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Shopping
for Foreclosures? Secure Financing Early!
By
Jim Saccacio, RealtyTrac Chief Executive Officer
With
interest rates ticking up and ARMs adjusting upward, experts predict an
increase in the number of foreclosure properties on the market.
Foreclosure properties are some of the best opportunities in real
estate today with average savings of 10 to 30 percent of market
value. Some properties offer savings of up to 50 percent or
more!
There’s
never been a better time to educate yourself about the foreclosures
market and line up your resources, so that you’re ready to make a move
when you find that ideal property.
Learning
about available properties has become much easier with Web-based
services such as RealtyTrac, which gives consumers access to
foreclosure and pre-foreclosure information that was previously
available only to professional real estate brokers and investors.
Today, homebuyers can use these services to identify and research
potential home purchases, as well as to find the tools and professional
resources they need to help them close the deal.
But
while it’s one thing to look for property, few sellers will consider
you to be a serious buyer unless you have your finances well in
order. Buyers really need to be pre-qualified before engaging in
discussions with a seller. This ensures that the buyer is in a
financial position to purchase the property, and is in the strongest
possible position to negotiate. For pre-qualification, a loan officer
will ask you a few questions concerning employment history and proposed
collateral, and will ultimately provide you with a pre-qualification
letter stating the amount you are pre-qualified to borrow.
Sales
in this marketplace can move rather quickly, so it’s crucial to secure
financing early. Generally, it’s best to work with a lender who
understands the foreclosure process, and can guide you through certain
steps, such as ensuring that a property is FHA-compliant. It should be
noted that not all lenders finance foreclosure properties, so you may
have to shop around a bit for a lender who does. This is yet another
reason why pre-qualification early on is a good idea.
Determining
How Much You Can Afford
Figuring
out how much you can afford to spend doesn’t have to be
difficult. Basically, how much you can afford is dictated by the
amount of cash you have on hand plus the amount a lender is willing to
loan you. There are two rules of thumb to keep in mind in this
area. First, you can afford a home that is up to 2.5 times your
annual gross income.
Second,
your monthly principal and interest payments should equal one-fourth of
your gross pay, or one-third of your take-home pay.
Of
course, this is dependent on your lender’s approval and your own
comfort level. From the lender’s standpoint, your credit rating,
income and related factors will determine how large a mortgage you can
support. You will need to take a few more factors into
consideration to establish your own comfort level with the mortgage
amount. For example, if you are young and upwardly mobile, you
may feel more comfortable stretching to afford a bigger home, knowing
that eventually your increasing income will make the payments
easier. On the other hand, if you’re older or plan on retiring
soon, you may want a lower mortgage payment that won’t tie up as much
of your income.
Types
of Mortgages Available
There
are basically three types of mortgages available: fixed-rate,
adjustable-rate and hybrid.
Fixed-rate
mortgages offer stability, since interest rates and monthly payments
remain the same throughout the life of the loan. Adjustable-rate
mortgages are loans in which the interest rates and monthly payments
can go up and down depending on the market. Hybrid loans offer a
combination of fixed and adjustable mortgages.
Exactly
which type of mortgage is best for you can be a matter of individual
preference, so it’s best to consult with your lender and review
comparisons as they apply to the loan you require.
Types
of Available Loans
It’s
a good idea to familiarize yourself with the types of loans commonly
available, so that you can draw comparisons to make sure you’re getting
the loan that is best suited for your needs. Here’s a quick
rundown on the types of loans currently available.
Conforming
loans are mortgage loans with standard features defined by and
eligible for sale to Fannie Mae and Freddie Mac.
Non-Conforming
and Jumbo loans are those not eligible for sale to Fannie Mae
and Freddie Mac, due to non-standard features, such as exceeding
standard amounts. These loans are often sold on the secondary
market to private investors or held in the lender’s portfolio as an
asset.
Convertible
loans offer a fixed rate for the first three, five or seven
years, and then switch to a traditional adjustable-rate mortgage that
fluctuates with the market. If you strongly believe that interest
rates will fall, then selecting a convertible loan might be a smart
move.
Balloon
loans are short-term loans with smaller payments for a certain
period of time, and then one or more large payments for the remaining
principal amount, due at a specified time.
Secured
loans are those for which you have given the lender a lien on
personal property such as an automobile, boat or real estate property
to serve as collateral for the loan.
FHA
loans are designed to make housing more affordable to
first-time buyers and those with a low-to-moderate income. Both
fixed-rate and adjustable-rate FHA mortgages are available. FHA
loans are insured by the U.S. Department of Housing and Urban
Development (HUD). With FHA insurance, eligible buyers can put
down as little as 3 percent of the FHA appraisal value or the purchase
price (whichever is lower).Qualifying standards are not as strict and
rates are slightly better than with conventional loans.
VA
loans are special loans to make housing affordable to U.S.
veterans. To qualify, you must be on active duty, a veteran, a
reservist, or a surviving spouse of a veteran with 100 percent
entitlement. This type of loan is simply a fixed-rate mortgage
with a very competitive interest rate. Qualified buyers can also
use a VA loan to purchase a home with no money down, no cash reserves,
no application fee and a reduced closing cost amount.
There
are many loan options available to you, but it’s important to make sure
you fully understand the terms of each and how they will affect your
finances long term. Your mortgage is probably the biggest loan
you’ll ever have, so it’s prudent to take the time to make the most
informed decision possible.
Having
approved financing in hand makes negotiations with both the seller and
the lender easier, and may even make it possible for the buyer to
simply cure the default and take over the existing loan to reduce loan
processing fees. So, securing your financing early can actually
translate to big savings in the long run!
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