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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