Scott Mortgage Blog

What should I do if I’m upside down on my home?

There is much happening in the mortage industry. This week the loan limits for FHA (loans insured by the Federal Housing Administration) were very much increased. This may effect YOU.

The FHA is coming in big time to help us out of the housing crisis. Bear with me while I give you some history. The FHA was born in 1934 as a solution to American home ownership. At that time, only the wealthy could afford to buy and own a home. Buyers often had to have a down payment of as much as forty to fifty per cent! Twenty five per cent was on the very low end of the scale. Interest rates were very high. Many banks were failing, and housing production had ceased. The FHA came in to help us get out of the Depresson. They would insure a loan for as much as $16,000, which was triple the median home price at that time. Your average worker could actually afford a home, because the borrower only needed 3% down. The housing market started to move then flourish.

In later decades, Congress directed the FHA to lower its limit of borrowing, and to only service entry-level housing. The FHA became a relic of the past. It was no longer a solution for the masses. That is why you may know little about the subject today. “Sub-prime” loans were doled out until the big crash this year. Does it seem to you now that almost “no one” can qualify for a loan? Many borrowers were put in jeopardy, in danger of losing a home. Again, it seemed like only the wealthy could purchase a home or qualify for a loan.

There actually is some good news. Things are loosening up because congress is responding to the crisis. The FHA loan limit increase means that you can buy a very decent house in Clearwater with an FHA loan limit of $292,500. The minimum down is a 3% which can be a gift. The loan limit increase also means you may be able to use this product to refinance, lower your payment, and save your home.

Some feel that the FHA’s role is going to be significant and that it will prop up the entire housing industry. Federal Reserve Chairman Ben Bernake has suggested a loosening of the rules so that more borrowers in trouble can be bailed out. The point of the FHA is to keep money flowing into mortages. It’s a backstop. It may determine where the bottom is and how fast we spring back.

If you’ve been turned down for a loan do not give up hope yet. Not all lenders are familiar with the scope of what the FHA can do for you. You still might be able to get a loan.

Being in the lending business, I am frequently asked if the mortgage meltdown is also affecting business lending. If you are the owner of a small business, with growth in mind, it may be time to rethink some strategies. Yes, credit is getting tighter, but if you use your credit wisely you can stretch your buying power. How do you do that? Leasing is the way.

If you think that leasing is just a high priced loan, think again. Eight out of ten American companies lease all or some of their equipment. Each year, more and more companies choose leasing to procure new equipment, over buying or getting a loan. These are just some of the advantages:

CASH FLOW

This is reason number one for most. Leasing offers the advantage of being able to manage your cash flow more efficiently. You don’t need a down payment. 100% of the item is financed, and you get to use it NOW. By leasing, you preserve your capital for future expenditures. The lease does not count as a strike against you in future lending, the way an equipment loan can. Your company’s balance sheet will be more favorable for securing future loan requests. You’ll have better financial ratios.

SPEED, EASE OF USE, FLEXABILITY

Nearly anything you need for your business can be leased. Furniture, computers, software, your phone system, a thermo-nuclear imaging thing-a-ma-bob-- you name it.

In most cases you can be using it within 24-48 hours.

LATEST TECHNOLOGY

This is exciting for those who need the latest technology to remain cutting edge. There is a type of lease wherein you use the equipment for say, 12 months, and turn it back in and get the next advanced model.

TAX ADVANTAGE

There can be an advantage tax-wise to leasing equipment versus getting a loan. Ask your accountant.

Some small business owners have fallen into the trap of using their personal credit cards for their business. Don’t do it! Even if you think that the interest rate on your card is favorable, there are problems. As credit is getting tighter, credit card companies have been suddenly and without warning, lowering the credit limits. The borrower then might be unknowingly at a very high percent of their credit limit on that card. This will lower your personal credit score and limit your ability to secure financing for your business.

There are other ways as well to structure business loans and acquire capital to expand your business. A good business finance consultant can help you in many ways.

Many sellers are turning to what's known as short selling as a last resort for getting out of their financially imploded realestate. Lets see how it works and whom it might benefit.

In a short sale, the lender allows the property to be sold for less than what is owed on the loan. In some cases, the lender forgives the remaining debt. For someone who has fallen on hard times, lost his job, and just can’t pay the mortgage anymore, this might be a solution. He might even be able to qualify with the IRS for income tax forgiveness on the debt. However, don’t expect this to be a solution for you if you are an investor who made a bad decision, or you just don’t want to pay on an upside down house. I’ve heard that some lenders have sued short-sellers after the fact. This can occur if there was a lie on the line and you really didn’t qualify for short selling.

What if you are a buyer? What I see is that a lot of buyers are on the sidelines scared to death to buy in this market. The media is making this a scary proposition. There is a savvy group of buyers who are not “buying” into this. They are scooping up the short sales. Again, the media can be misleading. An article that I read on the internet just today proclaimed that there are NO real bargains out there, as the banks will not sell the houses below market value. Not what I am finding. One realtor friend today told me about a particularly nice deal. The house was a $190,000 value, and the bank is taking $100,000 for it.

There is a caveat to buying a short sale. You have to know what you are doing. There are many deals out there that are a “no deal”. The appraisal may have been inflated in the first place. There may be many liens on the home. You have to have an excellent title company who will not miss liens on the title search. You need to understand the true current values of the neighborhood. You might need an attorney.

My opinion: short sale is better for a lender than the expense of foreclosing. Whether it’s for you depends upon your circumstances. If you are in the buying mode, be careful to do your due diligence. There are terrific bargains out there. Currently its possible to find nice homes in Clearwater in decent neighborhoods for $100,000! Work with a trusted professional who is experienced in short sales and you might score.

My friend Dave told me recently that his mother could not afford to fly out from California to visit his family. I was really surprised because I had always thought of Dave’s mother as “wealthy”. She has one of those homes in Silicon Valley that is worth a fortune. Unfortunately, she, like many seniors, is “house- rich /cash-poor”. She does not want to leave the home in which she raised her family. She is comfortable right where she is. She can barely afford to go to the movies. That’s a problem. There is a solution that could dramatically improve the quality of life for Dave’s mother. He was relieved to hear about it. I’ll explain the details:

There is a special loan product for Seniors aged 62 and above that allows them to access the equity in their homes. Without having to sell, move, or make payments, Seniors can get cash on a monthly basis. They can get a lump sum and pay off an entire existing mortgage and never have to make a payment again.

You may be wondering, as Dave was, is there any catch? Is there any liability for him in the future? Could he as an heir end up owing money on his mother’s estate? Could she lose her home? The answer to that is NO. With this special program, one can never end up owing more than the home’s value, and the senior can never be thrown out of the home. I explained that the loan is not due until his mother moves, sells the home, or the estate sells the home. Yes, there would be less money left for the inheritance, because Dave’s mother would be using that money to live on now. All remaining funds would go back to her, or to her estate.

For Dave this was a big relief. All he really wanted was for his mother to be happy, and really enjoy her remaining years. She had worked hard to accumulate assets, and now he wanted her to benefit from them. He told me that if his mother could visit the grandchildren more often and enjoy going out to dinner and getting her hair done, this was much more important than any inheritance. They are currently finding out more about the senior loan. Maybe it can help someone you know and care for.

People want to know if its safe to come out and participate in today’s real estate market. The media in the main is NOT going to make you feel very safe, but there IS good news you might want to be aware of. It’s buried under the bad stuff. I’ll give you a taste of what I am seeing and hearing.

Recently, I got an interesting good news piece passed along to me by a Realtor. It’s about a billionaire hedge-fund manager, Edward S. Lampert. It says “Lampert is placing new bets on a U.S. housing recovery, buying stakes in beaten-up home builders, mortgage lenders and a home-improvement retailer.” His fund, ESL Investments Inc., controls $11.6 billion. Recently he’s invested $60 million in housing related stocks and increased his holdings in Home Depot.

In another good news story, the chief economist for the National Association of Realtors, stated in a recent trade meeting that home sales and prices throughout most of the country will improve in the second half of 2008.

On the local scene, there is an interesting phenomenon. A bank owned home in my neighborhood recently was listed below market to help garner interest. According to local realtor Kerry Fuller, there were 24 separate people bidding on the house in 5 days. There ARE folks out there buying.

So what should one do? Prices have been going down, and interest rates are predicted to go up. Currently there are very good buys out there. If you are waiting for the very “bottom” it can be very difficult to catch. However, one can pin down a good interest rate now while they are available, saving tens of thousands of dollars over the life of the loan. There is a plentiful supply of homes for sale at affordable prices. Rates are still reasonable. There are great first time home buyer’s programs, and programs for those who don’t currently own. There are tax incentives to owning, pride of ownership, and the ability to call your own shots. Balancing the news, is it your time to buy?

The Federal Housing Administration wants to help save your home and lower your payment. There is a new type of loan I’d like to tell you about that can help you do just that. This new loan is called “FHA Secure”, and so far it’s helped thousands of Floridians from loosing their homes. Maybe it can help you too. But the time to act is now. Don’t wait until your credit is hemoraging to see if this is the right turniquet for you. Be pro-active now.

What is FHASecure?

FHASecure is a new FHA mortgage refinancing option enacted on August 31, 2007 to assist home owners who are now facing a mortgage default or foreclosure due to the mortgage payment adjustment of their subprime loans. With FHASecure, the lender will not automatically disqualify you because you are delinquent on your loan. What counts here is whether or not you were current on your payments before the loan adjusted. If the reason for your late payments is “payment adjustment shock”, then you might qualify. You do not have to already be in an FHA loan.

By refinancing into a FHA-insured mortgage, you can expect to pay lower monthly mortgage payments. In some cases negations with the bank are possible if you are upside down on the home. As I said, be pro-active and don’t just assume you are going to loose the home.

You may qualify if:

1)Your mortgage interest rate has or is going to reset between June 2005 and December 2009.

2) You have a credit history of on-time home mortgage payments before your mortgage teaser rates expired.

3) You’ve been employed for the last two years

4) You have sufficient income to make the new FHASecure mortgage payment.

5) Your new loan amount will not exceed current FHA limits.

If you are afraid of loosing your home and this is not a fit for you, enquire anyway. There may be other options. One that comes to mind is the new 40 year loan, which has helped folks lower their payments. Another option is to get in communication with your lender and work out new terms. Even if it is a rental home, in which case FHASecure does not apply, its possible that your tenant might be able to buy the home from you with an FHA loan. The thing not to do here is to bury your head like an ostrich! Don’t loose your home.

Can I really still buy a house? Purchasing a home with little money down has gotten a lot easier.

With all we are hearing lately in the media about the sub-prime fall out crisis and lenders tightening up, you may have become confused and unnecessarily given up on the goal of owning your own home. Don’t give up! Despite what you may have heard, it is not all that difficult to purchase a new home these days- and with very little money down. There have never been so many bargains out there ripe for the picking. But what if your credit is not all that perfect? What if you don’t have any credit? You may be thinking that since there is little to no sub-prime lending anymore, that you are going to be left behind. Not necessarily true. Your solution might just be an “FHA” loan. I’ll explain.

The FHA was created in 1934, and since its inception, has helped more than 34 million Americans become home owners. The FHA (Federal Housing Administration), is not itself a lender- you do not get an FHA loan directly from the FHA. Rather, it is a government agency that provides insurance to the lender in the event that the borrower defaults on their loan. Yes, it is mortgage insurance, and because of it, lenders bear less risk and that can be good news for you. Lenders will be more willing to give you a loan backed by the FHA. You might have been turned down for a conventional loan, and given up, yet you might qualify using the FHA guidelines.

Here is some good news: the FHA , unlike conventional loans, requires only a small down payment. There is more flexibility in an FHA loan in calculating household income and payment ratios. Down payments can be as little as 3%, and unlike most conventional loans, the money can come from a family member, an employer, or a charitable organization as a gift. Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify. The interest rate is really low, and fixed for 30 years.

An FHA loan might be right for you if:

1) you are a first time homebuyer, or do not currently own a home

2) you don’t have a lot of money to put down on a house

3) you want to keep your monthly payments as low as possible

4) you are worried about your payments going up- the rate is FIXED for 30 years

5) you are worried about qualifying for the loan because of no credit

6) you don’t have perfect credit

So here are some more questions that I have been asked:

Are FHA home inspections a hassle?

No, a lot of the quals that were there in the past have been taken off the list. It is a much easier process. They generally take 30 days form start to finish.

Are FHA rates competitive with conventional loan product?

This is something that you need to go over with a competent mortgage professional who is qualified by the Federal Housing Administration to offer FHA loans. You need to compare the cost of the conventional loan to the FHA loan. Take into account fees, interest rates, and mortage insurance on each loan. What is the rate? What’s the down payment? For some borrowers it could be more advantageous to go with the conventional loan, but for many others the FHA loan might be less expensive. If you are putting down a large down payment, don’t go with an FHA loan. You can do better with a conventional loan.

Many people who have been turned down are not aware that they might have qualified with the FHA. In many cases this could be that the lender did not have approval to offer FHA loans, or did not know the guidelines. Sadly, many folks who could have qualified for an FHA loan were put into a more expensive sub-prime loan that was not right for them. My advice is to contact a mortgage professional that you are comfortable with, and who is qualified to offer FHA loans, and see if its right for you. The best time to find out is before you shop. Since the FHA was set up to stimulate the economy, maybe you will be lucky and be able to ride that wave.

There is also an FHA program to help people that are behind on their mortgage or currently facing forclosure. More on that in the next article.