John Beckett's Real Estate Blog

Her we are back to Thursday which is Real Estate term day. If there is a term you do not understand please send me an email and I will get it answered for you. (john.beckett@sbcglobal.net)

Adjustable Rate Mortgage

An adjustable rate mortgage (ARM) loan that bears interest at a rate that is subject to change and therefore adjustable during the term of the loan on a specified financial index that has been predetermined.

Inclusionary Zoning

An ordinance that requires a builder of new housing to set aside a designated number of units for low and moderate-income people.

Lease With An Option To Purchase

A lease in which the lessee (tenant) has the right to purchase real property under certain conditions such as a stipulated price or within a stipulated time frame either during or at the end of the lease term.

Lease to own

Lease-to-own is a term that refers to renting the home now but including a contract to be able to purchase that specific home in the foreseeable future. This is also refered to as a rent-to-own purchase or a lease purchase. The purchase option, is an option at a option fee agreed to by the parties. This option fee, up to 5% of the current value of the property, is a cost to the borrower since he is getting the benefit of the option. The borrower pays rent, and an additional rent premium that is also credited to the purchase price. If the purchase option is not exercised, the buyer loses both the option fee and the rent premium.

Sorry for the long blog today but I was asked about down payments today so I decide to explain how to come up with a down payment in detail. Not long ago, no-down-payment loans were the height of fashion for homebuyers. But now that lenders have tightened their standards, borrowers once again are expected to “put some skin in the game,” to use a favorite industry catchphrase. That “skin” refers to the borrower’s own cash, and it means down payments are definitely back in style. The chief advantage of a down payment today is simply the ability to qualify for a loan, as only a handful of so-called zero-down loan programs still exist. Yet down payments have other benefits, too. The more money you put down to buy a home, the smaller your monthly payments will be. A buyer’s down payment becomes a homeowner’s instant equity when the purchase closes, and that equity can be borrowed against with a home-equity loan or line of credit. Guidelines to qualify for these loans have become much stricter, however. Many first-time homeowners are “surprised by the true cost of owning and maintaining their home.” So they should keep some reserves rather than allocate every dollar to their down payment. Some loan programs require cash reserves for this reason.

Other benefits of a down payment include:

• Borrowing less money to buy the home.

• Shopping among more lenders, loan originators and loan products.

• Getting a lower interest rate.

• Paying less for mortgage insurance.

• Avoiding mortgage insurance altogether if the down payment is at least 20% of the home’s purchase price.

How to get a down Payment

Many homebuyers have difficulty coming up with a down payment. Here are a dozen ways to do it:

• Set up an automatic saving plan.

• Get a gift from your parents, grandparents, other relatives or friends.

• Sell a car, boat, motorcycle, collectibles or other assets.

• Liquidate stocks, mutual funds, savings bonds or other investments.

• Allocate your income tax refund.

• Take a loan from your 401(k) retirement plan and repay yourself with interest.

• Withdraw funds from your 401(k) plan, subject to taxes and penalties.

• Collect on a loan that you made to someone else.

• Get a bonus from your employer.

• Explore homebuyer programs for public servants if you qualify.

• Apply for a state or local government down-payment program.

• Use a private down-payment assistance program.

A down payment needs to be “sourced and seasoned. That means the lender needs to know how you obtained the funds and that you’ve had control of those funds for at least several months. Gifts and seller’s concessions are acceptable, up to the percentage allowed by the loan program, but borrowed money can’t be used as a down payment, as it is debt that has to be repaid.

Government-backed programs

Two government-run programs are designed to aid homebuyers who haven’t saved much for a down payment. The Federal Housing Administration offers mortgage insurance that allows qualified buyers to purchase a home with a 3% down payment, all of which may be a gift. The U.S. Department of Veterans Affairs offers a home-loan guarantee program that helps military veterans buy homes with no down payments. Down-payment programs run by state and local housing authorities offer grants and low-interest deferred-payment loans to homebuyers, though the restrictions can be pretty severe. Some programs require borrowers to live in a disadvantaged neighborhood. Others have income limitations, for example. The biggest problem tends to be that if you make enough money to qualify for a loan, you probably make too much money to get the down-payment assistance. Down-payment assistance programs offered by private organizations — Nehemiah and AmeriDream are two of the largest — convert money contributed by the seller into the buyer’s down payment. They are using the seller’s equity to fund a grant, which allows the buyer to buy with no money down. These programs serve a need for people who struggle to save a down payment, if the seller is motivated to contribute. But these programs are not without controversy. The down payment is of value only if the homebuyer can afford the monthly payments and whether someone who didn’t have the discipline to save a down payment would have the discipline to make the payments may be questionable. The FHA has tried, so far unsuccessfully, to ban the use of private down-payment programs in conjunction with FHA loans because FHA-insured loans using these programs have been shown to have a significantly higher incidence of default and foreclosure than loans not using such assistance, according to an FHA study. FHA loans made to borrowers relying on seller-funded down-payment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own down payments.

Down payment or closing costs?

Should homebuyers who have limited funds allocate more money toward their down payment or set aside some share of the total for closing costs? The simple answer is that the down payment should be the priority, up to at least 5% (or 3% for an FHA-insured loan) of the home’s purchase price. It doesn’t matter if they have the money for closing costs if we can’t show (the lender) that they have the money for the down payment.

If you’ve saved enough for a down payment but not closing costs, here are some options:

• Ask the seller to pick up the tab.

• Pay a higher interest rate in exchange for lender-paid closing costs.

• Wait to buy a home until you’ve saved more money.

If you want the seller to pay the costs, you should discuss that concession upfront before you sign a purchase contract, because payment of costs is a negotiable term that affects the seller’s net proceeds from the transaction. Borrowers can reduce or even eliminate their closing costs by paying a higher interest rate on their mortgage. This sophisticated strategy should be discussed with your loan officer, but the basic rule of thumb is that an additional 1/8% higher interest rate will net a credit against closing costs equal to 1/2% of the loan amount. For example, an additional 3/4% in interest might eliminate closing costs of 3%. The catch is that as your credit gets larger, it takes a bigger interest rate jump to achieve the same amount of savings. Instead of your total costs being 3% at one end of the spectrum and zero at the other end with a 3/4% higher interest rate, you could compromise on whatever combination of closing costs and interest rate you want.

Read at: http://articles.moneycentral.msn.com/Banking/HomeFinancing/HowToComeUpWithADownPayment.aspx?page=2

A new federal program, Home Affordable Foreclosure Alternatives, encourages banks to accept short sales by offering them financial incentives to do so. It offers sellers incentives, too.

Homeowners win because:

• They won’t get stuck with a deficiency judgment. Under the program, homeowners are released from all obligations.

• They can receive $3,000 in relocation expenses.

• They can’t be charged any fees to participate.

Creditors win, too, because they don’t inherit a vacant home to maintain. As big as the losses in short sales can be, the losses from foreclosure can be even bigger — by some estimates, as much as 60% of what’s owed on the mortgage.

Secondary lenders, who often stand to get nothing in foreclosures, can receive up to $6,000.

You may qualify for the foreclosure-alternatives program if:

• You have tried unsuccessfully to get a mortgage modification through the Home Affordable Modification Program.

• The property is your principal residence.

• You got your first mortgage loan before Jan.1, 2009.

• You are behind on your mortgage or will be in the foreseeable future.

• You owe no more than $729,750.

• Your total monthly mortgage payment is more than 31% of your income before taxes.

The foreclosure-alternatives program is set to expire Dec. 31, 2012. Some critics predict that it will be as disappointing as the loan-modification program, which was launched in March 2009. Out of millions of distressed homeowners, just 170,000 had received permanent modifications as of the end of February, according to the Department of the Treasury and HUD. (Many more modifications are being offered or are in the trial phases.) The median decline in monthly mortgage payment was about $500.

Will the new program be any better?

“It’s half right,” says Mary Tootikian, the author of “Stunned in America: Sub-Crime Mortgage Crisis.” “The intent of it is good.”

She worries, however, that the new program’s application process will allow lenders to find out borrowers’ incomes and assets. “After they go through this fact-finding mission and they find out you have assets to go after, they don’t have to let you do a short sale,” she says.

Arian-Pace, the Florida attorney, is more optimistic. “The frustration of short sales is the timing of it all, getting banks to approve it,” she says. “You often lose the buyer in the process. I’m hoping it’s a step in the right direction. Really, it’s going to come down to how the banks implement it.”

Read entire article at: http://articles.moneycentral.msn.com/Banking/HomeFinancing/short-sales-are-the-new-foreclosure.aspx?page=2

Many lenders negotiate prices for short-sales, in which the seller is offering the home for less than is owed on the mortgage. But traditionally the only way you could find out was to submit a below-list offer and wait—often for many months—for a response. If the bank made a counter-offer, you knew you were in the ballpark; if they didn’t respond at all, you were too low. By then, you may have lost all interest in buying the property. The good news is, on April 5, this frustrating system will change at least for some buyers and sellers. That’s when the federal government will begin to provide financial incentives to lenders to do more short sales. The rules also help standardize the process, so your chances of negotiating a distressed-property bargain will increase. Under the old practices, when a financially-distressed seller brought a potential buyer who was offering less than the amount owed on the loan, the bank would order an appraisal or broker’s price opinion (BPO) and then decide whether the offer was acceptable. Under the new federal rules, banks will order a BPO before the property is listed for sale, and will share information on the minimum net proceeds they’re willing to accept with the sellers. If they then bring in a buyer whose offer is equal to or greater than this pre-approved amount, the lender must accept it within 10 days.

Not all sellers are eligible for this program, called Home Affordable Foreclosure Alternatives (HAFA). But since the process is likely to go so much smoother for those who buy and sell under HAFA, I suggest you wait a bit until the program goes into effect and concentrate on finding these “pre-approved” deals. Of course, when you do find a property you like, you may not be the only person bidding on it. To improve your chances of winning, make sure your offer is “clean,” with as few contingencies as possible (though I would never forego a home inspection). Include tax and credit records, and a mortgage pre-approval letter. If you can afford to pay cash, that will put you in an even stronger bargaining position. Still, in your eagerness to win the property, don’t forget that distressed properties often come with added financial burdens. Although under HAFA, the seller is supposed to provide clear title, to protect yourself, your contract must make it clear that you will not be responsible for any of the seller’s unpaid property taxes, liens or second trusts. Also, cash-strapped homeowners often stop paying taxes and homeowners’ association fees during the time between when the house is listed and the deal is closed. To make sure that you’re not on the hook for these expenses, it is recommended that you ask that the bank escrow at least six months worth of taxes and HOA fees, to cover any potential shortfall.

Read more at: http://online.wsj.com/article/SB10001424052748704207504575130053855146896.html?mod=WSJ_Real+Estate_LeftTopNews

In most cases, certain closing costs are charged to buyer and others to the seller.  State law may dictate the division of some fees, but usually the division of costs follows local custom.  For most charges, it is always possible for an agreement between the parties to change the usual practice. In general, the seller usually pays for the costs of proving clear title, which may involve a survey and a search of the public records, summarized in an abstract of title. The seller usually pays any broker’s commission or state transfer taxes if required, and for any termite inspection. The buyer usually pays the costs of placing a new mortgage (application fee, appraisal, points on the loan), recording the mortgage and deed in the public records, mortgage tax if required, title insurance and home inspector’s fees where used. Again, the division of the charges can be changed by agreement between the parties.  Many mortgage plans set a limit on how many of the buyer’s costs the seller may agree to cover.

Read more at: http://www.askedith.com/questions/buying/who-pays-closing-costs