Tips for Avoiding Mortgage Fraud
Mortgage fraud continues to be a major problem for banks, mortgage lenders and consumers. Mortgage fraud is action that is not only investigated by local law enforcement but will be investigated by the Federal Bureau of Investigation as well. In fact, engaging in mortgage fraud can be punishable by up to 30 years in federal prison or $1,000,000 fine, or both. Mortgage fraud scams impact banks and mortgage lenders with loans that default as well the real estate profession, the economy and a significant number of individual homeowners.
Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the FBI recently commented in a press release that, “We will not stand by while real estate professionals and others exploit the financial system for their personal gain. Mortgage fraud – and the foreclosures and boarded up houses that often follow from it – has a real and significant effect on neighborhoods and property values. The FBI is working tirelessly in every part of the country to protect communities and financial institutions from the effects of mortgage fraud.”
For those consumers that are buying a new home, refinancing an existing mortgage, or searching for help to reduce their home loan debt and other debts, they could be a target of mortgage fraud by individuals and mortgage professionals.
Mortgage fraud is defined as a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan. The FBI puts out notices that remind individuals that it is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.
There are two general types of mortgage fraud, fraud used to acquire property and fraud used purely for profit. Mortgage fraud that is used to purchase a home or acquire property usually involves a borrower who is committing fraud on a single home loan transaction. Often, the individual committing fraud is buying the property to occupy it and fully intends to repay the home loan. Though the intentions may not sound bad, the borrower makes misrepresentations about their income or their debts, the value of the home or falsifies data about the down payment. At times mortgage and real estate professionals are involved in assisting the home loan borrower so that they qualify for the mortgage and can purchase or refinance the home.
Fraud that is committed for the motive of turning a profit will involve mortgage or real estate industry professionals. These cases of mortgage fraud generally involve several home loans and can often be for millions of dollars. Mortgage fraud cases with professionals can be much more complex and involve issues as wide spread and complicated as having straw buyers which involves a borrower that assumes the identity of another person, property value that are fraudulently inflated, scam down payments that do not exist or are borrowed and disguised as the borrowers own funds, as well as flagrant misrepresentations including: overstating income, overstating assets, overstating collateral, fictitious employment and other related untrue facts and figures.
Some tips for recognizing and avoiding being part of a mortgage fraud transaction include:
Make sure to read and understand everything you are signing. Speak to another mortgage professional or an attorney if you need something explained. Don’t sign anything you don’t understand at anytime in the purchase, mortgage application or closing process.
Do not sign any home loan documents that contain inaccurate information, such as inflated or inaccurate income, sources of the down payment, incorrect sales price, type and length of your employment, your intent to occupy the property as your primary residence, existing debts, etc.
Don’t sign any mortgage loan documents with information left blank. Blank spaces can be filled in later by other parties to the transaction yet still has your original signature.
Know and understand the terms of the home mortgage. Check your information against the information in the home loan documents to ensure they are accurate and complete.
Do not agree to a price above your asking price. If there are any unusual circumstances regarding the purchase price, take a second look at the transaction and ask for assistance if the arrangement seems unusual. This may be particularly important if you are asked to refund the difference after the closing or if the extra money is to be used for repairs or improvements that you know are unnecessary.
Do not let someone else use your name or social security number to buy a property, especially if he or she offers to pay you for using it.
Deal directly with the mortgage lender or the mortgage broker. Do not let a third party arrange your mortgage loan.
Make sure to get a complete set of the mortgage loan and related closing documents at the time of settlement.
Review the title history to determine if the property has been sold multiple times within a short period. It could mean that this property has been flipped or bought and sold recently and the value can possibly be falsely inflated.
It is always sound advice to get referrals for real estate and mortgage professionals before filling out the mortgage loan application or signing a contract. Check the licenses of the real estate professionals and mortgage lenders involved in the transaction with the local licensing authorities.
Shopping and comparing mortgage loans and mortgage rates involves some work, don’t skimp on the process since the long term costs of a mistake can be significant.
Buying a New Home at a Discount
New home builders are starting to struggle a bit. As the housing market continues to slow, new home sales are dropping. Prospective buyers wind up stuck in their current homes as they struggle to sell, leaving builders with an ever increasing inventory of new homes.
To move those properties, builders are starting to offer substantial incentives and discounts. Some homes have been slashed in price by as much as twenty percent. Other builders pay closing costs on the mortgage loan or offer gift certificates for free furniture to help seal the deal. Home loan related offers also include builders paying points on the mortgage which can help to reduce the mortgage rate. Still others are offering perks such as free rooms or upgrades.
While this situation is getting sticky for some builders, it is a wonderful opportunity for those in a position to buy a new home and take advantage of lower home prices and reduced cost mortgages. For the first time in years, you are now able to negotiate with builders to secure your brand new home at a sizeable discount. Or at the very least take advantage of standard rebates and other incentives builders are throwing at buyers.
Spec Homes
The best deals to be had are on existing inventory. When builders start a home without a buyer lined up, it is called a spec home. These are the “quick move-in” homes advertised by builders for those who don’t want to wait for months to start new construction. These spec homes are also what are weighing heavily on many builders.
When a spec home doesn’t sell quickly, it is costly to builders. An undeveloped lot or even a home in progress is appraised far less than a completed home. As a home nears completion, the taxes are higher and builders feel greater motivation to sell. This motivation is the key to your future great deal.
Builders complete a specific number of spec homes every month depending on market conditions. Of course, new homes can take four to six months to complete, so it can be challenging to judge the market conditions that far in advance which is one reason there are so many spec homes to be found.
Another reason is that many potential buyers start building a new home only to find they are unable to sell their existing home. If they started their new home on a contingency, the builder assumes responsibility of the started home and it becomes yet another spec home for the builder to try to sell through rebates and substantial discounts.
The internet provides an excellent way to begin your research and even complete many of the home buying steps to secure a great deal on a new home with a builder.
Builder Websites
If you know of builders in your area, start by searching their websites for existing inventory. There may be advertised specials on the website, but even so, send an email to the builder requesting additional information on spec homes in the neighborhood and asking if any additional discounts or promotions are available. You’ll likely see a rapid response if the builder is able to move on his price at all or make other incentives to move the house. If the builder isn’t offering to pay mortgage points or mortgage closing costs they may offer upgrades to the property for free or even male the first mortgage payments on yourun new home loan.
Aggregate Sites
Even if you have no idea what companies are building in a certain area, you can still find new homes online along with discounts on those homes. Sites such as inest.com and move.com allow you to search for all new homes in a certain area. These sites may have incentives listed as part of the description on the new home. If not, you can still contact the builder through the company website or possibly through contact information provided by the aggregate site to see if additional discounts exist.
Web Searches
Finally, a web search may help you find additional discount opportunities. In a major search engine, such as Google, type in “Your City New Home Discounts” and see what results you find. Many may be repeats from other research methods, but you may find a hidden jewel or two from custom builders or real estate companies.
Yahoo, among other websites, offers a real estate service that plots new neighborhoods and builders in the area. On Yahoo’s site, a pull down menu in the real estate section allows you to locate new homes in any city you request in the search box.
Local newspaper websites will not only display real estate listings including new homes, but you may also be able to find banner ads displaying the various incentives builders are offering. Search for newspapers in your desired city and then comb through the online real estate section to see what you can find in the way of new homes and possible incentives.
Remember that you are looking for “Available” or “Fast Move-in” or “Move-in Ready” homes from these builders, so vary your keywords when you search to be sure you catch all possible opportunities. Seek out additional discounts and negotiate as much as possible. Even if the builder is not offering financial incentives you can ask if they will negotiate to get your mortgage rate lower. You may just land yourself your dream home and low cost mortgage loan for far less than you ever imagined.
Are Your Ready to Buy a Condo?
When you think you’ve found the perfect unit, you have your down payment ready, your going to call the mortgage lender and you’re ready sign on the dotted line, hold off for a moment. Are you sure you are completely prepared to buy into a community property? Do you know everything there is to know about your future home? Are you really ready to buy a condo?
Documented Problems
One of the best places to look for hidden dirt on your future home is in the minutes of the condo association board meetings. Anyone with complaints will likely come before the board and if you notice several of the same complaints, you may be buying into a lemon or simply a property that is poorly managed. You don’t want to be part of either one.
Delinquencies
Has there been a history of missing payments from your future neighbors? You should be able to find the delinquency records for the building. High rates of delinquency, or even moderate ones, are a sign of bad things to come. One problem is that the condo owners are having financial trouble which can lead to more distressed sales that bring down prices. In addition, when the condo owners are delinquent less money is paid into the project for common area maintenance and expenses.
Repair/Reserve Fund
Owners pay into a repair and reserve fund. Research the fund to see how much it contains. Older properties should have as much as 50% of the estimated costs of refurbishing the building and grounds in the fund for planned improvements, new fixtures or roofing, and emergencies. Newer buildings should have at least 10-25%. Make sure to carefully review the condition of the property, not just the unit you intend to buy but the exterior of the building and the common areas as well.
Insurance
Make extra sure you take a look at the insurance on the property. Find out if replacement costs and costs of rebuilding are correct and find out if the property has a building ordinance clause. This pays for improvements to the building to bring it up to date as ordinances change. You should also be sure you know how much of your unit and personal property is covered by the building insurance policy and be sure to make up the difference with your own insurance.
Legalities
Utilize the services of a real estate lawyer to work through all the paperwork and bylaws of the association to be sure everything is up to snuff. The laws should not only make sense for the units, they should also be in line with state and local laws as well. Your lawyer can also head over to the local courthouse to check and see if any suits have been brought against the property.
Renters
You need to know how friendly your condo is to renters. You don’t want too many renters as they can change the attractiveness of the units to other buyers, but you also want to know if you are able to rent your own unit to others. Would you need to find and screen those renters or is that taken care of by the management company? Also be aware that bylaws affecting renting can change at any time. If a fair number of owners rent, however, that is considerably less likely to happen. The number of renters may also present a problem when it comes time to obtain a home loan for to purchase the property. Mortgage lenders consider is a greater risk if the condo project has a large quantity of renters and may not approve a mortgage loan on a heavily rented project.
Management
Finally, understand exactly who is managing the property. Are the owners managing the building or is it under the control of a management company? Buildings managed by the owners can be fraught with hassles, even if the overall management is done effectively. If you are looking at a building with a property management company, find out all you can about that company and be sure to interview the day-to-day manager directly. You want to be sure your property is in excellent hands at all times.
Condo Mortgage Loans
A final caution is to be fully aware of the home loan guidelines on condos. Many mortgage lenders, during times of tight mortgage credit, restrict their home loans on condos. Mortgage lenders will often require a slighter larger mortgage down payment and may increase the mortgage rate. The reason behind the restrictions is that condos will generally not appreciate as fast as single family homes and when they have to be foreclosed on and sold in times of distress, it is more common that the sale price will not be enough to cover the mortgage loan balance. Also, condos have historical had a higher mortgage delinquency rate during economic contractions. Therefore, mortgage lenders like to reduce their risk exposure to these types of mortgage loans.
While new buyers may not be overly concerned about refinancing the home loan, since condos will appreciate at a slower rate than single family homes in general, refinancing in the future may be slightly more difficult than it would be on a single family detached home. Increased equity by appreciation or mortgage loan balance reduction makes mortgage refinances easier especially when the mortgage holder is not requesting cash out. Since the condo may not increase in value as fast that little benefit of increased home equity in the home is not a strong on a condo as it is in a single family detached home.
Not-So-Glorious Home Ownership
According to any number of experts in the media, political arena and at backyard barbecues, we should all own our own homes. Home ownership has always been a goal in the United States as it makes a statement about the stability of your income and makes you a better citizen, among other things. Homeowners have long been extolled as being pillars of the moral society, being more involved in the community, and having more educated children. But how much of that is fact, and how much is mere propaganda?
Recent numbers have certainly shown that far too many Americans own homes that they can not afford. Mortgage delinquency is rising as more mortgage payments are slipping seriously past due. These homeowners fell victim to irrational pressures that push home ownership on the American people. People that are now trying to recover from financial loss associated with an unsustainable mortgage loan, credit problems and personal problems stemming from the desire to follow the propaganda pushing the American dream.
Is Home Ownership for Everyone?
If propaganda is to be believed, we should all own our own homes. Unfortunately, many people buy into this belief but fail to consider if, in fact, owning and maintaining their own home is really the right personal decision. There is no doubt society is telling you to buy a home. But it may very well be that your bank account, your lifestyle and your career are sending a very different message entirely.
There are many home loan programs available from the government and banks that have helped low income families become proud home owners with reduced mortgage down payment programs. Unfortunately, many of those homeowners are now staring at rising mortgage payments and imminent foreclosure. Many of these families and individuals took advantage of the sub prime lending craze that swept the nation in recent years thanks to overall low interest rates, low mortgage rates and in some cases additional government assistance.
Now, with mortgage rates creeping back up, mortgage loan payments are coming up too and money is getting tight. When these sub prime buyers are unable to pay their mortgage, they face eviction and foreclosure. Mortgage refinancing, which seemed like a viable option for mortgage payment relief, became more difficult and often involved an even higher mortgage rates. Not only have they lost any investment up to this point, they have also lost their credit rating and their pride. It’s hard to feel good about yourself after being kicked out of the home you were so proud to own a few short years ago as well as losing the mortgage down payment funds and any other money that may have allocated to make previous mortgage payments and housing maintenance.
Don’t Buy a Home
Home ownership isn’t for everyone. When you own a home you must have time and money to spend maintaining that property. You must learn how to cut and edge the lawn and how time consuming driving from the suburbs to the city can be. Many city dwellers who buy a home in the suburbs chafe at the sudden isolation and removal from community activities.
Others find their free time now consumed by drives to and from work every day. Still others realize that paying homeowner association dues and property taxes isn’t as much fun as they were anticipating.
Many homeowners are not only overwhelmed by the new mortgage payment, referred to as payment shock in the mortgage industry, especially when the home loan is based on an adjustable rate mortgage but are also unpleasantly surprised over the cost of maintenance. Maintenance does not just mean maintaining the yard and cleaning but unlike a rental unit in which the structure is maintained by the landlord, your home physical structure including plumbing, electrical and physical wear and tear is maintained by the home owner.
Buying a home isn’t the right choice for many people. If you are in a career that relocates you often, you may be frustrated trying to sell home after home and losing money in mortgage closing costs and commissions. You may also not be an ideal candidate for home ownership if you are at retirement age. Many retirees would do well to sell their homes (along with the maintenance they represent) and find a high-quality, well maintained rental instead.
But Is It Better To Own a Home?
There is some truth to studies that children are more successful academically in families that own homes. There is no difference between those children and children of long-term renters, however. It seems the mobility of families, not the home location is a factor in educational success. Your children will do just as well in a rental as a home, so long as you live there for a long period of time.
Home owners are not necessarily more involved in the community or better citizens, either. Again, the longer you are in a community, the more involved you are likely to become.
As evidence, you can look too many of the cities in Europe. In the United States, 70% of citizens own their own homes. In the well-educated, successful country of Switzerland, only 34% of residents own their own homes. In Berlin, a mere 11% are homeowners.
Perhaps your desire to own a house springs more from the pressure around you than your actual desire to plant a garden or build a porch. Consider strongly your motivation before following the rest of the country into the home buying craze. Study your own personal choices regarding time and your budget for both the mortgage loan down payment and the monthly mortgage payments. Investigate the mortgage programs available and mortgage rates and do not fall into a false sense of security believing that you can always refinance a high mortgage rate into another home loan. The mortgage calculators may be especially helpful in determining mortgage options and mortgage payments. But, the mortgage calculator and mortgage rates can not determine if the work, time and investment in home ownership matches your individual goals and needs.
Investing for Retirement with Your Home
The huge gains in the housing market in recent years (before the market tightened, of course and housing plummeted) gave inspiration to many home owners as to a better way to save for retirement. Rapid housing appreciation made it possible to turn a $20,000.00 down payment into a $100,000.00 plus capital gain. Why stick your money in boring savings accounts when you can invest for retirement in a place that has real value – your home!
But is investing in a large home a realistic strategy for retirement savings? Many argue that it is, but others find many problems with the assumptions made by those encouraging this form of “savings.”
Retiring with Your Home
The basic plan for those planning on retiring thanks to their home value is to buy a very expensive home using as much as they can afford with a very large home loan. For example, rather than staying in a $300,000.00 house, they opt for the $600,000.00 home using most of the money they would otherwise be saving for vacations or furniture or other living expenses. Then, when retirement comes around, they simply sell that now appreciated million dollar home, buy another $400,000 one and live comfortably on the equity. For some people, this strategy worked well…for awhile. Instead of buying an affordable home, these investors took out a large mortgage to buy a home they could just barely afford. The large mortgage payment made for belt tightening in other parts of the family budget but housing appreciation and the power of leverage paid off.
The leverage is working in more than one way. First, homes can be purchased with a very small down payment relative to the size of the asset. A $25,000.00 down payment on a $250,000.00 home is more leverage than can be found in just about any other asset class available for an individual. While some home owners may be overly concerned about a large monthly mortgage payment, the power of leverage can lead significant financial gains relative to the value of the investment. For instance should the investment increase by 15% that is not a 15% return on the $25,000.00 down payment but a 15% return on the $250,000.00 home value which is equivalent to a dollar return of $28,750.00 or a 115% return on the $25,000.00 down payment.
In addition there a variety tax benefits for home ownership. Real estate taxes are generally tax deductible as is mortgage interest paid. And while the mortgage interest is by and large tax deductible the mortgage rates are also typically the best interest rate available for consumer borrowing. Mortgage rates are almost always lower than car loan rates, personal loan rates, credit cards and most all forms of borrowing accessible to an individual.
Pros of the Real Estate Plan
With a bird’s eye view this plan looks fantastic. Real estate is touted as an excellent investment and with the returns we’ve been seeing in recent years on homes, you can expect your home to increase tremendously over the next twenty or thirty years. The problems with the plan come as you begin to drill down into the details.
Problems with the Real Estate Plan
The bare bones plan of selling expensive real estate and living on the proceeds is more than adequate, it’s attractive to many buyers – especially those who would greatly enjoy living in a larger home for the next thirty years. But when the yield from the plan is compared to the earnings from more traditional savings, the computations begin to break down.
The housing market has been booming for the past few years. It is beginning to cool, but rates of return are still high in many parts of the country. This is why many people are shocked to discover that historically houses only truly appreciate at 2% above inflation over the course of twenty or thirty years. That’s slightly less than a treasury notes, one of the safest forms of long-term investment.
That million dollar house will be worth $1.8 million after thirty years. When you sell it, you won’t move back into a $400,000 house – those homes appreciated, too. You’ll be moving into a $700,000 house leaving you $1.1 million. A nice piece of change, but that’s before you start considering fees and commissions. That end results also doesn’t include the maintenance and taxes you’ve been paying on your home for the past thirty years.
By comparison, if you stuck with your $400,000 house and simply paid down the mortgage loan over those thirty years while sticking that extra money into treasury notes (which is a very conservative assumption), you would stand to earn $2 million in today’s dollars – almost twice the result of the home plan. And if you invested that money in real portfolios including stocks and a variety of other instruments, you’d be looking at up to three times the return or $3 million.
The biggest problem is simply the uncertainty of the future value of real estate. If an individual invests in a $750,000.00 home that has a mortgage that is barely affordable, a concern arises on what to do should the value of the home remain stagnant. Now the mortgage payment is crippling the home owner’s lifestyle and their assets are not diversified since the majority of their funds are tied up in a house that is not appreciating and is now potentially very difficult to sell.
Savings for retirement using your home is a plan that can work. The trouble is it simply doesn’t work well enough to justify your expensive new home to anyone but yourself. If you want to consider such a plan be sure to study the numbers. Analyze your budget and the cost of the home including the mortgage payment and cost of maintaining the property. Run the figures through a mortgage calculator and look at all the available options before leaping into this questionable retirement strategy.
Condos and Co-ops and Home Loans
Condos and co-ops may be the ideal real estate solution if you’re just starting out or you’re looking to downsize into something with less maintenance and less cost overall. Owning either a condo or co-op will allow the owner to still enjoy some tax benefits afforded real estate ownership in the US as well as potential property appreciation, while the property is maintained by others. That’s not to say, however, that condominiums and co-ops are a trouble free alternative to free standing homes. In fact, quite the opposite may be true.
Condos
Condominiums or condos are individually owned apartments in a building or complex. Owners are free to buy and sell their condo at will. Condo owners have their very own deed and title and simply pay a bit into the upkeep and maintenance of the property. The condominium owner holds legal title to the unit and pays real estate taxes and common charges for the maintenance of the building and common areas. Each condo unit owner owns an individual apartment in what is referred to as fee simple. The general attraction to condominium ownership is the properties can be less expensive than single family housing in the same area.
A condominium owner owns the unit in fee simple which is similar to most all other methods of home ownership, and also may own an undivided interest in the common areas of the condominium such as a pool, playground, lobby area, like parking lots, recreations areas, and hallways.
Co-Ops
Co-ops on the other hand, are not true real estate ownership. Members of a cooperative or co-op own stock in the company that actually owns a building. You’re not paying for an apartment; you’re paying for the right to lease one. Like with condos, you’ll pay a portion of maintenance fees and upkeep, but you’ll also be contributing toward the taxes and insurance on the building. Co-ops are also able to control your use of your unit. In a cooperative apartment complex you don’t actually own any real estate. Rather, you own shares in a not-for-profit corporation. When it comes to sell the property, the member of a co-op may sell their shares in the cooperative whenever they like for whatever price the market will bear, much like any other residential property.
Potential Pitfalls
The biggest problem of buying a condo or buying into a co-op is the close proximity of others. You may be subject to rules set by others such as no dogs and no major renovations. You’ll also be paying into the same building as many others which means you may be looking at trouble if the others, well, don’t pay in. If your neighbors start to default on their maintenance payments and mortgages, you’ll have to help cover the difference. If it happens too much, you may not be able to sell your unit as the whole complex will become unattractive to buyers.
Mortgage guidelines for condos and co-ops are more restrictive. As a general rule, the down payments will be larger and the mortgage rates will be higher. Mortgage lenders generally have even more restrictive lending guidelines for co-ops. There are far fewer mortgage options available, the down payments are often larger than they are for condos and they charge even higher mortgage rates.
Buy In Carefully
If you’re going to buy a condo or are considering joining a co-op, you’d best consider very carefully. The banks and other members of the co-op will be considering you just as closely if not more so. Banks are often hesitant when it comes to buying into group properties.
When a new condominium unit is built, banks often balk at lending money to prospective buyers. The building sponsor most likely owns the bulk of the units in the building which means he could easily turn around and rent them rather than selling them. The bank is also hesitant to put itself at risk if the majority of units are owned by a company that may default on the underlying mortgage thus causing you to default on yours.
Today, however, this is less of a problem as most building sponsors arrange financing prior to building. Prospective owners may establish a mortgage with the arranged lender or with another lender of their choice, but the financing is a bit more secured, which is to your and the bank’s liking.
Understanding Co-ops
Co-ops are very special entities that have grown in areas such as New York City. In a co-op you must not only arrange financing with the bank, but you must also pass muster with the co-op board. The co-op board is comprised of other residents who want to know exactly who is moving in next door. They will dig through every aspect of your finances to be sure you are a suitable resident, and it is not uncommon for applicants to be approved by the bank, but denied by the co-op board.
Protect Yourself
The best way to protect yourself with either a co-op or condominium is to scrutinize the finances and inner workings as much as your own are currently being investigated. Find and work with a knowledgeable realtor and attorney you can trust to help examine the statements of each residence to determine if it is a sound investment.
Understand the differences between styles of buildings as well. You may find newer buildings have lower taxes, while older buildings have different maintenance fees depending on how much is still owed on the underlying mortgage.
Mortgage Info on Condos and Co-ops
Make sure to check the available mortgage programs for either a condo or co-op in the area in which you are home shopping. Co-ops are less common product and the mortgage lenders and banks that make these home loans are usually local to the market. Condominiums are far more common and most all mortgage lenders and banks that make mortgage loans make home loans for condominiums. The mortgage rates may be slightly higher as well as the down payment requirement for these properties and theses terms may change with the geographic area. Some geographic areas have become overbuilt and greater percentage of the condos and co-ops are facing higher foreclosure and delinquency rates on the underlying home loans that will often scare off mortgage lenders from making more mortgage loans to those types of properties.
Ownership in these property types can be very rewarding as long as the buyer and potential home loan applicant is aware of the property and mortgage market and its potential pitfalls. The mortgage calculators can be used to make a variety of mortgage calculations on these home loans as long as the appropriate mortgage rates and loan terms are used for the input.
Negative Amortization Mortgages
It was a mortgage deal that you read or heard about, that just seems too good to be true. A financial institution, bank or mortgage lender says they will allow you to make payments that are so small they do not even equal the current mortgage interest due. This home loan programs would drastically reduce your monthly payments and you were on easy street. Negative amortization mortgage are what this type of mortgage arrangement is called. And it only sounds good in most cases. Interest money you save now will cost you dearly later.
The typical monthly mortgage payment is mainly interest, charged for the use of the money you borrowed on the mortgage. At the start of the mortgage term, almost all of the payment you make each month is paid in interest, with a small portion toward the principal of the home loan. Over the period of the mortgage, gradually the amount paid toward the principal increases, and the interest you pay slowly decreases. This process is the amortization of the mortgage loan. A different type of home loan find mostly with adjustable rate mortgages is called a negative amortization mortgage and it is something not to be entered into lightly.
A negative amortization mortgage allows you to pay less interest for a set period of time, normally this may last for a few to several years. Lets say for discussion that your normal mortgage payment each month is $1000, and of that amount $600 dollars goes toward the interest amount and the rest, $400 dollars goes toward the principal. If you begin a negative amortization mortgage you would conceivably have the option to make a monthly payment of say, $500 dollars, which would pay on the interest and nothing on the principal of the loan. You would still be responsible for the other $100 dollars of interest. This other $100 dollars of interest is then added back into the principal of the mortgage loan, and you then will pay interest on this amount, too.
Negative amortization is made available by mortgage lenders by calculating two different interest rates. The first interest rate is referred to as the payment rate and the second interest rate is simply known as, fully indexed interest rate. On adjustable rate mortgages with negative amortization features, you will find that the payment rate changes are normally capped off at 7.5% of the previous payment amount. However, the true interest rate is calculated by simply the adjustable rate mortgage index plus the margin without the use of periodic caps. However, what the borrower pays is ultimately up to them because the borrower is able to choose which mortgage rate they wish to pay. Because of this, you will find many amortization loans being advertised as “payment option” mortgage loans, due to the fact that you are given an option in how you wish you pay. Even though the borrower is able to have flexibility in how they pay for their home loan, they are still subject to the true mortgage interest rate.
This results at the end of the first month actually owing more on your home mortgage than you did at the beginning of the month, and you pay increased interest on the difference until the mortgage is retired or paid off fully.
Short term lower monthly payments leads to short term gain. Lower payments make it easy to qualify for a mortgage loan. But it also leads to long-term financial pain. You end up with more debt on your original mortgage than you started with and greatly increased mortgage interest payments. The longer that you are in a negative amortization mortgage, the greater sum of money you will wind up paying on your mortgage.
There are times that a negative amortization mortgage makes good sense because of the easy mortgage qualifications and lower monthly mortgage payments. But this is true only in certain cases. If you run into financial trouble, or sudden and unexpected expenses you cannot avoid. Or you are laid off of work and can’t find a job right away, in such cases a negative amortization mortgage may make sense. Entering into a negative amortization mortgage due to necessity or with the knowledge down the road you will be on better footing financially is sometimes a positive choice. Once your situation changes you can arrange to make either additional or increased monthly mortgage payments to take up the slack. Or, if you have the money you might pay it all off at once.
Some people use the undemanding qualifications and lower payments to pay for a house while the value of the real estate increased. In such cases a person may choose to live inexpensively in a house while it appreciates in value, then sell later and realize a profit. The profit can then be used to pay off the mortgage. But if the property does not increase in value or appreciate then you may be saddled with a large expensive mortgage and no way to pay it off. Another valid use was for young couples to use the adjustable mortgage rate feature for easy qualification on tight income or budget. The appeal would be that as young workers their income was more likely to increase rapidly in the ensuing years and handling the negative amortization feature in order to buy the house was reasonable trade off.
There is the chance that, as in life, your financial situation may not improve on the time schedule you anticipated. When this happens you can be faced with some very tough decisions and possibly being forced to sell your home or property.
The mortgage calculators designed to evaluate adjustable rate mortgages can be very useful in analyzing the mortgage payments on a negative amortization home loan. In addition, the mortgage calculator can be very useful in viewing future mortgage rate changes and how they will impact the monthly mortgage payment as well as the total amount of negative amortization that will take place when the mortgage rate rises and the payment is capped.
It is a risky business, so think carefully before entering a negative amortization mortgage. It can be attractive to help cope with some situations, but it assumes a large amount of risk and should be avoided if possible. These home loans are available for both a home purchases and an existing mortgage refinance.
No Doc, Stated, Alt Doc Home Loans Explained
Before reviewing the guidelines, the background and product description for alternative document home loans, it is important to be aware that most of these types of mortgage loans are no longer available. Limited variations are still available mostly by portfolio lenders but for the most part, the increased delinquencies and foreclosure rate on these loans has curtailed their use for home purchases as well as refinances.
Stated income loans, no document, no income no asset, SIVA, NINA and no ratio home loans are all variations of alternative documentation mortgage loans. Alternative documentation loans were intended to simplify and expedite the loan approval process. Mortgage lenders may offer a variety of documentation requirements from a full documentation loan to one of almost no documentation, aptly named a no doc loan.
The documentation requirements on a mortgage loan are intended to acquire information about the borrowers income, assets and employment. The varying types of alternative documentation mortgage loans lay the groundwork for how and whether this information will be used by the lender. In addition, the lenders documentation requirements will determine whether and how the mortgage lender will verify the information provided.
These mortgage loans were originally designed specifically for self-employed borrowers with high credit quality and significant amounts of equity or large down payments. Given that the risk to the lender rises as documentation requirements become less rigorous, the rate on these mortgages rise likewise.
A stated-income loan (SIL) or no income verification (NIV) loans were the simplest forms of alternative documentation loans. These home loans are designed to qualify a borrower using the income the borrower states, as opposed to the income the borrower can document. With an SIL or NIV, the lender agrees not to verify the income the borrower states on the application. While a mortgage lender does not verify income on an SIL or NIV, they do verify assets and the actual employment, not the income. From this point of documentation, a whole host of alternatives has crept up to establish the income and asset verification standards. On a no-ratio loan, income is not reported at all; on a stated-income/stated-assets loan, both income and assets are stated; on a no-income/no-assets loan, neither income nor assets are reported; and on a no-doc loan, nothing is reported, including employment.
The advent of these mortgage loans was to provide a means for some borrowers to purchase a home or do a cash out mortgage refinance with fewer documents and close the transaction faster. It afforded some borrowers the ability to maintain more financial privacy and confidentiality. These mortgage loan terms did in fact provide flexibility in mortgage financing for these borrowers. In its infancy, these loans were overlooking the verification of income or the borrower’s capacity to pay and compensating this decision with other factors. To account for this reduction in verification and increased risk, the lender would require greater equity in the property and a stronger credit profile combined with a higher interest rate. It was historically given that borrowers with high credit scores were much less likely to be unreasonable in their financial dealings and fail to make the mortgage payments.
Over time, the standards for credit and equity or down payments were reduced. These mortgage loans were now being offered to a much larger segment of borrowers than the programs were originally intended for. The misfortune on the expansion of alternative documentation loans is that some borrowers, without any practical basis for expecting a rise in income or additional resources of any kind, lied about their current income and took out home loans they could not afford. This irrational behavior of some of these borrowers was most likely encouraged by the behavior of greedy or even predatory loan officers who get paid only if a home loan closes.
With the increase in delinquencies on these mortgage loans, alternative documentation loans are regressing back to the original intention and original strict credit and equity guidelines. A borrower should not be steered to a low documentation or no documentation loan by a mortgage lender in order to speed up the loan application and approval process. Most borrowers should know that they would receive better pricing or a better mortgage rate the more documentation they provide. If an alternative documentation loan is needed, potential borrowers should be comfortable with their financial position regarding the affordability of the loan they may be accepting. As these home loans become more restrictive it is likely that potential borrowers will have to perform an amplified amount of shopping to find the best mortgage rate and terms.
Home Loans, Lot Size and Value
Many prospective home buyers question the value of large lots. Even with bigger house being built, new home lots are shrinking across the country. One way to keep new home prices down for builders has been to squeeze more lots into each development. As the older home owning population continues to age, there will be even more gravitation to small lots. More people in general are being drawn to these homes because they are valuing their free time, since they seem to have so much less of it these days. Some homeowners don’t want the lawn maintenance and water bills that often go with larger lots.
However, it is possible that existing homes may enjoy a competitive sales advantage against new homes because of their lot size. A question then arises on whether it is better to have a big lot, even if it means an older home? Or is best to stick to a new home on a small lot? How much is that lot worth? Big lots may be nice but when the price tag makes the mortgage payment and mortgage amount bubble over your monthly budget suddenly the smaller lot looks like the prudent buy.
Appraisal Value
Mortgages can be very complex debt instruments. Mortgage lenders use a number of tools to determine the mortgage qualifications for new home buyer. Mortgage lenders also use different ways to work out the size of mortgage they will give you including appraising the property and calculating the value of the property you want to buy. Part of the property’s overall value is the lot itself. Lot value is determined by size and location. In general, the larger the lot is compared to the surrounding area the greater the value will be and hence the greater the value of the home.
From an investment potential, a larger lot will generally contribute to the value of the property but will not necessarily lead to a better investment or rate of return. The lot maybe worth a great deal to someone with kids and pets, but there is little difference in overall home appreciation between a home on a large lot and one on a small lot. A large lot is different than acreage. Of course a ranch house on many acres will be valued more highly than a house on 3,000 square feet. But in a comparable neighborhood, a home on 3,000 square feet is appraised at the same rate as the home on 8,000 square feet.
Expansion Value
The value that may actually come from a house on a large lot is in the expansion. You can change the size of a home, but you can’t change the size of a lot. You can raise your property value tremendously by building a workshop or office on part of that land. Or put in a swimming pool which may not raise your property value much, but should make your property more enticing to buyers. If your home can be torn down and the lot subdivided, you can also double your property value simply by selling two separate homes. But remember, unless you have inside information about the property, the value of the subdivision of the property should be factored into the selling price. As far as your own expansion desires are concerned, a larger lot may have more value to you than to the average buyer and this is a factor in your purchase decision you should not ignore.
Aesthetic Value
If your lot offers great views and is well developed, it may aid in selling your home more quickly. A home with a terrific patio and garden may very well be more appealing to you than a small plot of green, especially if you enjoy spending time outdoors or hope to spend your mornings puttering in the garden. The larger lot and outdoor space should also add to better air circulation around the home and superior natural lighting. A larger lot will certainly offer more privacy designs with more outdoor living space in the rear of the property or the front and side property boundaries.
Sentimental Value
A large plot of land is also valuable for sentimental reasons. One of the classic values of many cultures is to own the land under your feet, and there is an emotional response to owning a great deal of land. Even if your land is subdivided with a privacy fence, it is still yours and you can dig it up, mulch it and mow it as you please. Although if you have a very large lot, you might have to invest in a riding lawnmower and other yard maintenance equipment to make the property management easier.
Making the Purchase and Obtaining the Mortgage Loan
Most all basic types of mortgages can be used to buy a home on small lot or a large lot. The lot size will certainly affect the home price and the amount of the home loan but home loans become a problem only when the house lot is in excess of five acres or represents the majority of the property value.
Try not to think about your house primarily as an investment. Think of it as your home. Find a neighborhood that fits your needs and a fixed rate mortgage you can afford and don’t pay as much attention to how a home with a larger lot is going to make you rich. The mortgage calculator will help you determine the monthly repayments for a given home loan amount on the home you want.
What Real Estate Agents Don’t Share
Information is the key element to finding the right mortgage and mortgage rate as well as the right home. Don’t skimp on acquiring the proper information when searching for a home loan or a home. The starting point for obtaining information on the right home is usually with the real estate agent.
As much information as a real estate agent shares with you, sometimes they can be guilty of holding critical information back. Ask your realtor about crime, zoning and property developments, demographics or the local school system and you’ll most likely get a tight lipped stare. Real estate agents are not allowed to “steer” you toward one property over another. They may simply show you properties that meet your criteria. By offering you information about the crime rate or demographics, they may be playing with fire.
Several pieces of information that may be helpful to a prospective home buyer to assess the value of the house and the neighborhood, the real estate agent simply may not be able to speak about due to fair housing laws. Sharing socioeconomic information along with race and cultural statistics in a neighborhood is taboo. Likewise an agent can’t chat with you about how good the schools are in a particular area. Instead the agent will likely direct you toward an internet website or other source to discover this information on your own. This isn’t the real estate agent holding out on you; it’s the agent protecting her own interests from a lawsuit or smear on her professional reputation by breaking the rules.
Crime
There are many ways to gain knowledge on the crime in an area. Start by simply reviewing the crime statistics for the area that are published in the local papers. Additional data on more troubling issues can be found by tracking the registered sex offenders living in the neighborhood or zip code. Websites such as Roddel’s Family Watchdog Website let you see exactly who is living in each neighborhood. You can see the house and a picture of each offender. You can even use information such as this as a basis of comparison when shopping for a house. Your real estate agent can show you properties in neighborhoods with less than a certain number of offenders, for example.
Other websites may offer additional crime statistics. The local police station is another excellent source of information about crimes in the area. Visit the station and get statistics. You might also visit the department of public safety for statistics as well.
Schools
The quality of school districts is the basis of many family moves. Your real esatte agent can’t tell you if your potential neighborhood feeds into good schools, but many websites can. The National Center for Education Statistics Website has information about ethnicity, socioeconomic status and student teacher ratios for individual schools. Standard & Poor’s runs an educational snapshot website, School Matters Web site, which can help you compare two different schools.
Take a tour of the neighborhood school and visit the school district’s website to read more about individual campuses. Review information online for the individual school’s website or school district website. You may also find community groups that speak out about the local schools and school district. These community groups will often have information online with forums for residents to discuss what they do and don’t like about their schools. Speak with other families in the area if possible to gain a full understanding of how the district works.
Demographics
The demographics of a neighborhood are one of the messiest areas for a realtor to discuss. Real estate agents will most likely direct you to the Census Website to see who lives in the surrounding area. Large cities and towns will generally also have website that post demographic information for instance New York holds a wealth of information on its site at www.nyc.gov under the residents tab. Driving through the neighborhood at various times of day may also lend clues as to who your future neighbors would be.
The Environment and Zoning Regulations
If you plan on doing improvements to the property in the future and are contemplating pouring a lot of money into your home you should know in advance before you acquire a large home loan on what exactly are the requirements and restrictions. Information on local zoning laws can also be vital for you to make an important decision about future improvements to the property or to know what improvements or changes can be done to nearby property. Open land may very well be in private hands and then turned into a shopping mall shortly after your move in to your new home. See what information is available online from the planning or zoning commission to avoid surprises.
The environment in neighborhoods is evaluated by the U.S. Environmental Protection Agency Website. Type in the zip code of the area you’re interested in to see pollution statistics, hazardous waste information and the quality of local air.
The Personal Feel
Visit the community. Walk through the neighborhood or at least drive through at various times of the day. Make sure to visit nearby areas as well. Come by during the day and in the evening to get a feel for traffic and parking. Breeze through on a weekend to see what the neighbors are up to. Get out and take a walk. Do you feel safe? More importantly, do you feel at home? This is not a pair of shoes you are buying this a large investment with a large mortgage loan, there is no such thing as too much information or too much research. Investigating the neighborhood and the local stores will help to get a feel for all the little things that will decide whether this house will be pleasant to live in.
When it comes to your home and your home loan there are some things a real estate agent can’t tell you and there are some things real estate agents just know very little about. Real estate agents are salespeople. Some real estate agents are very knowledgeable about all aspects of housing but many are not. Fortunately, there is a wealth of information on the internet about schools, crime, zoning laws and more. Do your research on the neighborhood just as thoroughly as you would or should research the mortgage. You have to scout around and do a lot of homework to make sure you get the home you want without unwanted surprises.