are for active duty military members, reservists and members of the National Guard called to active duty, and, in some situations, their spouses and dependents. To receive protection under some parts of the SCRA the member must be prepared to show that the active military service has had an adverse affect on the legal or financial matter involved.

The Six Percent Rule

The most well-known part of the SCRA is the Six Percent Rule. This provision allows the member to reduce the interest rates on consumer and mortgage debt to 6% under certain circumstances.

This does not happen automatically. The member would have to notify their creditors and lenders in writing and provide a copy of their mobilization orders. Then, the creditor or lender is required to reduce the interest rate on their debts to 6% for the period of time the member is on active duty. The SCRA does not apply to debts that are incurred after the start of the active duty.

The creditors or lenders can take the member to court to fight this. In court, the creditor or lender, not the member, must prove that the member’s ability to repay the loan at the agreed terms has not been “materially affected” by his military service.

Will the forgiven interest have to be repaid later?

No, any interest above and beyond the 6% is forgiven and the member will never have to repay that amount. However, as soon as the member’s active military service has ended, the interest rates will be reset per the original agreement and the payment adjusted accordingly. Also, the member will have to make the regular payments during the active duty to avoid having the account considered delinquent.

There are numerous other protections that a member can receive under the SCRA. To see the entire act please go to www.navy.mil/navydata/policy/hr100-scra.pdf.

---

PITI Payment Abatement Program

In my July 2007 article,"Payment Abatement: What the Heck is That?", I wrote about a payment abatement program where the sellers can pay for the interest portion of the buyers mortgage payment for up to the first 6 months of the loan. The buyers were still responsible for the principal payments (if it was not an interest-only loan) and the escrows payments.

Now, on certain Fannie Mae loans, we offer a PITI Payment Abatement Program. For up to 6 months, the seller can pay the buyers entire payment which includes principal, interest, taxes and insurance (homeowners insurance, mortgage insurance, and flood insurance, if required).

Many sellers, and especially builders, are finding that they are having a hard time getting buyers to look at their properties, let alone purchase them. Sellers often offer incentives such as free home warranties, paying points for the buyer, etc. Builders are making even bigger offers to buyers such as free upgrades, free basements, finished basements, etc. I even heard of a builder offering the chance for a buyer to win a BMW SUV!

When these incentives fail to attract the right buyer to the property, the sellers or builders will typically reduce the sales price low enough to attract buyers ahead of other properties. The problem with this is everyone loses. The sellers make less money on the sale of the home. The buyer purchases a home at a low price, thinking he is getting a great deal. However, when this happens, the value of all homes in the community falls, thus, impacting all homeowners in the area, not just the buyer and seller.

Payment Abatement Can Help You Sell Faster

With the PITI payment abatement program, you can advertise your property like this: “Purchase this property and make no payments for up to 6 months!” Do you think that would attract more buyers to your home? Do you think that would give your home the edge over a home that is offering a free TV or home warranty? I think so. A buyer can live in a new home, payment free, for up to a half year. They can use the money they would be sending to the mortgage company toward the expense of decorating the new home instead of putting it on their credit cards. Or, they could make large payment to pay off their other debts. Or, they could invest the money for the kids college? Or... well, you get the point.

The PITI Payment Abatement Program is subject to the following rules:

1. The seller must provide the payment abatement funds.
2. Payment abatement funds are subject to seller concession limits
3. Property must be a 1-2 unit Primary Residence or Second Home
4. Maximum term is 30 Years.
5. Buyers must qualify at the total amount of monthly payment

Example:

Suppose you sell your home for $250,000 and the borrower has a 10% down payment – their mortgage amount would be $250,000. Let’s assume the mortgage is a 30 year fixed rate mortgage with an interest rate of 6.5%; the taxes on the property are $5,000 per year; the homeowner’s insurance is $600 per year; and the mortgage insurance is $97.50 per month. The total PITI Payment for this property will be:

• Principal and Interest $1,519.22
• Taxes $416.66
• Homeowners Insurance $50.00
• Mortgage Insurance $97.50
• Total Monthly Payment (PITI) $2,083.38

If you agree to pay for the buyers PITI payment for 6 months, the total would be $12,500.28, or just over 5% of the sales price of the home.

Most people, in a regular real estate market, sell their homes between 90 – 98% of the asking price. In a slow market, homes typically will sell for less than that. But, if market your home with creative financing such as the PITI Payment Abatement Program, you could walk away with more money, and a quicker sale.

---

FHA Bans “Gift” Down Payment Assistance Programs

The Federal Housing Administration (FHA) has written a new rule that will no longer allow down payment assistance from popular programs such as the Nehemiah Program and AmeriDream. As I stated in my blog “Down Payment Assistance Programs” in February of this year, these programs “gift” money to the buyers for the down payment of the home provided the seller agrees to make a donation to the charity in the amount of the down payment plus a service fee. These changes will take effect 30 days after the FHA publishes them in the Federal Register.

Brian Montgomery with the FHA said, “These contributions often function as an incentive to purchase the home. But, these gifts are ultimately paid for by the borrower through a higher mortgage amount. The home buyers are often unaware that the ‘gift’ is something they end up paying for and is not a gift at all.”

Although these programs provide much-needed funds for down payments to otherwise-qualified buyers, the default and foreclosure rate on mortgage with the down payment assistance programs are much higher than for normal FHA mortgages. In 2005, the Government Accountability Office (GAO), the investigative arm of the US Congress, reported that borrowers who receive gifts from these seller-financed down payment assistance programs are more than twice as likely to default and become delinquent than other FHA borrowers and in 2006 the Internal Revenue Service called the charities “scams” and blamed them for increasing the cost of housing for these buyers.

The Mortgage Bankers Association of America (MBA) blasted the new rules. Steve O’Connor, Senior Vice President of Public Policy for the MBA, stated that the programs offer “important assistance to cash-strapped borrowers. O’Connor also said, “While there is a need for stronger quality control measures, we shouldn’t throw the baby out with the bathwater and end the program.”

Both Nehemiah and AmeriDream have filed lawsuits against HUD in federal court seeking an injunction against HUD from implementing these rules. Nehemiah, as a result of a 1998 settlement with HUD, will have 6 months before the rule becomes effective for them. For all other down payment assistance programs, the rule becomes effective October 1, 2007.

I will update my blog as more information becomes available on the down payment assistance programs. Please contact your Senators and Representatives in support of the programs and ask them to block the new HUD rule.

---

FHA Offers Relief to Homeowners with FHA Secure

President Bush recently announced that HUD’s FHA will be able to help an estimated 250,000 homeowners avoid foreclosure by enhancing some of its refinancing guidelines effective immediately.

The FHA secure initiative is a temporary program designed to provide refinancing options to borrowers of conventional adjustable rate mortgages (ARM) who are delinquent under their current mortgage as a result of an interest rate adjustment.

Eligible borrowers must be able to demonstrate that they were current in their mortgage payments prior to the interest rate adjustment of their ARM and are now delinquent due to the subsequent increase in monthly payments. Borrowers may be able to include the past due payments in their new FHA loan subject to FHA loan limits and loan-to-value limits.

Eligibility Criteria for FHA Secure Refinance Option:

• The current mortgage must be a non-FHA ARM
• The new FHA mortgage may be fixed or adjustable
• The borrowers’ payment history must show that they were current on their payments prior to their interest rate adjustment
• The borrowers must qualify for a new FHA mortgage using standard FHA guidelines
• If there is sufficient equity in the property, the new FHA loan may include past due mortgage payments up to the FHA loan limits
• Borrowers may obtain secondary financing if the new FHA mortgage is not sufficient to pay off the existing first lien plus closing costs

If you have an adjustable rate mortgage, and are delinquent due to increases in your interest rate, contact me or your current mortgage lender to see if this option can help you.

---

What do I do if my mortgage lender shuts down?

If you are already making payments on a mortgage, you will continue to make the payments as you have in the past. You may receive a notice that the mortgage has been transferred to another lender but the terms of your mortgage will remain in effect until the mortgage is paid off. If you're concerned, call your current mortgage company at the customer service number located on your mortgage statement.

What if my mortgage lender shuts down before my loan closes?

Until recently, I worked for American Home Mortgage (AHM), the nation’s 10th largest lender. And, like many other lenders, AHM went bankrupt and shut down their mortgage operations with little to no warning. While this is hard for the employees of AHM and the other lenders that have had the same fate, what about the people who are in the process of purchasing or refinancing their homes? What do they do?

Unfortunately, in the case of AHM, borrowers with over $800 Million worth of mortgages went to the closing table on July 30 & 31 expecting to close on their loans. Since AHM had no money to fund these loans, these borrowers had to cancel their closings and re-apply for a mortgage with another lender. In many cases these loans that did not fund affected even more closings that were dependent on these closings.

What should I do if I am in this situation?

In this crazy market it pays to be prepared for the worst. The first thing to do is to make sure you are working with a true mortgage professional. I understand that rates and costs are important considerations, but it is more important to make sure the loan will get closed on time. That means working with someone experienced, competent and professional.

Second, make sure that you always keep copies of all of the documentation you provide to your lender. If the lender happens to run into trouble and you need to find another lender, you will be prepared. On the same note, make sure you get a copy of the appraisal from your lender as soon as you can. If you have to find another lender you can forward this appraisal to them to help speed up the process.

Third, don’t panic and just run to the first lender you see. If you are working with a professional loan officer, contact him or her and ask for advice. Chances are they are already working on taking care of their customers’ loans before you even know there is a problem.

I had several mortgages that were set to close in August. As soon as I knew there was a problem, I contacted my borrowers and assured them that I would find a lender to close their loans on time. Luckily, several national lenders, including GMAC Mortgage, put plans in place to help these customers who found themselves suddenly without a lender. All of the customers who chose to stay with me closed on time and at terms as good as, or better than, they had at AHM.

Some of my customers chose to contact another lender for their mortgage. I heard from a few of them and, unfortunately, they received rates and fees higher than they should have gotten. When you panic and you're desperate, the chance of having someone take advantage of the situation is greater.

Pre-Screened Offers of Credit (Part 2)

On February 9, 2007, I wrote about receiving unsolicited credit offers from lenders as soon as you apply for a mortgage with another lender (Is My Mortgage Company Selling My Name?) Since then, I have spoken to a few customers who have been annoyed by the amount of offers they receive, and they want them to stop.

Mark Strassmann of CBS News did a report on this topic for The Early Show in May. Take a look at the amount of harassment this one couple had to endure: "Lenders Target Home Buyers"

Remember, you can stop this from happening by opting out of this process. By opting out, you will remove your name from lists sold to other mortgage companies. Simply visit http://www.optoutprescreen.com or call 888-567-8688 to opt out. You will have to give them some personal information necessary to process your request, and you can opt out for 5 years or permanently.

---

Payment abatement? What the heck is that?

You've probably seen advertisements for new construction homes that say, “Purchase a new home and don’t make payments for up to 6 months!” This is a payment abatement program. The seller, in this case the builder, will make your first six mortgage payments (interest-only payments).

With the slower housing market, there are more properties on the market and it is taking them longer to sell. This increase in inventory of homes will affect the housing market until they are all sold and/or taken off the market.

How can someone sell their home in a slow market?

Many Realtors have asked me about the payment abatement program over the past several weeks as a way to drive more traffic to their listings. They are beginning to advertise their listings by saying, “Move into this beautiful home and don’t make a payment for up to 6 months!” Now, that will surely attract more buyers and could possibly be the deciding factor when the buyer is looking at several similar properties in the area.
How does it work?

When the contract is written, the seller offers the payment abatement for 1 to 6 months the same way as they would any other seller’s concession (e.g. closing costs, points, etc.). They agree to pay an amount equal to the number of interest-only mortgage payments they are willing to make for the buyers. The amount of the payment abatement is still subject to the limitations of the mortgage programs. Generally, if the borrower has a 5- 10% down payment, the seller can give up to 3% of the sales price as a seller’s concession. For a 10% - 25% down payment the seller can give up to 6%. And, for a 25% or more down payment, the seller can give up to 9%.

The payment abatement program is an interest-only mortgage program and is offered as a 30 year fixed rate mortgage or a 3/1, 5/1, 7/1, or 10/1 ARM. The interest-only period for the fixed rate mortgage is 10 years (there is also a 15 year option) and the interest-only period for the ARMs is equal to the initial fixed rate period. After the interest-only period, the payment is calculated by amortizing the balance of the mortgage over the remainder of the 30 year period.
Can the buyers pay off their principal during the interest-only period?

Yes. The amount of interest due on the following payment will then be reduced to reflect the reduction in principal. May people may be uncomfortable with an interest-only loan (especially with all of the bad press they’ve received lately) so this makes them more like a traditional fully-amortizing loan. But, the buyer is the one that has to add the principal each month. This is also a good idea to avoid payment shock when the interest-only period ends and the new payments are now fully-amortizing.

Want to know more about how a payment abatement program might work for you? Just drop me an email or give me a call.

Does a Bi-Weekly payment plan save me enough money to make it worthwhile?

Yes! With a bi-weekly payment program, the homeowners pay one-half of their normal mortgage payment every two weeks instead of once a month. Because you are making a payment every other week, you make a total of 26 payments a year (there are 52 weeks in a year.)

These 26 payments are the equivalent of 13 full payments for the year, versus the 12 payments you would make with the regular monthly payments. So you are essentially making one extra payment a year. Even though it doesn’t sound like a huge savings, it can really add up over time.

Let’s take a look at a $200,000 mortgage at 6.5% interest rate. Your monthly Principal and Interest (P&I) payment would be $1,264.14. By splitting that payment in half ($632.07) and making this payment every other week, you would pay off your mortgage in 23 years instead of 30 years. The savings in interest over the course of your mortgage would be in excess of $60,000.00.

Below is an amortization tables that shows a standard 30 year mortgage versus one using the bi-weekly payment plan:



So you see that the mortgage is paid off in 24 years. With the traditional mortgage, you would still have 6 years of payments left. Over the 24 years that you made bi-weekly payments, you made extra payments (that 13th payment each year) of $30,339.84, which gives you a savings of $60,751.68.

Even if you don’t plan on living in your home for 30 years, the bi-weekly program can still save you thousands of dollars in interest. After 5 years, your principal balance would be $7,730.13 lower. In those 5 years, you made extra payments of $6,320.80 for an interest savings of $1,409.33. After ten years, the cost savings would be $5,759.82 and the principal balance on your mortgage would be $18,401.42 less than with the regular payment program.

So, is the bi-weekly payment program good for everyone?

No. The bi-weekly payment program works really well for those homeowners who are sure they have the funds available when the payments are due. Bi-weekly programs almost always require an automatic withdrawal from a checking or savings account. If you typically use the 15-day grace period that is standard with a mortgage, you would NOT be a good candidate for this program. This program works very well for those homeowners who have bi-weekly pay periods, because you can make your payments fit your pay schedule to make sure the money is always there.

Can I save this kind of money without signing up for the bi-weekly payment program?

Yes. You can achieve the same results without the bi-weekly payments if you add an additional principal payment to your regular payment each month. In the above example, if you add an additional $105.35 to your payment each month (the equivalent of 1/12 of your regular payment) you will achieve the same results that the bi-weekly payments will. You will pay off your mortgage in about 24 years by adding one additional payment each year.

I actually advise my clients to do this for several reasons. First, there is usually a fee to enroll in the bi-weekly payment program. Second, if you use the grace period on your mortgage (or, if your income fluctuates and is not consistent) it can be easier to make the payments yourself and add the additional principal.

On the other hand, some of my clients see the bi-weekly payment plan as a forced savings plan. They say they don’t even notice that there are two extra half-payments made each year, and it pays down their mortgage more quickly without them even thinking about it.

Bottom line, you can save a lot of money by paying extra on your mortgage – whether you use a bi-weekly payment program or do it on your own.

---

How can a “carpeting allowance” be a bad thing?

On many real estate sales contracts we see credits from the seller to the buyer in the form of “carpeting allowances” or “repair credit.” Basically, a buyer wants to purchase a home but wants the seller to replace the carpet or make some other repairs to the property. The sellers are unwilling to make the repairs before the close of the property, either because they don’t want to pay for the repairs out of their own pockets or they don’t want to wait to close on the property. So the sellers agree to give the buyers a credit at closing out of the proceeds from the sale.

So, what’s the problem? Sounds like everyone is getting what they want.

The problem with this is that the lender will not usually allow a credit directly from the seller to the buyer at closing. They will allow the seller to pay for closing costs, and other prepaid items for the buyer, but the money does not go directly TO the buyer. One of the reasons for this is that sellers are not allowed to provide the down payment for a home purchase to the buyers. So lenders do not allow these types of 'repair credits' because it would be an easy way for sellers to get around the no-down-payment rule.

When there is a repair credit on the contract, the lender will reduce the sales price by the amount of the repair credit and calculate the loan to value (LTV) off of that reduced sales price. For many transactions this will not have much of an affect. If the buyer has a large down payment, and if the repair credit is relatively small, the buyer will not really notice any difference.

The problems arise when the buyer has a smaller down payment, and/or the repair credit is large relative to the sales price of the property. Let’s look at the following transaction:

Sales Price: $150,000
Down payment (5%): $7,500
Mortgage $142,500

Let’s now assume that the seller is giving the buyer a $3,500 carpeting allowance at closing. The lender will reduce the sales price by the allowance and calculate the LTV off of that sales price.

Sales Price: $150,000
Allowance: $3,500
Effective Sales Price: $146,500
Mortgage $142,500
LTV: 97.2%

Now, the buyer thought they were going to be able to do a 95% LTV Conforming Fixed Rate loan. Because of the credit at closing, they either have to increase their down payment to $10,825 which would give them a loan amount of $139,175 and an LTV of 95% or, they would have to get a different mortgage program that allowed for a higher LTV. Most likely, since the buyer was only putting 5% down on the property in the first place, the second option is the most likely one. And, the mortgage programs available to the buyer now, would usually result in a higher interest rate and/or higher mortgage insurance payments on the program.


So, what can we do so everyone comes out a winner?

There are a few ways to deal with repair credits that will accomplish the goals of the credits without breaking the rules or harming the buyer. Here are three:

1) The seller agrees to lower the sales price by the amount of the credit. The sellers will still walk away with the same amount of proceeds from the sale of the home and the buyer will still be able to make a smaller down payment and get the mortgage they initially wanted. The buyers are also getting a better sales price. Unfortunately, the repairs have still not been completed and the buyers will now have to make these repairs with their own money. Chances are, they do not have the money to make the repairs or they would not have asked for the credit in the first place.

2) You can write in the contract that the seller agrees to pay a certain amount of money to a contractor of the buyer’s choice from the seller’s proceeds at closing instead of making the repairs. The money is not going directly from the seller to the buyer – it is going to the contractor for repairs agreed upon in the contract. This would have to be approved by the lender.

3) The seller can get bids for the work that needs to be completed and agree to set up an escrow account for the work to be performed after closing. The work will have to be completed, and an inspection will need to be performed, before the money will be released from the escrow account. Any money left in the escrow account after the repairs have been made will go back to the seller unless other arrangements were made. This is generally more acceptable to the lender since the money is held in escrow until the work in performed and the lender will verify that the work has been completed.

Although seller credits have not been allowed by mortgage lenders for quite awhile, I do still see them written into contracts. Many Realtors and attorneys are not aware of this, so if they are written into your contract, make sure it's done properly.

---

What is a short sale?

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.

Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.

---

Great new tools make Zillow a hit!

Back in July 2006 I wrote “To Zillow or Not To Zillow” as my first blog entry. Since then, Zillow has added many features which make it a pretty good web site to go for home buying and selling information.

The first new feature that helps with the accuracy of the Home Value Estimates, which Zillow calls “Zestimates,” is now the owner of the property can log in and make any changes necessary to give a better value. For instance, when I look at my home address, Zillow says that I have 1.5 baths and does not list the number of bedrooms in the home. The Zestimate I get from Zillow seems very low. When I go in and correct the number of bathrooms from 1.5 to 2.0 bathrooms, and enter 4 bedrooms, the value of the home is much closer to what I would have expected. Again, Zillow is using mostly public records data which can be inaccurate and incomplete. But, it still can be a good starting point to look for approximate values in a neighborhood.

The next features all deal with selling your home. If you are planning to sell your home without the use of a Realtor, you can list your home for sale. You can list your sales price and all of the features and amenities of your home as well as all of your contact information and any upcoming open houses you may have scheduled. You can even pick comparable properties in your neighborhood to show the value of your home.

If you are a Realtor, you can have a profile on Zillow and advertise all of your listings – for free! Just another tool to let potential home buyers and sellers get to know you and another avenue to get exposure for your listings. There are several other cool tools for Realtors such as a Real Estate Guide where you can contribute and share your expertise with the people who visit Zillow.

They will also allow professionals within the real estate field (e.g. Realtors, loan officers, home inspectors, attorney, etc.) create EZ Ads to advertise their services. It is a very cheap way to get your name out (only $0.01 per showing) and you can target specific zip codes and you are in complete control of how much you spend on these ads. I have just completed my first EZ Ad so I do not know if it is at all effective, yet. But, in the future I will let everyone know my experience.

The last feature I am going to talk about is the “Make me Move” listings. Let’s say you like where you live, the house is fine, you get along with the neighbors, etc. You aren’t actively looking to move but, if someone offered you the right price, you’d be out the door. That is what this tool is for. You set the price that would make you want to leave your property. You don’t have to deal with all of the hassles of actively marketing your home or having a Realtor do it for you but, if there is a buyer that would love to buy your home, he can contact you and make an offer.

Again, the Zestimates offered on Zillow are still dependant upon the information contained in the public records and, therefore, you need to be careful when relying on these estimates. But, they are moving in the right direction. And, the cool new tools make it a great site to check out when looking to buy or sell a home.

Interest-Only Mortgages - Are they for you?

Over the past few years, interest-only mortgages have become much more popular. An interest-only mortgage is one where the required monthly payment only covers the interest payment on the loan. With a traditional mortgage, part of the required payment is for interest and part of the payment is to reduce the principal amount of the loan – called amortization. With an interest-only loan, the loan amount will not go down (amortize) unless the borrower chooses to pay additional money with their payments.

Usually, the mortgage requires interest-only payments for a set period of time – 5 or 10 years. Then, the loan converts to a fully-amortizing loan over the remainder of the term of the loan.

There are many reasons that people may opt for an interest only loan. Many borrowers may need the lower, interest-only payments to be able to afford the home they want. This can be a good option for those borrowers who anticipate an increase in their income in the near future. They are able to afford the home they want now and, when the loan converts to a fully-amortizing loan, their income has increased so they can cover the higher payment.

Another reason for an interest-only loan is cash flow. Many real estate investors will use an interest-only loan in order to maximize the cash flow they receive from their rents. With a lower interest-only payment, the investors will have more money to work with each month.

Many people also choose this option so they have more money left over to pay down higher-interest debt such as credit cards and auto loans or to invest in hopes of earning a higher rate of return than the interest rate on their mortgage.

Some people feel that interest-only loans are dangerous. And, they can be. But so can any mortgage program if the borrower is not fully educated on the features, benefits, and possible problems with a loan program. There are several benefits to this program which were listed above. But, borrowers must understand that, if they do not make more than the interest-only payment, the balance of their mortgage will remain the same. When home values are rapidly increasing this is usually not a problem. But, if home values remain flat or decline, borrowers may find themselves with little to no equity in their properties.

If you’re interested in an interest-only loan, make sure your loan officer takes the time to fully explain this program and make sure you are comfortable with all the facets of the program before you sign.

---

How does the Subprime Crisis Affect My Home?

I've received this question several times from my past customers so I figured it was a topic to cover here.

No doubt, you have heard about the crisis in the subprime mortgage market by now. Subprime mortgage lenders are truly in a tough situation. According to the New York Times over 20 mortgage lenders have already shut down their operations for good. And, many of the top 25 lenders in the nation from 2006 are reporting serious losses, filing for bankruptcy protection, or looking for another company to buy them.

Bill Dallas, former CEO of Ownit Solutions has been quoted as saying that all subprime lenders will be severely hurt by the current market situation. He also stated that 10% – 40% of all borrowers will be affected by tightening credit standards that lenders are adopting in light of this crisis. Anyone looking for a mortgage in the near future will notice tighter qualifying criteria and fewer products available to them.

What happened?

Over the past several years housing prices in the US have been soaring. It has benefitted almost every homeowner in the form of additional equity in their property. Over this time period many lenders had relaxed many of their underwriting guidelines and introduced and/or expanded mortgage product offerings that did not seem as risky as long as the value of homes continued to rise. Some of these products include interest only loans and loans with no down payments – even for applicants with less than perfect credit. Even if the borrowers were in trouble, the increase in equity would allow them to refinance or at least sell their homes for more than they borrowed.

When a mortgage is originated, prime or subprime, the loan is typically sold to a company that combines these mortgages in big pools of loans and then markets them as securities on Wall Street. This is the backbone of the mortgage system in the US and allows lenders to constantly have enough money to lend to borrowers. But, with up to 15% or more of these loans now in default, many of the Wall Street bankers are sending these loans back to the lenders and demanding them to re-purchase these loans. This has crippled many of these lenders.

In addition, mortgage lenders traditionally have warehouse lines of credit from the major commercial banks. This allows them to fund loans until they can be sold to the Wall Street Bankers. Many of these commercial banks have closed or reduced the amount of credit extended to the subprime lenders. This caused them to no longer be able to fund any more loans.

How will this affect my home and my mortgage?

If you are current on your mortgage and do not plan to move or refinance in the near future, the answer is it will not affect you.

If you are planning to move or refinance in the near future you may notice that the underwriting guidelines for many mortgage programs (both prime and subprime) have been tightened. For many people this will simply mean that they need to provide more documentation than they have in the past few years or certain programs may not be as readily available. Many of the interest only mortgages and no income verification loans may require larger down payments that before and/or higher credit scores. But, the impact for you will be limited.

If you are currently late or in default on your mortgage you may be impacted. In the past, if you were late or in default on your mortgage you could always refinance to a subprime mortgage program. Since the value in your home was always rising, there was usually an option for refinancing. Now, with home values flat, or in some cases declining, and the current crisis, there are far fewer options for you. Please contact me, or another experienced loan officer right away, to see what options are available to you.

---

How will Illinois HB 4050 affect you?

Illinois HB 4050, “The Illinois Predatory Lending Database Law,” was a pilot program designed to protect consumers in certain areas of Cook County Illinois from getting into mortgage programs they do not understand or cannot afford, thus, reducing the number of foreclosures in these zip codes.

This law called for all high risk loan applicants to attend counseling provided by approved counseling companies. High risk applicants were defined as:

1) applicants with a FICO score below 620;
2) applicants with a FICO score between 621 and 650 if they are applying for an interest-only loan, a no-income verification loan, an ARM loan with an initial fixed period of less than 3 years, or if the property had been previously financed in the past 12 months;
3) all applicants who applied for a mortgage with a pre-payment penalty and/or possible negative amortization; and
4) all applicants applying for a mortgage with points and fees that total more than 5% of the loan amount.

While this sounds like a great idea, it was disastrous. There were several reasons for this. First, it only applied to a few zip codes in Cook County. Second, it only covered borrowers who applied for a loan with state-registered loan originators – federally chartered banks were exempt (eg. Chase, Bank of America, Citibank, etc.). There was a lot of opposition to this law from title companies, lenders, the Illinois Association of Mortgage Brokers, Realtors, and consumer right advocates. Still, the law went forward.

In December 2006 a report from the University of Illinois reported that the law was not achieving its goals. It showed that the neighborhoods in which the law was active were negatively impacted. The home sales in the affected zip codes declined by over 50% while other similar zip codes not affected by the law only saw a decline in home sales of 20% in the same time period. It also went on to say, in addition to other things, that the law does not offer borrower’s additional consumer protection. You can read the report in its entirety at http://www.sal.uiuc.edu/sparc/research/working-papers/pdf/bates_vanzandt_revised_0131.pdf.

In response to this report, Gov. Blagojevich issued a press release stating he had ordered the Illinois Department of Financial and Professional Regulations (IDFPR), the state department charged with implementing this law, to “immediately suspend the Illinois Predatory Lending Database Pilot Program, also known as HB 4050. You can read this press release at http://www.idfpr.com/newsrls/011907GOVIDFPR4050SUSP.pdf.

This measure was applauded by many consumer advocates, as well as mortgage lenders, brokers and Realtors. It was thought that this was the death of HB 4050.

On March 21, 2007 another press release was released which announced the new rules of HB 4050 – bringing this law back to life: http://www.idfpr.com/newsrls/032107HB4050PressRelease.asp

This time, it applies to ALL zip codes in Cook County which may affect thousands of borrowers per year. These new rules, although not yet confirmed by the IDFPR, apply to the following classes of borrowers:

1) first time homebuyers;
2) borrowers who have not purchased a home in the past three years; and
3) all refinance borrowers. If a borrower is in one of these classes, they may be subject to counseling if the loan they are applying for have any of the following features:
• Interest-only payment
• Possible negative amortization
• Pre-payment penalty
• No-income verification
• A Loan-to-value (LTV) of 100%
• An ARM that adjusts within the first 5 years
• Has points and fees in excess of 5% of the loan amount

The last time this law was in effect, the affected zip codes were adversely affected – now it will affect all of Cook County. A group called the “Concerned Citizens of Cook County” launched a web site (http://www.nocounseling.com) to try to fight the new proposed rules of HB 4050. It gives you a lot of information on the new rules along with their opinion of the rules. It also gives you an easy way to contact the members of the Joint Committee on Administrative Rules (JCAR) – the people who are responsible for making decisions on HB 4050.

As of this writing, I am not sure who comprises the “Concerned Citizens of Cook County.” They could be anybody, and they do not take credit for their actions but rather have a generic yahoo e-mail address. But, the information I found on the web site seems to be accurate and if this law concerns you, this site makes it very easy for you to voice your opinions to JCAR.

If you are a resident of Cook County, and are concerned that you may be affected as adversely as the residents of the first 10 zip codes were by the old rules, you should be concerned. The current 45 day comment period is when you should be contacting JCAR to give your comments and opinions on the law. The 45 day comment period began April 6, 2007.

---

This is not your father’s FHA

Mention the term FHA Mortgage, and you get different responses from different people. If you ask a buyer who was able to purchase a home due to the availability of FHA mortgages, the response is quite favorable. Ask a seller or a Realtor, and the response will be much different.

Many sellers feel FHA mortgages are too restrictive on the seller, costs the seller too much money, requires the property to be perfect, has a million forms to sign, and take too long to close. Many sellers will not accept offers with FHA financing. Most Realtors have horror stories about how long an FHA loan took to close or how much the sellers had to pay for unnecessary repairs to the property.

Many of the negative idea about FHA were not warranted, though many were.

But, in 2005 and 2006 HUD has made many changes to the FHA program that reflects a more “user-friendly” approach to appraisals, forms and costs. By accepting homes that are less than perfect, lower down payments, and weaker credit histories FHA loans are more attractive than ever to buyers, sellers, and Realtors.


No Longer Required:

• Automatic Termite Reports – these are no only required when there is evidence of previous wood-destroying insect damage, and evidence of un-repaired structural damage.
• Repair of peeling paint in homes built after 1978
• Repair of broken windows or damaged exit doors
• Roof certification of flat roofs
• Separate well and septic inspections on existing homes
• Handrails for steps and stairs
• Repair of minor cosmetic issues such as cracked plaster/drywall, soiled carpeting, minor plumbing leaks, crawlspaces with debris or trash, etc.
• 10 year builder warranty if a property is 90-100% complete at time of appraisal with a building permit and certificate of occupancy

Now accepted:

• “As-is” appraisals; no more cumbersome evaluation condition sheets!
• Minor property deficiencies, usually a result of normal wear and tear, that don’t affect the safety of occupants or security of the property.
• Down payment assistance (DPA) from the seller, in the form of a contribution to a non-profit organization that is gifted to the buyer; the DPA is allowed in addition to the 6% seller concessions for closing costs, prepayments or discount points.
• Fee structure similar to conventional loans; the only non-allowable FHA closing cost is the tax service fee.
• 95% cash out refinance.
• Maximum financing for non-arm’s length transactions under certain conditions.
• Conventional HUD forms for FHA loans, versus those formerly required.
• Buyers in a Chapter 13 Bankruptcy or consumer credit counseling program are eligible with a satisfactory 12 month payment history, versus complete payment of all accounts.
• Collections up to $3,000 may remain open – over $3,000 considered on a case by case basis.
• Buyers with a Chapter 7 Bankruptcy are eligible 24 months after discharge.
• 15% vacancy factor (vs. 25% on conventional loans) for cash flow analysis on 2-4 unit properties.

Last year, the Expanding American Homeownership Act was introduced in the Senate which would make FHA mortgages a more attractive option in today’s market. Some of the proposed changes are:

• Eliminate the statutory 3% minimum investment for borrowers. Many first-time home buyers are now getting mortgages will no money down. FHA would offer various down payment options.
• Increase and simplify the FHA loan limits. In many parts of the country home prices have risen to the point that FHA financing is not an option. By raising the loan limits to become closer to conventional loan limits more borrowers will have the option of using FHA for their home financing.
• Create a risk-based mortgage insurance premium that would be determined by the borrower’s credit risk. FHA is already less restrictive on credit histories than conventional loans, but this would open the program to borrowers who now only have the option of sub-prime lending prorgrams.

FHA has always been a great program to help people afford the American Dream. With the crisis facing the sub-prime mortgage market, FHA is again becoming a more popular financing option and, with the changes already made as well as the upcoming changes, will become more popular in the future.

Pre-Qualification vs. Pre-Approval

These are two terms in the mortgage industry that have often been confused with each other and sometimes (unfortunately) are used interchangeably. Let's take a look at each term and the similarities and differences.



Pre-qualification means finding out how much mortgage you will qualify for.
Simply put, it means contacting a mortgage lender and supplying your basic financial information (income, assets, liabilities, downpayment, etc.) so he/she can determine the amount of mortgage you can afford.

Sometimes, but not always, the lender may check your credit report during a pre-qualification. This is usually the first step in looking for a home as it gives you the price range of homes you should be looking at. However, the usefulness of a pre-qualification is limited since the information has not been verified and it has not been approved by an underwriter.

Pre-approval, on the other hand, takes all of the information that is given for the pre-qualification and verifies it.

Your lender will definitely have to check your credit for a pre-approval as well as ask for documentation that verifies the information (W-2s, check stubs, bank statements, etc.). Your information is then sent to underwriting where an underwriter will approve the mortgage application. This gives the buyer a firm loan approval, subject to some conditions specific to the property (e.g. fully-executed sale contract, appraisal, homeowners’ insurance, etc.)

The pre-approval is superior to the pre-qualification since the buyer actually has an approval that he can show to the seller when negotiating a sales contract. It gives the buyer more bargaining power because the seller is at less risk of taking his property off the market while waiting for the buyer to be approved. Also, it makes the process much quicker since most of the work has already been completed.

If a lender tells you you are pre-approved, but does not verify the information provided and have it approved by an underwriter, it is simply a pre-qualification that they are calling a pre-approval. Typically, this will have many more conditions such as verification of the information, etc.

Pre-qualification is an important first step - but make sure you get an actual pre-approval right away. The bargaining power and convenience will make your home shopping experience much less stressful and more rewarding.

Home Inspection Basics

So many people have questions about home inspections, that I've asked Steve Nations, from Nations Home Inspections, to guest blog today.

---

Americans love their homes. Whether it’s an old fixer-upper, new construction with all the amenities, or somewhere in between, most of us smile with pride when we talk about our homes. And why shouldn’t we? We spend more time at home than anywhere else and the time we spend at home is usually in the company of those we love the most. That’s why it is so important to go into your new home with your eyes wide open to all of its potential flaws and foibles. As we all know, knowledge is power and when we understand our homes we are certain to enjoy them more. That’s why all home buyers (and even existing home owners interested in a “tune-up” for their home) should have a professional home inspection.

A home inspection helps to identify problems in the house that may cost you money or be a safety hazard. Many of these problems will not be visible to you as you tour the house with your realtor. The inspector will take their flashlight and tools into the recesses of the house. Places you probably avoided on the tour like the attic and crawlspace and inside other accessible panels and covers. A professional home inspector has the knowledge and training to identify potential “money-pit” problems and point out the important maintenance items so you can also keep the home in good shape.

Another benefit of the knowledge gained through a home inspection is negotiation leverage. Armed with your inspection report, you may be able to negotiate a better price for the home. And, though fairly rare, sometimes a buyer will decide that the house’s flaws are just too many or too severe and will walk away from the deal. More often, there are no major problems and then the inspection simply provides some peace of mind for you as the deal moves forward.

Typically, a home inspector is hired immediately after the contract or purchase agreement has been signed. However, if you know you’ll soon be home shopping, I recommend you find an inspector before you sign so you have the time to find someone you trust. Realtors are always happy to make recommendations but I believe it is in your best interest to keep “church and state” separate in this process and find a home inspector that is not connected to your realtor. Be sure there is an inspection clause in the sales contract, making your final purchase obligation contingent on the findings of a professional home inspection. This clause should specify the terms and conditions to which both the buyer and seller are obligated.

When hiring an inspector there are some things to keep in mind. First and foremost is that you should expect the inspector to be your advocate and to have your interests be his (or her) primary concern. Be present at the inspection. You’ll get a lot more out of it if you’re there to see potential problems first hand. Your inspector should be accessible after the inspection and be able and willing to discuss the findings with you, put things in perspective, and offer advice. But don’t expect advice on whether or not you should buy the house; this is not allowed. In the end, the knowledge your inspector imparts is one factor in your purchase decision.

In Illinois home inspectors are licensed by the state, so be sure that your inspector is licensed. And your inspector should belong to a professional society, such as the American Society of Home Inspectors (ASHI), whose members are committed to the highest levels of professionalism as well as ongoing training to keep up with the latest in home inspection technology.

So, happy house hunting. I hope you find the home of your dreams!

Steve Nations is president of Nations Home Inspections, Inc., which serves the entire Chicagoland area. Steve has a master’s degree in Mechanical Engineering from Columbia University and brings an engineer’s natural curiosity to every inspection he conducts. Steve can be reached at 708-837-6972 or at steve@nationshomeinspections.com

---

Down Payment Assistance Programs

---

NOTE: RULES REGARDING DPAs HAVE CHANGED.
CLICK HERE FOR AN IMPORTANT UPDATE

---

One of the biggest obstacles to purchasing a first home is accumulating the down payment. There are many families that have sufficient income to qualify for a mortgage, and an acceptable credit history, but lack the funds for the initial down payment and closing costs. Down payment assistance programs (DPA) are one solution to this problem.

With a DPA, a buyer receives a 'gift' from the DPA (which must be a non-profit corporation defined as a 501(c)(3) Corporation by the IRS). These gifts can cover all or part of the down payment and closing costs on an FHA mortgage.

All of the DPAs work in essentially the same way and have the same basic guidelines:

• The DPA must be a 501(c)(3) corporation


• The sellers of the property must agree to participate in the DPA and make a donation to the DPA in the amount of the gift plus a service fee out of the proceeds of the sale of the home.


• The buyers have to qualify and be approved for a program that allows these types of gifts funds such as FHA.


• The maximum amount of the gift may vary by program but they are usually between 3 to 6% of the sales price.


• Funds can be used for down payment and closing costs. If there are funds left over after the down payment and closing costs have been paid, these funds must be returned to the DPA.


• Sellers may not write off the amount of the gift, but MAY use it as a selling expense when completing their tax returns (Consult a tax professional for rules on this)

FHA is the primary financing used with DPAs, but there may be other programs that accept this type of gift for down payment.

Many people ask if HUD approves certain DPAs. The answer is, no. HUD does provide guidelines for using these programs, but the lender must ensure that the program conforms to the guidelines. Here are HUD’s guidelines on DPAs:

“HUD does not approve “gift” programs administered by charitable organizations and, thus, will not offer a formal approval of your program. Mortgage lenders are responsible for assuring that the gift to the homebuyer from the charitable organization meets the instructions in HUS Handbook 4155.1 REV-4, CHG-1 Paragraph 2-10(c) (e.g no repayment implied, etc.). Those charitable organizations that comply with existing regulations and policy guidelines are permitted to give cash gifts to eligible homebuyers and do not need prior FHA approval to do so.” Your lender can ensure that the DPA is acceptable.

DPAs exist because underwriting guidelines for FHA, and most other mortgage programs, restrict sellers from giving buyers money for their downpayment. Many people think that the sellers are giving the money to the buyer but by working with a DPA they are following the underwriting guidelines for FHA. One important distinction is that the funds that are given to the buyer from the DPA are sent to the title company prior to the loan closing. The sellers then make a donation to the DPA after the loan closes out of the proceeds of the sale of their home. These funds are then added to the pool if funds the DPA has to make future gifts.

Most people can see the benefit to the buyers – they can purchase a home with little or no money out of pocket. But, what are the advantages for the seller – aren’t they losing money by donation 3 – 6% of the sales price to the DPA (plus a service fee)? Well, there are a few things to keep in mind.

In most markets, sellers price their homes knowing they need some room for negotiating. Buyers seldomly offer the full price when purchasing a home. Sellers will usually settle for a sales price below their asking price and/or offer other concessions to the buyers (e.g. Paying points, paying closing costs, etc.).

When participating in the DPA sellers will accept an offer that is closer to the asking price than they would if they were not participating in the DPA. Therefore, they will still make about the same amount of money from the sale of their home. And, since there are now more people that can afford to purchase their home, they may be able to sell their house more quickly at a higher sales price. The buyers are protected against a sales price that is too high because the lender will order an appraisal on the property to make sure they are not lending money on a property that is worth less than what it is worth. It is truly a win-win situation.

Want to see if a DPA is right for you? Give me a call or send me an email. Or consult your own mortgage professional for a personal assessment.

---

NOTE: RULES REGARDING DPAs HAVE CHANGED.
CLICK HERE FOR AN IMPORTANT UPDATE

---

Is my mortgage company selling my name to mailing lists?

"Why do I get so many unsolicited credit offers as soon as I apply for a mortgage? Is my mortgage company selling my information?"

The answer to the second question is almost always, NO! The reason you get so many unsolicited offers is because the major credit repositories – Trans Union, Experian, and Equifax - sell your information as soon as a credit report is ordered by a mortgage company.

A creditor, in this case a mortgage lender, is allowed to make an offer of credit to anyone who meets their lending criteria. As soon as the lender orders the credit report as part of the normal mortgage process, the credit repository puts the borrowers’ names on a "Pre-Screened Offer of Credit” list, more commonly known as a "trigger list."
This list is sold to anybody who wants to buy it. Mortgage lenders and brokers purchase the list and then solicit the borrower, either by phone or e-mail, with an offer of their own. All of this can take place within minutes or hours of the lender pulling your credit report. Last fall, my sister and her husband wanted to refinance their mortgage. The day after I pulled their credit report, they received an offer from the current servicer of their mortgage – the next day!

There is a way you can stop this from happening - you can opt-out of this process. By opting out, you will remove your name from lists sold to other mortgage companies. Simply visit http://www.optoutprescreen.com or call 888-567-8688 to opt out. You will have to give them some personal information necessary to process your request, and you can opt out for 5 years or permanently.

By opting out, it in no way limits your ability to apply for or obtain a mortgage or any other kinds of credit. It just prevents your information from being sold to other lenders which will prevent your private information from being sold to people you didn't authorize to have it, protect your privacy, reduce the number of unwanted credit offers you receive, and may even reduce your risk for falling prey to identity theft.

---

Mortgage Insurance is Now Tax-Deductible

Here's some info that just might save you money on your taxes nest year! Mortgage lenders usually require mortgage insurance for borrowers who have less than a 20% down payment. This insurance covers the lender in case the borrower defaults on the loan. Mortgage insurance has made homeownership more accessible for most Americans.

One of the problems with mortgage insurance is that it is not tax-deductible like mortgage interest and is viewed as something to be avoided. Over the past decade, “piggyback” loans have become a popular alternative to mortgage insurance. By combining a 1st mortgage for 80% of the sales price and adding a 2nd mortgage (piggyback) for the remainder, you can avoid mortgage insurance.

Over the past couple years, though, many people have seen the disadvantages of the piggyback loan. First, over the past couple years, short-term interest rates such as the Prime Rate (which many 2nd mortgages are tied to) have risen dramatically, thus increasing the payments on the second mortgages. Many people are now paying more than they would have with the one mortgage and mortgage insurance.

Second, borrower can eliminate mortgage insurance after a period of time, as long as they maintain a good payment record and are at a certain loan to value level. So, if your home appreciated in the past couple years, and you made your payments on time, you could have eliminated the mortgage insurance by now. With the piggyback loan, you would have to refinance it with your 1st mortgage into one loan – but rates are higher now.

Lastly, there is the convenience factor - two loans, two applications, two set of underwriting guidelines, and two payments to make. Many people would just rather make one payment per month and not have to worry about it.

In December 2006, Congress approved legislation that will make mortgage insurance payments tax-deductible.

• Effective for the 2007 tax year on loans closed on or after January 1, 2007
• For households with adjusted gross income of $100,000 or less
• 100% deductible mortgage insurance premiums for qualified applicants
• Simplified mortgage process — only one loan needed!

This law is expected to save nearly 1 Millions Americans about $91 Million when they file their tax returns in 2008. This will make the option of mortgage insurance much more attractive to more people than it has in the past.

However, this legislation is only for one year and only covers borrowers with an adjusted gross income of $100,000 or less. So, there are still several reasons that you may want to consider a piggyback loan. A mortgage professional can help you weigh the pros and cons of all of your options.

---

3 Tips for Selling in a Slow Market

Janet E. from Chicago asks - "With the market slowing down, I'm seeing houses sit longer before selling. We're planning to sell in the spring -- what can we do to help our house sell faster?"

---

Good question, Janet! I've asked one of the leading Realtors® in my area to "guest blog" today and answer your question.


Colleen Basinski from Coldwell Banker in Tinley Park, IL offers this expert advice:

It's true that homes aren't selling as fast as they were earlier in the year, but there are 3 things you can do to help your home sell itself.

1.) DRESS FOR SUCCESS. Dress your house up to look as warm and inviting as it can be. Get rid of clutter & debris. People need to see the potential of a house, so the less they see, the better. Don't leave packing boxes in rooms or hallways, they make the house look smaller.

Tidy up kitchens and baths - stash the haircare products under a sink or in a closet. Toss the dishes into the dishwasher. And give each room a focal point - flowers on a table or a greatart book on a coffee table. Get rid of random photo frames and knick knacks - everyone won;t share your taste. There are a lot of shows on tv today that give great examples of how to do this, and some people actually hire 'stagers' who come in and dress your home for you.

2.) PRICE IT RIGHT. Let's face it, everyone thinks their home is worth a lot of money, but you can't price a house based on emotion. If you really want to sell your home, you need to look at what similar homes are selling for, and then price it properly. And don't price high to allow for negotiation room. If you price it too high, a lot of perfectly good buyers may not even look at it because it is not in their range. If you want to get $350,000 for your house, for example, don't price it at $375,000 and plan to come down later if you need to. Someone looking in the $300-350K range may never look at your house, but might have been willing to pay $350,000 to begin with.


3.) HIRE A GOOD REALTOR®. A lot of people are selling homes on their own today, thinking they can save money on the agent's fee. And if you have a lot of time, and are willing to do the work, it might work out for you. But if you truly need to sell your home, you need to hire a professional. Good agents really earn their fee, and often will get you a higher price than if you had negotiated on your own. Good agents know the market, they know how to negotiate, and they know how to help sell your home, not just list it. Get referrals from friends if they used an agent they liked.

In the end, if your house looks good, is priced right, and is represented by a good agent, you should have no problem getting buyers who are interested.

Contact Colleen at:

Colleen Basinski
Coldwell Banker
7615 W 159th Street
Tinley Park, IL 60477
(708) 612-2248
http://soldbycolleen.point2agent.com

---

Free Home Finding Service

Ready to Buy a Home But Don’t Know Where to Start?

If you're Scouting for a new home, in your community or anywhere across America, take advantage of an innovative, online, FREE home finding service called the Home Buyers Scouting Report®. The Report is provided to you by Home Buyers Marketing II, Inc. (HBM II), a national real estate service company.

Shop online from the comfort of your own home!

The Report provides you with ALL the available listings from area real estate companies, complete with pictures, prices, maps, comprehensive neighborhood information and more*. Whether you’re buying, building or selling, I work with some of the most trusted and qualified real estate professionals, certified home builders and financial advisors, and I would be happy to introduce you.

There’s a better way to find and finance your new home!
I've been selected and certified as a Preferred Lender of HBM II and can assist you in determining your comfortable price range for listings that will be presented to you on the Home Buyers Scouting Report®. I specialize in free mortgage pre-approval and guidance through every step of the home loan process. Call or email me today if you would like an introduction to one of my trusted real estate agents, certified home builders or financial advisors or more information about the Home Buyers Scouting Report ®.

See Your Preferred Lender First™!

Click here to learn more.


*In some markets not all of the listings, addresses, mapping & other property information is available because of local rules & regulations. The Preferred Loan Officer’s role is to assist in determining a comfortable monthly payment and price range for Home Buyers Marketing II, Inc. (HBM II) to use when it is searching for properties within your search criteria. The Preferred Loan Officer is neither an employee of HBM II nor the provider of the Home Buyers Scouting Report® (HBSR). The real estate agent is not an employee of HBM II, but works cooperatively as a
licensed real estate professional to assist in your Home ScoutingTM efforts. The Home Buyers Scouting Report® (HBSR) is a free home finding service of Home Buyers Marketing II, Inc. (HBM II), a licensed real estate company that provides the Report directly to homebuyers through a secure, password-protected online service.
© Copyright 2006, Home Buyers Marketing II, Inc.

---

HAPPY NEW YEAR!

It's a new year and that means it's time to watch your mail for your W2s and other tax statements you'll need for your taxes. Don't forget, your mortgage interest may be tax deductible - so consult your tax professional.

A new year also brings new ideas - and one new idea I'll be incorporating this year is Guest Bloggers. I'll be tapping the brightest minds in real estate - from real estate agents to appraisers to home inspectors and more. And of course, you will continue to find answers to your questions about home financing and mortgages from me.

So send in your questions, and we'll be sure to answer them in upcoming blogs! And most of all, enjoy a wonderful new year!

FREE Credit Reports

Most of us know that we should be checking our own credit reports periodically to make sure the information is accurate. And, we have all seen the banner and pop-up ads offering us free credit reports. But, can we really get our credit reports for free?

Yes, you can. The Fair and Accurate Credit Transaction Act of 2003 (FACTA) was passed by Congress to, among other things, allow consumers to monitor their own credit reports from the three main credit repositories – Equifax, Experian, and Trans Union. These free credit reports may be obtained on the internet, over the phone, and through the mail through a centralized source that was established specifically for this purpose (you cannot obtain a free credit report by contacting the credit repositories directly.)

On the internet go to http://www.annualcreditreport.com to get copies of all three credit reports. You can also call 8770322-8228 to obtain the credit reports by phone or you can download a form to mail in at http://www.annualcreditreport.com/cra/requestformfinal.pdf.

Why should you check your credit periodically?

First, the credit reports may contain information that is inaccurate. Most of the credit you obtain, and the rate you pay, are based upon your credit history and credit score. If your credit reports have inaccurate information you may be paying more for credit than you should.

Second, all of us have heard of identity theft on the news. The key to minimizing the damage done by identity theft is to stop it as quickly as possible. By checking your credit report at least annually you can spot activity that may be identity theft and take steps to stop it as soon as possible.

What if the information on my report is inaccurate?

All three credit repositories will list the steps you need to take to dispute an inaccurate listing. When you receive your reports, simply follow the steps for each of the three credit repositories.

Another site that has a lot of great information on FACTA, identity theft, and privacy issues is www.privacyrights.org.

What is a "buydown?"

A buydown, or temporary interest rate buydown, is a mortgage program that offers the borrower a lower interest rate in the beginning years of a mortgage, and a fixed rate for the remainder of the mortgage.

The most popular of the buydowns is a 2-1-0 Buydown. With this program, the interest rate is 2% below the note rate in year one, 1% below the note rate in year two, and the note rate for years 3-30 of the mortgage.

In order to get the reduced rates for the initial years, a buydown subsidy account is established. At closing, money is deposited in this account in an amount equal to the differences in payment in the initial years. Below is an example:

Assume the note rate on a $100,000 mortgage is 6% for 30 years. With a 2-1-0 Buydown the rate would be 4% in year one, 5% in year two, and 6% for the remaining 28 years.

Year 1 Payment (@4%) = $477.42
Year 2 Payment (@5%) = $536.82
Year 3-30 Payment (@6%) = $599.55

The difference in payments for year one is $122.13 per month or $1,465.56 per year.
The difference in payments for year two is $62.73 per month of $752.76 per year.
The total difference in payments for both years is $2,218.32.

So, a buydown subsidy account in the amount of $2,218.32 would be established at closing. Each time a payment is made money from the buydown subsidy account is withdrawn to make up for the payment difference.

As you can see, there is a big savings in the first two years which would allow the borrower to qualify for a larger mortgage. It is also useful for a borrower who now their income will be increasing in the future. It is very popular with people who are relocating for work. They have a new job but their spouse will need to find a job when they get to their new home. This gives them time with a lower payment.

The problem for most people is the amount of money needed for the buydown subsidy. There are several ways to put money into this account. The borrower can pay cash at closing, the borrower can negotiate for the seller to pay for the subsidy, or the borrower can roll the costs into their mortgage on a refinance, or the borrower can opt for a higher note rate that will give them a credit to pay part or all of the subsidy.

Should I refinance my ARM?

Over the past several years Adjustable Rate Mortgages (ARMs) have been a very popular option for homeowners. With rates climbing over the past two years, many customers are asking me if it is now time to lock in a fixed rate.

Many people had opted for hybrid ARMs. These programs offer lower fixed rate periods for the borrower at the beginning of the mortgage (usually the first 3, 5 or 7 years) and a yearly rate adjustment after that. Many people with the 3/1 ARM are already seeing their rates and payments adjust, and those with the 5/1 ARMs are losing sleep trying to anticipate how much their rates and payments will increase.

When you first chose your ARM, you were given disclosures that spelled out the adjustment caps. These caps tell you the MAXIMUM a rate can adjust at any given rate adjustment date.

There are typically three different adjustment caps:
1) the initial adjustment cap
2) the periodic adjustment cap
3) the lifetime adjustment cap

The initial adjustment cap lets you know the maximum your rate can adjust at the end of the fixed-rate period.

The periodic adjustment cap lets you know the maximum your rate can adjust at each rate change (usually monthly, bi-annually, or annually).

The lifetime adjustment cap lets you know the maximum the rate can change over the life of the loan. (If you have a 3/1 ARM, you may only notice two adjustment caps – this is because the initial and periodic adjustment caps are the same.)

In order to determine if you should refinance your ARM to a fixed rate loan, there are several things to consider. First, if your ARM has already adjusted, and the current rate is higher than the going fixed rate, you should consider refinancing. Your loan officer can let you know the costs and payments you will have and help you determine if it is the right move for you.

Second, if your mortgage is set to adjust in the near future, you have to find out what the margin is for your ARM. You can look at your closing documents to see what this is. Add the margin to the index for your ARM, and you will have the fully-indexed rate for your mortgage. At the next adjustment, your rate will move toward this rate, limited by your rate caps discussed above.
For example, if you have an ARM based on the 6 Month LIBOR index (5.370% as of 10/26/2006) and your margin is 2.75%, your fully-indexed rate is 8.124%. This is much higher than the current fixed rates and you should definitely consider refinancing.

Many people whose rates are not going to change for another year or so are hesitant to refinance. One of my customers has a 5/1 ARM at 4.5% that is set to adjust in January 2008. The index and margin on his loan are the same as in the above paragraph. He does not want to “lose” his 4.5% rate and take a fixed-rate between 6.0 & 6.5%.

At first, it seems that his strategy makes sense. But, most experts agree that rates will rise moderately from now until the beginning of 2008. So, if he waits until his ARM adjusts, and rates are higher than today, his new rate will be at least 8.125%. So, by “losing” the 4.5% for one year, he'll be saving a lot of money in future years, until rates fall to the levels we have seen in the recent past.

My advice is this: it never hurts to take a look at the costs and payments for a refinance. An experienced loan officer can give you all the information you need to make the decision to refinance or not. In most cases, now is the time to get out of the ARM and into a fixed-rate mortgage before rates climb any higher.

What are "points"?

Several people have written to ask about points.

Simply put, 'points' are fees the borrower pays the lender when the loan is closed. Each 'point' is equal to 1% of the loan. On a $100,000 loan, for example, 3 points would equal $3,000. When you pay points, you are paying interest up-front to lower the rate on your mortgage. Not all loans require you to pay points.

Some of you have asked if it is smarter to pay the points to get a lower payment on your mortgage. Typically, I recommend against paying points on a mortgage. There are severl reasons for this:

First, it usually takes about seven years before the amount you save on your mortgage payments equals the amount you paid in points. Most people will either sell their home and move or refinance their mortgage within seven years. In these cases, the money paid in points is gone and, in my opinion, wasted.

Second, you can usually save more on monthly payments by applying the money you would have spent on points to other higher-interest debt such as credit cards. The reduction of payments per month should be more than the reduction in your mortgage payment would be and, credit card interest is not tax-deductible whereas mortgage interest is.

Third, may people purchase a home and end up running up their credit card bills to furnish and decorate the home. By using the money that would otherwise go toward points, you can apply that to the furnishing and decorating and save on your credit cards.

There are some situations where it is advantageous to pay points. For instance, if the seller or builder are willing to pay points for you, take it. You get the lower payment and also get to deduct these points on your tax returns*.

All situations are different and there may be reasons to pay points. An experienced loan professional can show you the pros and cons of paying points or applying that money elswhere to better your financial position.

*Consult your tax advisor to see how this relates to you.

Understanding Credit Scoring & Credit Repair

With the exception of recognizing that the best score wins, the average home shopper knows very little about the whole credit scoring process. Sub-prime borrowers who are eager to move into A-Paper territory often find themselves at a loss when trying to find ways to upgrade their credit history. The good news is there are ways to improve less-than-perfect credit scores and obtain a loan for the home you really want.

The first step in the process is making sure that you have a current copy of your credit report. Congress recently amended the Fair Credit Reporting Act so that consumers may now receive one free credit report annually. There are three major credit bureaus: Equifax, Experian, and Transunion. Since entries can vary across bureaus, you’ll want to request a free report from each of the three companies. (Go to www.annualcreditreport.com)

It's also important to know just what a good credit score is. Most A-Paper scores generally begin around 680, although this number may differ slightly among lenders. Don't despair if you come up shy, there is always room for improvement. Increasing your score just 5 points can save a significant amount of money. For example, if your score is 698 and you increase it to 703, then you could save yourself thousands of dollars over time as a result of a slight improvement to your loan’s interest rate.

While credit repair is necessary for some, it's not the only way to increase your credit score. Even if you have stellar credit, you can enhance your score through these steps:

• Evenly distribute your credit card debt to change the ratio of debt to available credit. Let's say you have a credit score of 665. If you have debt on only one card, and four additional credit cards with zero balances, evenly distributing the debt of the first card could move you closer, and possibly into, that ideal bracket.

• Keep your existing accounts open and active. The average consumer is usually anxious to close credit card accounts that have zero balances, but doing this can cause them to lose the benefits of a long-term credit history and increase their ratio of debt-to-available credit. The bottom line is don't close those old accounts!

• Keep credit inquiries to a minimum. Each inquiry into your credit history can impact your score anywhere from 2-50 points. When it comes to mortgage and auto loans, even though you're only looking for one loan, multiple lenders may request your credit report. To compensate for this, the score counts multiple auto or mortgage inquiries in any 14-day period as just one inquiry, so try and stay within that time frame.

Remember, credit scores don't change overnight. Improving them requires time and diligent effort on your part, so it's a good idea to get the ball rolling at least three to six months prior to submitting your application for home financing.

If credit repair is what you need, you can either begin the process yourself or seek out a repair service. If you decide to make your own improvements, visit as many websites as possible to get information regarding credit laws and consumer rights. (See resources below) Diligently search through them and educate yourself to ensure that you don’t sustain any self-inflicted wounds. A good place to start would be the Federal Trade Commission's website, which contains a wealth of helpful literature.

If you’re facing severe or complicated credit issues, then you’ll probably want to enlist the assistance of a professional credit repair company. Before you do, be sure to familiarize yourself with the FTC's regulations on credit repair. With over 1100 credit repair companies to choose from, it's important to be certain you are dealing with a reputable firm. Examine the FTC's information on fraudulent practices to avoid falling prey to credit repair scams.

Addressing credit issues can be uncomfortable to say the least. But by taking these steps now, you’ll be that much closer to obtaining the home of your dreams.

Additional Resources:

To order your free credit report, go to:
www.annualcreditreport.com

To read the Fair Credit Reporting Act, go to:
www.ftc.gov/os/statutes/frca.htm

For the Federal Trade Commission's information on consumer credit, go to:
www.ftc.gov/bcp/conline/edcams/credit/index.html

---