Question: I have the funds to buy a rental. How do I decide if I should be a landlord?
Answer: Before you buy any investment, you need to ask yourself some basic questions. First, are you emotionally prepared to be a landlord? If the toilet starts to leak on a Friday night, will you be willing to cancel your weekend plans so you can meet the plumber out at the property? If the tenant stops paying rent, can you handle the emotional upheaval that comes with an eviction?
The second question you must ask is whether or not you are financially prepared to carry the cost of owning property for at least three months. There will be times when the property is vacant or when repairs are needed. This will require you to come "out of pocket" to cover these expenses. You simply can not assume the rent will always be there. If you do not have a reserve from which you can draw when problems arise, you will soon find yourself in financial trouble.
Next you need to consider what type of property to buy. This will be dictated, to some extent, by your finances. Assuming you are looking at a small investment property (1-4 units), you need to decide if you want a multi-family or a single family home. Multi-family units are more expensive to purchase and maintain. However, the vacancy risk is spread out over a number of units. For example, if you have a single family home as a rental, when it is vacant, all your rental income is gone. If you have a duplex and one unit is vacant, you still have rent coming in from the other unit. On the other hand, the more units you have, the more maintenance is required, both in terms of managing the property as well as managing the tenants.
If this is your first rental, you may want to consider a condominium. You will have to pay homeowners dues, but you will be relieved of many maintenance issues such as gardening, roof, exterior paint, etc. Before you buy, make sure to check whether or not the Homeowners Association restricts the number or type of rentals. If you don't, you may find that you have purchased a home that can not be rented.
It's hard to manage property and harder to manage people. Of course, you can always hire a property manager. But that becomes an additional expense that must be factored in to the cost of ownership. And you need to be prepared to manage the manger. The bottom line is, you must approach real estate investing as a business. And, as such, it requires research to make sure you know what you are getting yourself in to, both financially and emotionally.
Monday, January 28, 2008
Friday, January 25, 2008
Ask the Expert - Should I Remodel Before Selling?
Question: I am about to put my home on the market. I spoke with a couple of agents. One said I needed to replace the carpets and paint before I sell. Another said I should redo the kitchen. But another said the house is OK to show now. I'm really confused. Should I remodel or not?
Answer: With that wide range of advice, it's no wonder you're confused! Without seeing your home, it is impossible for me to give you specific suggestions, but I can give you some guidelines to help you sort out what is the best course of action.
First, you need to have an accurate perception of your home's condition. From your question, I am assuming we're not talking about serious structural problems (broken stairs, falling retaining walls, etc.). Instead, you are asking about cosmetic issues. For most of us, it is very difficult to see our home as others do. You might want to ask a friend to walk through the home and give you an honest assessment of its cosmetic condition. You want to stress that you are prepared for some brutal comments and will not be offended to learn that the clown collection you have so prominently display in your living room looks ridiculous to others, or that the sea-green color you chose for the bathroom makes people nauseous.
Now that you have your list of "problems", prioritize them. Some problems are cheap and easy to fix and you should do them. Clutter usually comes under this category. Pack the clowns away. Remove excess furniture and clear away some bric-a-brac. You might consider renting a storage space if you don't have room in your home to hide these items. But you don't need to go overboard. There are some Realtors who believe that a home should be "sanitized", that all personal items like photos and mementos should be removed. I don't agree. I like showing a place that feels like someone's home rather than a motel room.
Next, consider doing upgrades and repairs that are inexpensive. Are there areas that need a fresh coat of paint? If you can do this yourself, this is a relatively easy and cheap fix and will certainly brighten up the home. One of the agents suggested you replace the carpet. If that carpet is not damaged or badly stained, perhaps a deep cleaning would make it acceptable. Small repair jobs should certainly be considered - recaulking bathtubs, fixing cabinet doors, replacing broken electrical faceplates - all these can be done for minimal amounts of money and effort.
Now to the big ticket items. This category usually includes things like remodeling the kitchen or bath, replacing carpet, etc. These take time and money. Do you have both? If not, then this is a moot point. But the bigger question is, should you, for example, remodel your kitchen before selling? In my opinion, unless the kitchen is in very bad condition, the answer is no. A home with a remodeled kitchen may sell faster than one without, but you almost never get back the money you spent for the remodel in the sales price. And more to the point, the buyer may not like what you're done.
As an example, let's say you decide your carpet needs to be replaced. Not that it's torn or horribly stained, but it looks "tired". So you spend $5,000 and install a lovely, good quality tan Berber. A buyer walks in the door, and says, "this is a nice house, but that tan carpet will look terrible with my furniture. The first thing I'd need to do is rip up this carpet and put in a different color. So I'll offer $5,000 less to make up for the cost of a new carpet." Now you're out $10,000 - $5,000 for the carpet you installed and $5,000 in reduced sales price. Instead, you might consider listing the home "as is" but with a $5,000 credit to the buyer for new carpeting. That way, the buyer can put in what they like and it has only cost you $5,000.
The bottom line is that you need to start by looking at your home through a buyer's eyes and getting a real sense of what needs to be done. Do those things that are cheap and easy. Next, consider those things that will give you the most "bang for your buck". And finally, for those items that are expensive and time consuming, consider a giving a credit-back to the buyer.
Answer: With that wide range of advice, it's no wonder you're confused! Without seeing your home, it is impossible for me to give you specific suggestions, but I can give you some guidelines to help you sort out what is the best course of action.
First, you need to have an accurate perception of your home's condition. From your question, I am assuming we're not talking about serious structural problems (broken stairs, falling retaining walls, etc.). Instead, you are asking about cosmetic issues. For most of us, it is very difficult to see our home as others do. You might want to ask a friend to walk through the home and give you an honest assessment of its cosmetic condition. You want to stress that you are prepared for some brutal comments and will not be offended to learn that the clown collection you have so prominently display in your living room looks ridiculous to others, or that the sea-green color you chose for the bathroom makes people nauseous.
Now that you have your list of "problems", prioritize them. Some problems are cheap and easy to fix and you should do them. Clutter usually comes under this category. Pack the clowns away. Remove excess furniture and clear away some bric-a-brac. You might consider renting a storage space if you don't have room in your home to hide these items. But you don't need to go overboard. There are some Realtors who believe that a home should be "sanitized", that all personal items like photos and mementos should be removed. I don't agree. I like showing a place that feels like someone's home rather than a motel room.
Next, consider doing upgrades and repairs that are inexpensive. Are there areas that need a fresh coat of paint? If you can do this yourself, this is a relatively easy and cheap fix and will certainly brighten up the home. One of the agents suggested you replace the carpet. If that carpet is not damaged or badly stained, perhaps a deep cleaning would make it acceptable. Small repair jobs should certainly be considered - recaulking bathtubs, fixing cabinet doors, replacing broken electrical faceplates - all these can be done for minimal amounts of money and effort.
Now to the big ticket items. This category usually includes things like remodeling the kitchen or bath, replacing carpet, etc. These take time and money. Do you have both? If not, then this is a moot point. But the bigger question is, should you, for example, remodel your kitchen before selling? In my opinion, unless the kitchen is in very bad condition, the answer is no. A home with a remodeled kitchen may sell faster than one without, but you almost never get back the money you spent for the remodel in the sales price. And more to the point, the buyer may not like what you're done.
As an example, let's say you decide your carpet needs to be replaced. Not that it's torn or horribly stained, but it looks "tired". So you spend $5,000 and install a lovely, good quality tan Berber. A buyer walks in the door, and says, "this is a nice house, but that tan carpet will look terrible with my furniture. The first thing I'd need to do is rip up this carpet and put in a different color. So I'll offer $5,000 less to make up for the cost of a new carpet." Now you're out $10,000 - $5,000 for the carpet you installed and $5,000 in reduced sales price. Instead, you might consider listing the home "as is" but with a $5,000 credit to the buyer for new carpeting. That way, the buyer can put in what they like and it has only cost you $5,000.
The bottom line is that you need to start by looking at your home through a buyer's eyes and getting a real sense of what needs to be done. Do those things that are cheap and easy. Next, consider those things that will give you the most "bang for your buck". And finally, for those items that are expensive and time consuming, consider a giving a credit-back to the buyer.
Tuesday, January 22, 2008
How to Value a Property - Whose Fault is it if I Paid Too Much?
There is an article in today's New York Times about a woman who is suing her Realtor because she believes she paid too much for her house. She claims her Realtor withheld important information about the value of the home, and that the lender and appraiser aided in this fraud. As a real estate professional, I am intrigued by the specifics of the suit. But it brings up a broader question. Excluding cases where there has been fraud or misrepresentation, what influences a buyer's opinion when deciding what a home is worth?
Buyers look to a number of resources for help when deciding on an offer price. Typically, the primary source for pricing information is their Realtor. Hopefully the Realtor and client have looked at other homes in the neighborhood for comparison. In addition, the Realtor should be able to show the client sales prices for similar homes. But no two homes are identical. Even homes with the same floor plan can have vastly different values depending on condition, upgrades, lot, views, etc.
A second source of information is the appraisal. At it's most basic, an appraisal is designed to assure the lender of the home's value. This is why many purchase agreements have a contingency that states the appraisal must equal or exceed the offer price. Usually the appraiser finds recent sales of similar homes. He then lists the differences between these "comparables" and the subject property and assigns a value to each difference. By adjusting the value of the subject property based on the value of these differences (adding value for assets the subject has that the others don't, subtracting value for assets the comparables have that the subject does not), he comes up with the appraised value of the home.
But buyers also turn to another source for help in establishing a home's worth and, in my experience, this group has more influence then either the Realtor or the appraiser. It consists of friends and family. They may or may not have actually knowledge of similar property values, but they will certainly have an opinion. Most of us like to have our decisions confirmed by those we know and trust. If a friend looks at the home, hears the offer price and starts to gush about what a great a "deal" it is, odds are that the buyer will go ahead and make the offer. If, however, this same friend frowns and suggests the price is too high, no amount of comparables proving otherwise will make most buyers comfortable with the offer price.
But the final judge of a property's worth comes down to the buyer herself. We all see property through our own set of preferences and prejudices. Sometimes we know what we want, describe it to the Realtor, and he finds something that comes close. But every Realtor who has been in the business for more than a few years has a story about a buyer making a list of "must-haves", then buying something different.
When a buyer walks into a home and her eyes light up, nothing and no one will dissuade her from doing whatever she can to get the home. Her Realtor can show her "better" homes; the appraiser can provide lower-priced comparables; friends can point out the home's defects. But even with all this data, sometimes a buyer simply must have that house. It's as if she has fallen in love. And, as with love, a buyer can be blind to the house's true value. It's only after the honeymoon period is over that the buyer may realize she has paid too much. And, like a marriage, it can be very costly to "divorce" your house.
Buyers look to a number of resources for help when deciding on an offer price. Typically, the primary source for pricing information is their Realtor. Hopefully the Realtor and client have looked at other homes in the neighborhood for comparison. In addition, the Realtor should be able to show the client sales prices for similar homes. But no two homes are identical. Even homes with the same floor plan can have vastly different values depending on condition, upgrades, lot, views, etc.
A second source of information is the appraisal. At it's most basic, an appraisal is designed to assure the lender of the home's value. This is why many purchase agreements have a contingency that states the appraisal must equal or exceed the offer price. Usually the appraiser finds recent sales of similar homes. He then lists the differences between these "comparables" and the subject property and assigns a value to each difference. By adjusting the value of the subject property based on the value of these differences (adding value for assets the subject has that the others don't, subtracting value for assets the comparables have that the subject does not), he comes up with the appraised value of the home.
But buyers also turn to another source for help in establishing a home's worth and, in my experience, this group has more influence then either the Realtor or the appraiser. It consists of friends and family. They may or may not have actually knowledge of similar property values, but they will certainly have an opinion. Most of us like to have our decisions confirmed by those we know and trust. If a friend looks at the home, hears the offer price and starts to gush about what a great a "deal" it is, odds are that the buyer will go ahead and make the offer. If, however, this same friend frowns and suggests the price is too high, no amount of comparables proving otherwise will make most buyers comfortable with the offer price.
But the final judge of a property's worth comes down to the buyer herself. We all see property through our own set of preferences and prejudices. Sometimes we know what we want, describe it to the Realtor, and he finds something that comes close. But every Realtor who has been in the business for more than a few years has a story about a buyer making a list of "must-haves", then buying something different.
When a buyer walks into a home and her eyes light up, nothing and no one will dissuade her from doing whatever she can to get the home. Her Realtor can show her "better" homes; the appraiser can provide lower-priced comparables; friends can point out the home's defects. But even with all this data, sometimes a buyer simply must have that house. It's as if she has fallen in love. And, as with love, a buyer can be blind to the house's true value. It's only after the honeymoon period is over that the buyer may realize she has paid too much. And, like a marriage, it can be very costly to "divorce" your house.
Saturday, January 19, 2008
To Tell Or Not To Tell - Real Estate Disclosures
Whether you are buying or selling residential real estate, your contract, if correctly written, will require a variety of disclosures. Disclosures are documents provided to the buyer, usually by the seller or someone hired by the seller, divulging information which could materially affect the desirability or marketability of the property. Some disclosures are mandated by law; others are dictated by common sense.
They cover a lot of ground, everything from whether the home has legal and functioning smoke detectors to whether the neighbors are noisy. But whatever the topic, they exist as an attempt to stop misunderstandings and potential lawsuits.
Because disclosures cover so many areas, it is sometimes difficult to decide what should and should not be disclosed. But what if the seller knows about a condition that may occur? Should that be disclosed? As an example, let's assume the seller lives near an open lot that is under negotiations to be developed. Nothing is finalized and no one has actually started building. But the seller knows that this could occur. Should the seller disclose this?
The answer is yes. This is just the sort of information a buyer needs to know and a seller has an obligation to disclose. These potential developments may not be obvious to someone driving through the area, but the seller knows about them. So even if building hasn’t begun, a buyer has the right to be informed of the possibility of development.
This information could directly affect a purchaser’s assessment of the value of the property. He could decide that he doesn’t want to live in a place where trucks and workers will be driving through on a daily basis. He may not want to live with the noise, dust and disarray that happens with construction. On the other hand, the buyer may see this as a boon. More building brings more buyers into the area and, perhaps, an increase in property values.
In any event, it is up to the seller to disclose this information. And it is up to the buyer to decide how this information will affect his desire to purchase. This is the essence of the disclosure laws.
They cover a lot of ground, everything from whether the home has legal and functioning smoke detectors to whether the neighbors are noisy. But whatever the topic, they exist as an attempt to stop misunderstandings and potential lawsuits.
Because disclosures cover so many areas, it is sometimes difficult to decide what should and should not be disclosed. But what if the seller knows about a condition that may occur? Should that be disclosed? As an example, let's assume the seller lives near an open lot that is under negotiations to be developed. Nothing is finalized and no one has actually started building. But the seller knows that this could occur. Should the seller disclose this?
The answer is yes. This is just the sort of information a buyer needs to know and a seller has an obligation to disclose. These potential developments may not be obvious to someone driving through the area, but the seller knows about them. So even if building hasn’t begun, a buyer has the right to be informed of the possibility of development.
This information could directly affect a purchaser’s assessment of the value of the property. He could decide that he doesn’t want to live in a place where trucks and workers will be driving through on a daily basis. He may not want to live with the noise, dust and disarray that happens with construction. On the other hand, the buyer may see this as a boon. More building brings more buyers into the area and, perhaps, an increase in property values.
In any event, it is up to the seller to disclose this information. And it is up to the buyer to decide how this information will affect his desire to purchase. This is the essence of the disclosure laws.
Friday, January 18, 2008
Mortgage Forgiveness Debt Relief Act - No Longer Adding Insult To Injury
Mary and John Smith bought their home in 2005 for $300,000. They got 100% financing and an adjustable rate mortgage starting at 4.5% with monthly payments of just over $1,500. In 2007, their interest rate adjusted up to 6.5%, increasing their monthly payment almost $400. For a couple of months they struggled with the increase, but finally they realized that they could no longer afford the payments. So they decided to sell their home.
Unfortunately, their house was now worth only $250,000, $50,000 less than their mortgage. They called their bank and explained the situation. The bank realized that if they had to foreclose on the Smiths, the cost of the foreclosure would be more than the $50,000 they would lose if they let the Smiths sell the home for its lowered value. So the bank agreed to accept a "short sale". They would let the Smiths sell the home for less than the $300,000 loan, and the proceeds from that sale would be accepted as payment in full for the $300,000 loan. The Smiths thought they were lucky to have a bank that was willing to release them from their $300,000 liability for only $250,000. And they felt even luckier when they actually found a buyer for their home.
But their luck ran out with the IRS. The IRS looked at the short sale and said that the $50,000 difference between what the Smiths owed the bank ($300,000) and what they gave the bank ($250,000) was, in the eyes of the IRS, forgiveness of debt and, therefore, should be counted as income. They demanded that the Smiths pay taxes on the $50,000 "income", even though the Smiths never received the money!
The unfairness of this was so clear that Congress passed, and the President signed, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648). For those homeowners who qualify, they are relieved of this tax liability. The bill is effective retroactively for debt discharged from January 1, 2007 through December 31, 2009. The Act deals only with personal residences where debt is discharged through foreclosure, short sale, renegotiations, etc. And for those who keep their homes put pay mortgage insurance, it also extends the tax deduction for payment of governmental and private mortgage insurance for another three years.
Check with your tax advisor or read the full text of the Act to see if you qualify. It may not allow you to keep your home, but at least it won't be adding insult to injury by having you pay taxes on "income" you never received.
Unfortunately, their house was now worth only $250,000, $50,000 less than their mortgage. They called their bank and explained the situation. The bank realized that if they had to foreclose on the Smiths, the cost of the foreclosure would be more than the $50,000 they would lose if they let the Smiths sell the home for its lowered value. So the bank agreed to accept a "short sale". They would let the Smiths sell the home for less than the $300,000 loan, and the proceeds from that sale would be accepted as payment in full for the $300,000 loan. The Smiths thought they were lucky to have a bank that was willing to release them from their $300,000 liability for only $250,000. And they felt even luckier when they actually found a buyer for their home.
But their luck ran out with the IRS. The IRS looked at the short sale and said that the $50,000 difference between what the Smiths owed the bank ($300,000) and what they gave the bank ($250,000) was, in the eyes of the IRS, forgiveness of debt and, therefore, should be counted as income. They demanded that the Smiths pay taxes on the $50,000 "income", even though the Smiths never received the money!
The unfairness of this was so clear that Congress passed, and the President signed, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648). For those homeowners who qualify, they are relieved of this tax liability. The bill is effective retroactively for debt discharged from January 1, 2007 through December 31, 2009. The Act deals only with personal residences where debt is discharged through foreclosure, short sale, renegotiations, etc. And for those who keep their homes put pay mortgage insurance, it also extends the tax deduction for payment of governmental and private mortgage insurance for another three years.
Check with your tax advisor or read the full text of the Act to see if you qualify. It may not allow you to keep your home, but at least it won't be adding insult to injury by having you pay taxes on "income" you never received.
Wednesday, January 16, 2008
Credit Repair Scam That May Get You A New Home - IN JAIL!
Your credit is lousy. Maybe you just declared bankruptcy or gone into foreclosure. You're desperate and depressed. Suddenly, you find the answer to your prayers. It may come as an add on TV. Or it might show up as a letter in your mailbox. But there it is - a chance to start over:
Erase Your Credit!
Get a New - CLEAN - Credit File in 30 Days!
Get a Fresh Start With a New Credit ID!
Whatever the words, the promise is the same. For a fee (of course) you will get a new credit ID number which you can then use to build a whole, new credit profile. Use this new number when applying for credit and no one will ever see your old credit problems. And, best of all, this is totally legal and sanctioned by the government!
It sounds wonderful and, like most things that sound too good to be true, this one is a lie. It's a scam to move what little money you have left, out of your pocket and into those of the "credit repair" company. The difference between this and other scams is that this one is also illegal and, by following their instructions, you could end up in jail.
The scam is based on a process called "file segregation". You will be told how to file for a "new" social security number. In fact, what you will be doing is filing for an Employer Identification Number (EIN). EIN's look like social security numbers, but they are used by businesses to report financial information to the IRS. Your helpful "credit counselor" will recommend that you use a different mailing address on your application, and suggest you come up with some credit references ("not to worry if the addess and references are fake, it's just a formality").
Once you get your EIN, you will be instructed to use it (and the false address and credit references) to apply for new credit cards or loans. You'll be cautioned that it may take 60-90 days before your new credit "really begins to work", so be sure to pay all your new bills on time.
What you will NOT be told is that, by following their advice, you may be committing fraud. It is a federal crime to:
Misrepresent your social security number;
Obtain a EIN under false pretenses;
Make false statements on a loan or credit application.
If you use the mail or phone to apply for credit and provide false information, you could also be charged with mail or wire fraud. And if that were not enough, in most states, you could also be accused of civil fraud.
The bottom line is that there is no quick and easy way to "start over". If you want to repair your credit history, start by reading Your Credit Rating - Know the Score and Help During Hard Times.
Many people are looking for a quick, easy way to repair their credit. But it takes time and work. Don't fall for this scam. Not only will you be throwing away your money, you may end up in jail.
Erase Your Credit!
Get a New - CLEAN - Credit File in 30 Days!
Get a Fresh Start With a New Credit ID!
Whatever the words, the promise is the same. For a fee (of course) you will get a new credit ID number which you can then use to build a whole, new credit profile. Use this new number when applying for credit and no one will ever see your old credit problems. And, best of all, this is totally legal and sanctioned by the government!
It sounds wonderful and, like most things that sound too good to be true, this one is a lie. It's a scam to move what little money you have left, out of your pocket and into those of the "credit repair" company. The difference between this and other scams is that this one is also illegal and, by following their instructions, you could end up in jail.
The scam is based on a process called "file segregation". You will be told how to file for a "new" social security number. In fact, what you will be doing is filing for an Employer Identification Number (EIN). EIN's look like social security numbers, but they are used by businesses to report financial information to the IRS. Your helpful "credit counselor" will recommend that you use a different mailing address on your application, and suggest you come up with some credit references ("not to worry if the addess and references are fake, it's just a formality").
Once you get your EIN, you will be instructed to use it (and the false address and credit references) to apply for new credit cards or loans. You'll be cautioned that it may take 60-90 days before your new credit "really begins to work", so be sure to pay all your new bills on time.
What you will NOT be told is that, by following their advice, you may be committing fraud. It is a federal crime to:
Misrepresent your social security number;
Obtain a EIN under false pretenses;
Make false statements on a loan or credit application.
If you use the mail or phone to apply for credit and provide false information, you could also be charged with mail or wire fraud. And if that were not enough, in most states, you could also be accused of civil fraud.
The bottom line is that there is no quick and easy way to "start over". If you want to repair your credit history, start by reading Your Credit Rating - Know the Score and Help During Hard Times.
Many people are looking for a quick, easy way to repair their credit. But it takes time and work. Don't fall for this scam. Not only will you be throwing away your money, you may end up in jail.
Tuesday, January 15, 2008
Ask the Expert - Exclusive Listing = Good Deal?
Question: I want to sell my home and interviewed a couple of agents. One of them said he would list my home as an "exclusive" and charge a lower commission. I'm confused as to what this means. This seems to be a good idea since he says it will save me a lot of money in commissions. Is this as good a deal as it looks?
Answer: You are wise to be skeptical. Remember the old adage "if it looks too good to be true, it probably is"? That applies here. Contrary to what you may think, an agent's primary job is not to market your home to potential buyers. His job is to market your home to other agents! Why? Every agent has a "stable" of clients. At any moment in time, I have about a hundred qualified buyers with whom I am actively working who may be interested in your home. And if I got your listing, I certainly would advertise the home to them. But each agent also has their "stable". So when I interest an agent in your home, I am, in essence, contacting all her clients! When an agent lists a home on the multiple listing service, he is advertising to all other agents that the home is available.
Sometimes an agent will offer to cut his commission in exchange for being the only agent who can sell the home. As the seller, you see a dollar savings in the commission. What you don't see is how expensive this "savings" can be. First of all, it may take longer to sell you home since you have severely cut the numbers of potential buyers. And because the home is not being allowed to respond to market forces (i.e. the greatest number of buyers looking at the home), you will never know if the sales price you ultimately settled for is the best you could have gotten. The more agents involved, the more likely you are to get your highest and best offer. So if you agree to this agent's suggestion of an "exclusive", you may be invoking another old saying - "penny wise and pound foolish"!
Answer: You are wise to be skeptical. Remember the old adage "if it looks too good to be true, it probably is"? That applies here. Contrary to what you may think, an agent's primary job is not to market your home to potential buyers. His job is to market your home to other agents! Why? Every agent has a "stable" of clients. At any moment in time, I have about a hundred qualified buyers with whom I am actively working who may be interested in your home. And if I got your listing, I certainly would advertise the home to them. But each agent also has their "stable". So when I interest an agent in your home, I am, in essence, contacting all her clients! When an agent lists a home on the multiple listing service, he is advertising to all other agents that the home is available.
Sometimes an agent will offer to cut his commission in exchange for being the only agent who can sell the home. As the seller, you see a dollar savings in the commission. What you don't see is how expensive this "savings" can be. First of all, it may take longer to sell you home since you have severely cut the numbers of potential buyers. And because the home is not being allowed to respond to market forces (i.e. the greatest number of buyers looking at the home), you will never know if the sales price you ultimately settled for is the best you could have gotten. The more agents involved, the more likely you are to get your highest and best offer. So if you agree to this agent's suggestion of an "exclusive", you may be invoking another old saying - "penny wise and pound foolish"!
Saturday, January 12, 2008
Mortgage Rates - Lock Them Up
Generally, when a borrower applies for a loan, the rate "floats", or moves up or down with market conditions, until the loan is approved. So if rates rise between application and approval, you get the higher rate. Conversely, if rates go down, you get the lower rate.
If rates are on the rise, a borrower might want to "lock in" their rate early on, before rates go any higher. This is called a rate lock and it can offer a borrower peace of mind.
Simply stated, when a borrower locks in the interest rate, the borrower gets the rate as contracted, whether rates move up or down. In a climate of rising rates, this can be very appealing. But there are a few things to be aware of before you turn the key on your rate lock.
Many borrowers believe that, once they lock in their rate, the rate is secure until they close escrow. This may not be the case. Most lenders will lock the rate for 30 days. Unfortunately, the average escrow is 45 to 60 days. So be sure to ask your lender the exact date your lock will expire.
If your lock does expire prior to closing your escrow, how do you protect your rate until closing? You could delay locking-in the loan by waiting 15 to 30 days after you have a signed purchase agreement. If you suspect rates may drop in the short term, this could be a wise strategy. But in a rising interest rate market, you could end up with a higher rate.
You could ask the lender to extend the lock-in period. Most lenders will allow this - but for a price, usually a small additional loan fee. You will need to weigh the cost of the extended lock against your guess as to whether rates will go up, down, or remain level.
Finally, some lenders offer the option that, if you lock in and rates go up, you have the contracted rate. But if rates go down, they will give you the lower rate. This option seems to be getting harder to find, but it's worth asking your lender if they offer it.
If rates are on the rise, a borrower might want to "lock in" their rate early on, before rates go any higher. This is called a rate lock and it can offer a borrower peace of mind.
Simply stated, when a borrower locks in the interest rate, the borrower gets the rate as contracted, whether rates move up or down. In a climate of rising rates, this can be very appealing. But there are a few things to be aware of before you turn the key on your rate lock.
Many borrowers believe that, once they lock in their rate, the rate is secure until they close escrow. This may not be the case. Most lenders will lock the rate for 30 days. Unfortunately, the average escrow is 45 to 60 days. So be sure to ask your lender the exact date your lock will expire.
If your lock does expire prior to closing your escrow, how do you protect your rate until closing? You could delay locking-in the loan by waiting 15 to 30 days after you have a signed purchase agreement. If you suspect rates may drop in the short term, this could be a wise strategy. But in a rising interest rate market, you could end up with a higher rate.
You could ask the lender to extend the lock-in period. Most lenders will allow this - but for a price, usually a small additional loan fee. You will need to weigh the cost of the extended lock against your guess as to whether rates will go up, down, or remain level.
Finally, some lenders offer the option that, if you lock in and rates go up, you have the contracted rate. But if rates go down, they will give you the lower rate. This option seems to be getting harder to find, but it's worth asking your lender if they offer it.
Thursday, January 10, 2008
Piggybacking Credit - Don't Get Taken For A Ride
We've all heard the ads - "Increase your credit score in 30 days or less!" - companies promising to bolster your credit score into the 700's so you can get better rates on your loans or credit cards. How do they work this magic when it takes the rest of us months to clean up our credit?
The process they use is called "credit piggybacking". For a fee (usually in the thousands of dollars) they will match you up with someone with excellent credit who will then place you on one of their credit cards as an "authorized user". You don't get to use the other person's card. In fact, you often don't even get the card. What you do get is to "piggyback" on to part of their credit history. Their entire payment history for that account magically shows up on your credit report as if it were your own payment history. Because these "donors" have been screened to ensure their credit is excellent, their payment history serves to increase your overall credit score. If you buy enough of these accounts, it can really push your score up.
It's a great situation for everyone. You get an increase in your credit score, allowing you to get credit at a better rate. And the owner of the account and the company that matched you with the credit card holder gets to share in the fees you paid to have this done. Everyone is happy. Everyone, that is, except the bank when you apply for a new loan or credit card. For some reason, they seem to view this as credit fraud. And now it is going to stop.
FICO, the company that compiles credit scores for banks, is revamping the way scores are calculated. An "authorized user" account will no longer count when calculating your credit score. It won't hurt you, but it won't help you either. If you have been using an "authorized user" account to bolster your credit score, you may actually see your score decline, since this account will no longer be factored in to the calculation.
If you need to improve your credit, read Your Credit Rating - Know the Score. If someone offers you an "autorized users" account, don't take it. At best you'll be throwing out money on fees. At worst you'll be accused of credit fraud. This is one piggyback ride you can't afford to take.
The process they use is called "credit piggybacking". For a fee (usually in the thousands of dollars) they will match you up with someone with excellent credit who will then place you on one of their credit cards as an "authorized user". You don't get to use the other person's card. In fact, you often don't even get the card. What you do get is to "piggyback" on to part of their credit history. Their entire payment history for that account magically shows up on your credit report as if it were your own payment history. Because these "donors" have been screened to ensure their credit is excellent, their payment history serves to increase your overall credit score. If you buy enough of these accounts, it can really push your score up.
It's a great situation for everyone. You get an increase in your credit score, allowing you to get credit at a better rate. And the owner of the account and the company that matched you with the credit card holder gets to share in the fees you paid to have this done. Everyone is happy. Everyone, that is, except the bank when you apply for a new loan or credit card. For some reason, they seem to view this as credit fraud. And now it is going to stop.
FICO, the company that compiles credit scores for banks, is revamping the way scores are calculated. An "authorized user" account will no longer count when calculating your credit score. It won't hurt you, but it won't help you either. If you have been using an "authorized user" account to bolster your credit score, you may actually see your score decline, since this account will no longer be factored in to the calculation.
If you need to improve your credit, read Your Credit Rating - Know the Score. If someone offers you an "autorized users" account, don't take it. At best you'll be throwing out money on fees. At worst you'll be accused of credit fraud. This is one piggyback ride you can't afford to take.
Tuesday, January 8, 2008
Getting Ready to Buy
If you have been trying to sell your home during the last six months, you know it’s been a very difficult time. But what’s bad for the seller can be very good for the buyer. Many buyers have been waiting on the sidelines to see if real estate values will drop any further and, when they do, these folks plan to buy. If you are one of these potential buyers, you may want to consider what you can do today to make it easier to buy tomorrow.
Start by getting your credit in order. Read my blog entry, Your Credit Rating – Know the Score, to learn how to get a free credit report as well as tips to help you resolve any credit problems. It is imperative that you get your credit score as high as possible. After last year’s mortgage crisis, lenders are very leery of making loans to people with credit problems. In the past, these folks would have been offered loans at a less advantageous rate. This is known in the industry as “B paper”. But it is just these loans that are at a high risk of defaulting. So lenders have really scaled back on making “B” loans. If you have credit problems, you will have problems getting a loan, so it will be well worth your time to try and clean up your credit report before you go hunting for a loan.
Next, review your spending and savings habits. The days of 100% financing are over. You will need money for a down payment. If you don’t have the money already saved, start saving now. If someone is planning to gift you the funds, see if they would be willing to do so sooner rather than later. Why? Let’s say your parents plan to give you $10,000 towards your down payment. You find a home you love, make an offer, and the offer is accepted. You call the folks, tell them the good news, and they send you the money which you deposit into your savings account. Suddenly you get a call from your lender asking where this money came from. You will now have to go through some hoops to prove the money is, in fact, a gift and not a loan. The folks will have to sign a document stating that they never intend to have you pay back the money. Often people don’t like having their motives questioned and I’ve seen situations where this has caused a rift between parent and child. If, however, you have the funds in the bank before you apply for the loan (usually 3 months will do the trick) the lender will not question the source of the funds.
OK – you’ve cleaned up your credit and stashed away the down payment. Now you need to find a home. Before you go house-hunting you need to know your price range. Start by talking to your lender to see how much you can borrow. Add your down payment to the loan amount and you’ll have a good sense of the price range the lender thinks you can afford. But that’s only half the story. You need to do some soul-searching before you go house-searching. Let’s say the lender says you can afford monthly payments of $2,000 per month. Presently, you pay rent of $1,200 per month. That’s $800 less per month, but at the end of each month when you look at your checkbook, the balance is $0. What happened to that extra $800? If the answer is you spent it on movies, vacations, and going out to eat, you need to decide whether or not you can live without these luxuries. Remember, you are not just buying a home; you are also buying a lifestyle. If you cannot, or will not, live without these “extras” then you either need to scale back on the price of the home or keep renting.
Start by getting your credit in order. Read my blog entry, Your Credit Rating – Know the Score, to learn how to get a free credit report as well as tips to help you resolve any credit problems. It is imperative that you get your credit score as high as possible. After last year’s mortgage crisis, lenders are very leery of making loans to people with credit problems. In the past, these folks would have been offered loans at a less advantageous rate. This is known in the industry as “B paper”. But it is just these loans that are at a high risk of defaulting. So lenders have really scaled back on making “B” loans. If you have credit problems, you will have problems getting a loan, so it will be well worth your time to try and clean up your credit report before you go hunting for a loan.
Next, review your spending and savings habits. The days of 100% financing are over. You will need money for a down payment. If you don’t have the money already saved, start saving now. If someone is planning to gift you the funds, see if they would be willing to do so sooner rather than later. Why? Let’s say your parents plan to give you $10,000 towards your down payment. You find a home you love, make an offer, and the offer is accepted. You call the folks, tell them the good news, and they send you the money which you deposit into your savings account. Suddenly you get a call from your lender asking where this money came from. You will now have to go through some hoops to prove the money is, in fact, a gift and not a loan. The folks will have to sign a document stating that they never intend to have you pay back the money. Often people don’t like having their motives questioned and I’ve seen situations where this has caused a rift between parent and child. If, however, you have the funds in the bank before you apply for the loan (usually 3 months will do the trick) the lender will not question the source of the funds.
OK – you’ve cleaned up your credit and stashed away the down payment. Now you need to find a home. Before you go house-hunting you need to know your price range. Start by talking to your lender to see how much you can borrow. Add your down payment to the loan amount and you’ll have a good sense of the price range the lender thinks you can afford. But that’s only half the story. You need to do some soul-searching before you go house-searching. Let’s say the lender says you can afford monthly payments of $2,000 per month. Presently, you pay rent of $1,200 per month. That’s $800 less per month, but at the end of each month when you look at your checkbook, the balance is $0. What happened to that extra $800? If the answer is you spent it on movies, vacations, and going out to eat, you need to decide whether or not you can live without these luxuries. Remember, you are not just buying a home; you are also buying a lifestyle. If you cannot, or will not, live without these “extras” then you either need to scale back on the price of the home or keep renting.
Monday, January 7, 2008
Ask the Expert - Which Agent Writes the Offer?
Question: Last week I drove by a home that looked interesting. I called the agent whose name was on the sign and made an appointment with her to see the house. After looking it over and discussing the pros and cons with her, I told her I was interested in making an offer, but that I would be using my own agent. She seemed upset. Did I do something wrong?
Answer: In a word - "yes". Instead of calling the listing agent, you should have had your own agent make an appointment to show you the property. Look at it from the listing agent's point of view. She took the time to meet you at the property, show it to you, answer all your questions, maybe even give you pricing comparables for the house and advise you on the best structure for an offer. You used her time and her expertise. But you didn't want her to get paid for that. Instead, you handed the fruits of her work over to another agent. In effect, you said that her time and knowledge were worthless. Sure, she would still get part of the commission if you bought the home through another agent. But you increased her work without increasing her pay. And you took up her time that she could have spent working with her own clients. No wonder she was upset - wouldn't you be if someone did that to you?
Answer: In a word - "yes". Instead of calling the listing agent, you should have had your own agent make an appointment to show you the property. Look at it from the listing agent's point of view. She took the time to meet you at the property, show it to you, answer all your questions, maybe even give you pricing comparables for the house and advise you on the best structure for an offer. You used her time and her expertise. But you didn't want her to get paid for that. Instead, you handed the fruits of her work over to another agent. In effect, you said that her time and knowledge were worthless. Sure, she would still get part of the commission if you bought the home through another agent. But you increased her work without increasing her pay. And you took up her time that she could have spent working with her own clients. No wonder she was upset - wouldn't you be if someone did that to you?
Sunday, January 6, 2008
Ask the Expert - Appraisal Question
Question: I am in the process of refinancing my home loan. The lender called the other day and said they would be sending an appraiser out to my home. What effect, if any, will the appraisal have on my interest rate?
Answer: The appraised value of your home certainly can alter your interest rate. Basically, the more equity you have in your home, the better your loan rate and terms. Why? Because the lender thinks you will be less likely to default on a loan if you have a lot of equity in the house. What's a lot of equity? For an owner occupied home, the lender would like to see 20% or more equity. So if the home is valued at $100,000, the lender will loan you up to $80,000 and still give you the best rate and terms. That is not to say the lender will not loan you more, but, in most circumstances, the rate and terms will be the most advantageous at this 80% number. So back to your question - the appraisal certainly can affect your interest rate. If you want to refinance $80,000 of debt, you hope the property appraises for at least $100,000. If not, you may need to accept a less advantageous rate or term, or you may need to borrow less money.
Answer: The appraised value of your home certainly can alter your interest rate. Basically, the more equity you have in your home, the better your loan rate and terms. Why? Because the lender thinks you will be less likely to default on a loan if you have a lot of equity in the house. What's a lot of equity? For an owner occupied home, the lender would like to see 20% or more equity. So if the home is valued at $100,000, the lender will loan you up to $80,000 and still give you the best rate and terms. That is not to say the lender will not loan you more, but, in most circumstances, the rate and terms will be the most advantageous at this 80% number. So back to your question - the appraisal certainly can affect your interest rate. If you want to refinance $80,000 of debt, you hope the property appraises for at least $100,000. If not, you may need to accept a less advantageous rate or term, or you may need to borrow less money.
Saturday, January 5, 2008
Your Mortgage Payment - Go Figure
Many of us pay a home mortgage each month. But few of us understand how the payment is calculated. I know - no one told you there'd be math. But grab your calculator anyway and follow along.
Amortized loans (loans where the payment includes principal as well as interest) are generally due on the first day of each month. Unlike rent, where the amount you pay on May 1st is for use of the home from May 1st - May 31st, interest is paid "in arrears". This means that the payment made on May 1st is for the use of the funds from April 1st - April 30th.
The payment has two parts - principal, which helps to pay down the debt, and interest. The interest payment is calculated by multiplying 1/12 of the interest rate times the previous month's loan balance. Whatever is left after paying the interest is the principal, and your loan is decreased by that amount.
Let's assume a $100,000 loan at 6% amortized over 30 years with a monthly payment of $599.56. (The amortization term sets the monthly payment.) 1/12 of .06 (the interest rate) is .005. Multiply that times $100,000 and you get $500. So $500 of the payment goes to pay interest. The balance, $99.56, will be used to reduce the principal. Therefore, next month the loan balance will be $99,900.44.
The process repeats each month, but the portion of the payment allocated to interest gradually declines while the portion used to reduce the loan gradually rises. For example, the next month's payment is allocated as follows: interest due .005 times $99,900.44, or $499.51, leaving $100.06 as the amount available for principal reduction.
One thing to remember is that, while the payment may be "due" on the 1st, it usually is not "delinquent" until later in the month. That date can be as late as the 15th. A payment received by the delinquent date (in this example, the 15th) is treated exactly the same as if it were received on the 1st. So you can hold on to your funds for an additional 2 weeks without penalty. You do not want to incur a late fee so be sure to confrm your specific delinquent date with your lender.
Fortunately, your lender calculates your principal and interest allocations for you. But it's always good to know how it works - just in case you ever want to check the math!
Amortized loans (loans where the payment includes principal as well as interest) are generally due on the first day of each month. Unlike rent, where the amount you pay on May 1st is for use of the home from May 1st - May 31st, interest is paid "in arrears". This means that the payment made on May 1st is for the use of the funds from April 1st - April 30th.
The payment has two parts - principal, which helps to pay down the debt, and interest. The interest payment is calculated by multiplying 1/12 of the interest rate times the previous month's loan balance. Whatever is left after paying the interest is the principal, and your loan is decreased by that amount.
Let's assume a $100,000 loan at 6% amortized over 30 years with a monthly payment of $599.56. (The amortization term sets the monthly payment.) 1/12 of .06 (the interest rate) is .005. Multiply that times $100,000 and you get $500. So $500 of the payment goes to pay interest. The balance, $99.56, will be used to reduce the principal. Therefore, next month the loan balance will be $99,900.44.
The process repeats each month, but the portion of the payment allocated to interest gradually declines while the portion used to reduce the loan gradually rises. For example, the next month's payment is allocated as follows: interest due .005 times $99,900.44, or $499.51, leaving $100.06 as the amount available for principal reduction.
One thing to remember is that, while the payment may be "due" on the 1st, it usually is not "delinquent" until later in the month. That date can be as late as the 15th. A payment received by the delinquent date (in this example, the 15th) is treated exactly the same as if it were received on the 1st. So you can hold on to your funds for an additional 2 weeks without penalty. You do not want to incur a late fee so be sure to confrm your specific delinquent date with your lender.
Fortunately, your lender calculates your principal and interest allocations for you. But it's always good to know how it works - just in case you ever want to check the math!
Friday, January 4, 2008
The Rationale Behind Ratios
Over the years, lending guidelines for the purchase or refinance of a home have become increasingly prescribed. Complexes must meet specified owner-occupancy percentages, credit scores must exceed specified numbers, and down payments must meet a lender’s minimum criteria.
All of these come under the heading of “underwriting guidelines”. And one of the first guidelines written was how to calculate the borrower’s “top and bottom ratios”. No, this does not refer to a borrower’s ideal waist and hip measurements. Rather, it is a formula to assess whether or not the borrower can meet her loan payment obligations. If a borrower falls within certain ratios, the lender feels comfortable with the borrower’s ability to repay the loan. Here’s how these ratios are calculated.
The “top” ratio refers to the monthly cost of running the property divided by the borrower’s monthly gross income. The lender calculates the proposed monthly mortgage payment, adds the monthly property taxes, insurance and homeowner’s dues (if any). This number is divided by the borrower’s gross monthly income and the resulting number is the “top” ratio.
The “bottom” ratio is calculated the same way, except that, along with the property costs, the lender includes all other regular monthly expenses. This would include such items as child support, alimony, car payments, credit card payments, student loans, boat docking fees, etc.
Let’s look at an example. Say a borrower makes $50,000 a year and wants to borrow $100,000 at 7% for 30 years. The monthly payments would be $662. Property taxes and insurance might be $250 per month, bringing the total monthly expense for the property to $912. The borrower’s monthly gross is $4,167, and when that is divided by 912, the result is 22%, well below 28%, the maximum lenders like to see for a “top” ratio.
Now let’s add in other monthly expenses like $300 for credit cards and $175 for a car loan. Add this to the monthly $912, and our borrower now has a projected monthly expense of $1,387. Divide this by the monthly gross and you have a “bottom” ratio of 33% which just meets the lender’s guidelines.
Most lenders have a variety of loan programs for borrowers who don’t fit into these ideal ratios. But they are generally at less favorable rates and terms. And many of them will be adjustable rate loans, rather than fixed rate.
While it is still possible to convince an underwriter to consider “extenuating circumstances” when reviewing your loan, more and more, the human element in underwriting is being replaced by cold numbers. The trend in the industry is towards computer programs designed to evaluate a borrower’s credit-worthiness. And though they may be efficient, computers are rarely sympathetic.
All of these come under the heading of “underwriting guidelines”. And one of the first guidelines written was how to calculate the borrower’s “top and bottom ratios”. No, this does not refer to a borrower’s ideal waist and hip measurements. Rather, it is a formula to assess whether or not the borrower can meet her loan payment obligations. If a borrower falls within certain ratios, the lender feels comfortable with the borrower’s ability to repay the loan. Here’s how these ratios are calculated.
The “top” ratio refers to the monthly cost of running the property divided by the borrower’s monthly gross income. The lender calculates the proposed monthly mortgage payment, adds the monthly property taxes, insurance and homeowner’s dues (if any). This number is divided by the borrower’s gross monthly income and the resulting number is the “top” ratio.
The “bottom” ratio is calculated the same way, except that, along with the property costs, the lender includes all other regular monthly expenses. This would include such items as child support, alimony, car payments, credit card payments, student loans, boat docking fees, etc.
Let’s look at an example. Say a borrower makes $50,000 a year and wants to borrow $100,000 at 7% for 30 years. The monthly payments would be $662. Property taxes and insurance might be $250 per month, bringing the total monthly expense for the property to $912. The borrower’s monthly gross is $4,167, and when that is divided by 912, the result is 22%, well below 28%, the maximum lenders like to see for a “top” ratio.
Now let’s add in other monthly expenses like $300 for credit cards and $175 for a car loan. Add this to the monthly $912, and our borrower now has a projected monthly expense of $1,387. Divide this by the monthly gross and you have a “bottom” ratio of 33% which just meets the lender’s guidelines.
Most lenders have a variety of loan programs for borrowers who don’t fit into these ideal ratios. But they are generally at less favorable rates and terms. And many of them will be adjustable rate loans, rather than fixed rate.
While it is still possible to convince an underwriter to consider “extenuating circumstances” when reviewing your loan, more and more, the human element in underwriting is being replaced by cold numbers. The trend in the industry is towards computer programs designed to evaluate a borrower’s credit-worthiness. And though they may be efficient, computers are rarely sympathetic.
Thursday, January 3, 2008
Economic Hard Times - A Home Survival Guide
In these complex economic times, you may find yourself in the position of possibly losing your home to foreclosure. Lenders understand these difficulties and have some flexibility in working with borrowers who run into financial trouble.
For example, according to the FreddieMac guidelines on alternatives to foreclosure, the secondary mortgage market gives a mortgage lender broad discretion to extend relief "to a borrower who encounters hardship, is cooperative and has proper regard for fulfilling obligations . . ."
This article explains steps you can take to work with your lender in an effort to preserve your home – and your credit rating. The key to each of these methods is cooperation. Once you realize you are having financial difficulties, you should notify your lender immediately. The sooner you contact them, the more time there will be to try and work out an acceptable arrangement. The more forthcoming you are, the more willing they will be to help.
The first potential remedy is referred to as temporary indulgence. Here, the lender, if asked, may grant the borrower a short period of time -usually not more than three months - in order to cure any delinquency. However, this is merely temporary relief, and by the end of that short grace period, the borrower must be completely current.
Another approach is a repayment plan. Under this scenario, the borrower is given a fixed period of time, usually not to exceed one year, in which to bring the mortgage current by immediately making and continuing to make payments in excess of the monthly loan payment. It is important to get this repayment plan in writing and signed by both the lender and the borrower.
Lenders also can enter into what is known as a special forbearance relief agreement. Under this plan the regular monthly loan payments are suspended or reduced for a period of up to eighteen months from the due date of the first unpaid monthly installment. At the conclusion of this relief period, the regular payments must be resumed. Additionally, you and the lender must have agreed upon a plan to pay back the loan amounts that were suspended.
If you are in the military, the Soldiers' and Sailors' Civil Relief Act of 1940 provides various forms of relief, but you should check with your military or civilian lawyer to determine your eligibility under that Act.
Another avenue that may be available to you is known as a short sale. Here, the lender will authorize you to sell the property, even though its value is less than the loan amount. The lender receives all the proceeds and you are absolved of any responsibility towards the debt.
The deed in lieu of foreclosure is another remedy that may be available to you. Under this arrangement, you deed your property to the lender (or to whomever the lender designates) and this is in lieu of (instead of) foreclosure proceedings.
The key element is time. If you are having, or think you may have, problems making your loan payments, call the lender NOW. The longer you wait, the less time there will be to try and remedy the problem before it becomes a crisis. And don't be embarrassed to ask for help. The worst thing the lender can say is no - and they just might say yes.
For example, according to the FreddieMac guidelines on alternatives to foreclosure, the secondary mortgage market gives a mortgage lender broad discretion to extend relief "to a borrower who encounters hardship, is cooperative and has proper regard for fulfilling obligations . . ."
This article explains steps you can take to work with your lender in an effort to preserve your home – and your credit rating. The key to each of these methods is cooperation. Once you realize you are having financial difficulties, you should notify your lender immediately. The sooner you contact them, the more time there will be to try and work out an acceptable arrangement. The more forthcoming you are, the more willing they will be to help.
The first potential remedy is referred to as temporary indulgence. Here, the lender, if asked, may grant the borrower a short period of time -usually not more than three months - in order to cure any delinquency. However, this is merely temporary relief, and by the end of that short grace period, the borrower must be completely current.
Another approach is a repayment plan. Under this scenario, the borrower is given a fixed period of time, usually not to exceed one year, in which to bring the mortgage current by immediately making and continuing to make payments in excess of the monthly loan payment. It is important to get this repayment plan in writing and signed by both the lender and the borrower.
Lenders also can enter into what is known as a special forbearance relief agreement. Under this plan the regular monthly loan payments are suspended or reduced for a period of up to eighteen months from the due date of the first unpaid monthly installment. At the conclusion of this relief period, the regular payments must be resumed. Additionally, you and the lender must have agreed upon a plan to pay back the loan amounts that were suspended.
If you are in the military, the Soldiers' and Sailors' Civil Relief Act of 1940 provides various forms of relief, but you should check with your military or civilian lawyer to determine your eligibility under that Act.
Another avenue that may be available to you is known as a short sale. Here, the lender will authorize you to sell the property, even though its value is less than the loan amount. The lender receives all the proceeds and you are absolved of any responsibility towards the debt.
The deed in lieu of foreclosure is another remedy that may be available to you. Under this arrangement, you deed your property to the lender (or to whomever the lender designates) and this is in lieu of (instead of) foreclosure proceedings.
The key element is time. If you are having, or think you may have, problems making your loan payments, call the lender NOW. The longer you wait, the less time there will be to try and remedy the problem before it becomes a crisis. And don't be embarrassed to ask for help. The worst thing the lender can say is no - and they just might say yes.
Wednesday, January 2, 2008
Beware of Predatory Lenders
Recently, I was asked to consult for some people who felt they had been defrauded by a lender and wanted to know what options were available to them. Their story is typical of how these scam artists work and can serve as an example – and warning - to others.
Usually the victims are chosen because they are perceived as not being very “bank savvy,” often immigrants with limited English skills or the elderly. But the scam also works well on people who are afraid of “looking stupid” so never ask questions. In general the “mark” is someone who can’t or won’t ask for advice.
Here’s the way the scam works. An offer is made to help the client get approval for a home loan. Typically, the lender will be of the same ethnic or racial origin as the client, especially if the client’s English language skills are limited. The lender will then explain that it is extremely difficult to find a loan for the client (this may or may not be true). However, by virtue of his skills, connections, hard work, and desire to help, he has managed to find a loan. The point here is to make the client grateful and to create a feeling of trust. The rates and terms are extremely high, but the lender explains that the added fees are necessary because of the client’s real or fabricated credit problems.
When the client goes in to sign the paperwork, he will find that the “deal” has changed. Rates and fees will be even higher than those initially quoted. If the client owns other property, the lender may suddenly require that these properties also be used as collateral. I saw a case where the lender tried to force the client to sign over his sister’s home!
Should the client balk at signing, he may be bullied and threatened. He will be told that “no one else will make you a better deal” and may be threatened with legal action if he does not sign. One client received harassing phone calls during the night and threatening visits at her place of business.
Once the client signs the deal, the real problems begin. Because the interest rates are so high the client is often not able to make the monthly payments. As an act of “generosity” the lender allows the client to tack the monthly payments on to the total loan amount rather than pay monthly. But at the end of the (very short) loan term, usually one to three years, the client finds that the amount owed has outstripped his borrowing power. A legitimate lender will not make him a loan. And the bank that holds the note will not extend the loan term.
And now we come to the point of the scam. The lender is not interested in the monthly payments. In fact, he prefers the client not make the monthly payments; he wants to foreclose on the house. In a place like the Bay Area, where housing prices are high, that’s where the real profit lies. The client is forced into foreclosure and the bank gets all the property secured by the loan.
Once the deal is signed, it is extremely difficult to prove that the client was coerced, harassed and bullied into signing. Protect yourself. Demand to see all documents in writing and take them to a third party for review before you sign. If the lender refuses to give them to you – RUN! You could be signing away your home and borrowing a load of trouble.
Usually the victims are chosen because they are perceived as not being very “bank savvy,” often immigrants with limited English skills or the elderly. But the scam also works well on people who are afraid of “looking stupid” so never ask questions. In general the “mark” is someone who can’t or won’t ask for advice.
Here’s the way the scam works. An offer is made to help the client get approval for a home loan. Typically, the lender will be of the same ethnic or racial origin as the client, especially if the client’s English language skills are limited. The lender will then explain that it is extremely difficult to find a loan for the client (this may or may not be true). However, by virtue of his skills, connections, hard work, and desire to help, he has managed to find a loan. The point here is to make the client grateful and to create a feeling of trust. The rates and terms are extremely high, but the lender explains that the added fees are necessary because of the client’s real or fabricated credit problems.
When the client goes in to sign the paperwork, he will find that the “deal” has changed. Rates and fees will be even higher than those initially quoted. If the client owns other property, the lender may suddenly require that these properties also be used as collateral. I saw a case where the lender tried to force the client to sign over his sister’s home!
Should the client balk at signing, he may be bullied and threatened. He will be told that “no one else will make you a better deal” and may be threatened with legal action if he does not sign. One client received harassing phone calls during the night and threatening visits at her place of business.
Once the client signs the deal, the real problems begin. Because the interest rates are so high the client is often not able to make the monthly payments. As an act of “generosity” the lender allows the client to tack the monthly payments on to the total loan amount rather than pay monthly. But at the end of the (very short) loan term, usually one to three years, the client finds that the amount owed has outstripped his borrowing power. A legitimate lender will not make him a loan. And the bank that holds the note will not extend the loan term.
And now we come to the point of the scam. The lender is not interested in the monthly payments. In fact, he prefers the client not make the monthly payments; he wants to foreclose on the house. In a place like the Bay Area, where housing prices are high, that’s where the real profit lies. The client is forced into foreclosure and the bank gets all the property secured by the loan.
Once the deal is signed, it is extremely difficult to prove that the client was coerced, harassed and bullied into signing. Protect yourself. Demand to see all documents in writing and take them to a third party for review before you sign. If the lender refuses to give them to you – RUN! You could be signing away your home and borrowing a load of trouble.
Tuesday, January 1, 2008
How To Get SERVICE From Customer Service
Most of us pay our home loan every month, never thinking there will be a problem. But on those rare occasions when something does go wrong, there is nothing more infuriating then having to deal with an uncooperative customer service representative. Here are a few suggestions that may help you get the service you need.
First and foremost, you must keep careful records of your conversations and correspondence. When you speak with someone, always ask for his or her name and telephone extension. If you mail something, keep a copy. Help the company help you by having these facts in front of you each time you contact them.
If you don’t get the service you expect, ask to speak with a supervisor.
Remember that the service rep’s job is to “shield” management from your call, so be persistent. You may need to ask for a supervisor three or four times before you are put through. And don’t forget to write down the supervisor’s name and phone number.
Never assume that the company is keeping track of these conversations. During each call, ask the person on the other end to be sure and document the call in your file. Ask twice, once at the start of the call and again before you hang up.
But sometimes calling isn’t enough. You then need to resort to putting your concerns in writing. Wait until you’ve had a chance to cool down. Then go to the top - send your letter to the company’s Chief Executive Officer. Be specific and clear in your letter. Send copies of any relevant documents. Refer to the names of those with whom you’ve spoken and the dates the calls were made. Be clear as to what you want the CEO to do.
You will probably not hear back directly from the CEO. But that’s OK. You want the CEO to contact the department that has made the error. If anything is going to get a response, it’s a call from corporate headquarters.
If all else fails, contact the regulatory agencies that oversee your lending institution. The easiest way to do this is to ask the lender; they are required to tell you.
I hope you never need to make use of these tips. But if you do, they may help you get the service you deserve.
First and foremost, you must keep careful records of your conversations and correspondence. When you speak with someone, always ask for his or her name and telephone extension. If you mail something, keep a copy. Help the company help you by having these facts in front of you each time you contact them.
If you don’t get the service you expect, ask to speak with a supervisor.
Remember that the service rep’s job is to “shield” management from your call, so be persistent. You may need to ask for a supervisor three or four times before you are put through. And don’t forget to write down the supervisor’s name and phone number.
Never assume that the company is keeping track of these conversations. During each call, ask the person on the other end to be sure and document the call in your file. Ask twice, once at the start of the call and again before you hang up.
But sometimes calling isn’t enough. You then need to resort to putting your concerns in writing. Wait until you’ve had a chance to cool down. Then go to the top - send your letter to the company’s Chief Executive Officer. Be specific and clear in your letter. Send copies of any relevant documents. Refer to the names of those with whom you’ve spoken and the dates the calls were made. Be clear as to what you want the CEO to do.
You will probably not hear back directly from the CEO. But that’s OK. You want the CEO to contact the department that has made the error. If anything is going to get a response, it’s a call from corporate headquarters.
If all else fails, contact the regulatory agencies that oversee your lending institution. The easiest way to do this is to ask the lender; they are required to tell you.
I hope you never need to make use of these tips. But if you do, they may help you get the service you deserve.
Your Credit Rating - Know The Score
If you’ve applied for a loan, you already know that one of the first things the lender will do is check your credit score. This score will dictate the type of loan for which you will qualify (fixed or adjustable), as well as its rate and terms. Understanding the components of this report, as well as how to modify it in your favor, could make the difference between getting a high or low interest rate, or even effect your ability to qualify at all.
A credit report is a printout of your credit history over the past seven to ten years. If you share credit with anyone (spouse, child, parent) the report will not distinguish among borrowers. It shows credit cards, both opened and closed, loans of all kinds (home, car, boat, etc.), as well as any judgments or liens which have been filed against you. If your ex-spouse has filed a lien against you for alimony or child support, or if you owe money to any governmental agency (property tax collector, IRS), those will also show up. In addition, any foreclosures, bankruptcies, or evictions will appear.
But the report is not simply a list of these items; it also contains your payment history. Each company with which you have established credit provides information to centralized credit reporting agencies. This information includes: when you established the credit; the type (revolving, installment, etc.); the maximum amount borrowed; and your payment record. Do you make your payments on time? How many times have you been 30, 60, or 90 days late (or more)? Is your account still open or has it been paid in full? Did the account go to a collection agency, and, if so, were any funds recovered? In addition, the report shows any inquiries made by credit agencies.
So what does all this mean to you and, more importantly, what can you do to change any negative items? One of the first things you can do is to find out exactly what your report shows. If you have been denied credit, you have the right to receive a copy of your report within 30 days of the denial. In addition, anyone can order a copy of his own credit report. There are three major U.S. credit reporting bureaus, Equifax, Experian, TransUnion.
The problem is that and not all companies report to all three. So if you want your full credit history, you will need to buy a consolidated report. However, once a year, you are entitled to get a credit report from each agency for free. To request your free annual reports, go to https://www.annualcreditreport.com/ .
Once you get the report, read it carefully. If something does not seem correct, you could be the victim of credit fraud. The National Fraud Information Center http://www.fraud.org/ can help. If you wish to dispute something on the report, contact the agency reporting the error. If you are unable to get satisfaction from the reporting company, contact your local consumer protection agency or the state Attorney General’s office.
If there are blemishes on your credit report, you may be able to mitigate their negative effects by attaching letters of explanation. You should also realize that too many credit inquiries can also be a red flag. So only apply for those credit cards you really need.
Perhaps most important is to understand the ramifications of your payment habits. Even minor late payments can effect your rating. And the trend in the lending industry is to discriminate even between excellent credit and perfect credit. The key is to repair what problems you can and make sure any future ratings are problem-free. In this way, you will improve you credit rating and obtain the best loan possible.
A credit report is a printout of your credit history over the past seven to ten years. If you share credit with anyone (spouse, child, parent) the report will not distinguish among borrowers. It shows credit cards, both opened and closed, loans of all kinds (home, car, boat, etc.), as well as any judgments or liens which have been filed against you. If your ex-spouse has filed a lien against you for alimony or child support, or if you owe money to any governmental agency (property tax collector, IRS), those will also show up. In addition, any foreclosures, bankruptcies, or evictions will appear.
But the report is not simply a list of these items; it also contains your payment history. Each company with which you have established credit provides information to centralized credit reporting agencies. This information includes: when you established the credit; the type (revolving, installment, etc.); the maximum amount borrowed; and your payment record. Do you make your payments on time? How many times have you been 30, 60, or 90 days late (or more)? Is your account still open or has it been paid in full? Did the account go to a collection agency, and, if so, were any funds recovered? In addition, the report shows any inquiries made by credit agencies.
So what does all this mean to you and, more importantly, what can you do to change any negative items? One of the first things you can do is to find out exactly what your report shows. If you have been denied credit, you have the right to receive a copy of your report within 30 days of the denial. In addition, anyone can order a copy of his own credit report. There are three major U.S. credit reporting bureaus, Equifax, Experian, TransUnion.
The problem is that and not all companies report to all three. So if you want your full credit history, you will need to buy a consolidated report. However, once a year, you are entitled to get a credit report from each agency for free. To request your free annual reports, go to https://www.annualcreditreport.com/ .
Once you get the report, read it carefully. If something does not seem correct, you could be the victim of credit fraud. The National Fraud Information Center http://www.fraud.org/ can help. If you wish to dispute something on the report, contact the agency reporting the error. If you are unable to get satisfaction from the reporting company, contact your local consumer protection agency or the state Attorney General’s office.
If there are blemishes on your credit report, you may be able to mitigate their negative effects by attaching letters of explanation. You should also realize that too many credit inquiries can also be a red flag. So only apply for those credit cards you really need.
Perhaps most important is to understand the ramifications of your payment habits. Even minor late payments can effect your rating. And the trend in the lending industry is to discriminate even between excellent credit and perfect credit. The key is to repair what problems you can and make sure any future ratings are problem-free. In this way, you will improve you credit rating and obtain the best loan possible.
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