Shop Around Until Interest Rates Drop when Buying a Home

When you're in the market for a home, I'm here to help you find the best mortgage terms around. But I also want you to be a fully-informed consumer! 

As you already know, buying a home may be the largest purchase of your life so you should go into it with eyes wide open! In this article, I'd like to provide you some proven and common-sense guidelines that can save you time, money and hassle during the mortgage-hunting process. 

Guideline 1: Look Beneath the Surface of the Interest Rate! 

If you're like most prospective home buyers, you call lenders or use the Internet to shop for the best interest rates. That's a good first step, no doubt about it! But, the mistake many buyers make is that they stop there and don't consider the fees that may be added on to the loan later by the cheapest lender. 

In other words, it's the lenders' game, and they may want you to play by the rules you're not even aware of. The answer, of course, is to know those rules ahead of time so you know exactly what you're getting when you buy that mortgage. More on this subject later! 

Guideline 2: Chose the Type of Lender That Works Best for You! 

There are several different sources of lenders - banks, credit unions, mortgage brokers, etc. They all have their advantages and disadvantages in terms of the rates and services they can offer you. For example, credit unions often provide the best value and service, but, of course, you have to belong to one in order to receive their services. 

Regular banks and "big lenders" (Bank of America, Citigroup, etc.) also provide competitive rates and services. Of course, they only offer products their companies provide. You can also use a mortgage broker. This person is a "wholesaler" who uses several lenders to give service to their customers. The advantage of a broker is that he or she offers a greater selection of rates and products. However, they also tend to be more expensive than regular banks and big lenders. 

Brokers make money in two ways. One is origination fees ("yield spread" or "rebate"). Essentially, the origination fee is a commission paid by the bank to the brokers to encourage them to use their firm. The second way is by selling a higher interest rate to you. This means there's room for you to negotiate that interest rate down! 

When a broker quotes you an interest rate, ask him or her to tell you what the origination fee, rebate or yield spread on that rate is. For a broker, a reasonable amount would be a total of 1% of the loan amount from yield spread, origination or combination of the two. Most brokers usually want to make at least 2%. 

Tip: Don't pay an origination fee unless the broker informs you that he or she isn't getting anything on the back end of the deal. 

The bottom line: you can (and should) shop among all these lenders to find the lowest rate. It can save you thousands of dollars over the life of the mortgage. 

Guideline 3: Review the Good Faith Estimate with an Eagle Eye! 

By law, lenders are required to provide you with a Good Faith Estimate or GFE. In essence, the GFE gives you a general summary of all the costs and expenses you'll incur at the time you close on your new home. The document should cover closing costs and the amount of cash you need to close on the agreement. It should also spell out which if any prepaid expenses must be handled and the average monthly payment you'll have to make in order to keep up with the loan. 

Most lenders provide complete and straight-forward information on these forms; however, there's no reason for you to accept the GFE at face value. Comb through the information and if you don't understand a particular item or fee, ask for an explanation. If you still don't understand them, you may want a lawyer to review them for you so you have complete understanding. 

Remember: A GFE is only an estimate. Changes may occur through no fault of the lender. A reputable lender will let you know if fees are going up substantially. In general, however, if those fees go up by more than approximately 16%, then a red flag should go up in your mind. 

Guideline 4: Negotiate, Negotiate, Negotiate! 

When confronted with the expertise and "prestige" of banks, we all have a tendency to think they know best, and we should, therefore, agree to their terms. Never think this way! Banks are like any business; you can and should negotiate with them! 

Want more information on banks and other lenders? Contact me today!

Short Sales Are the Latest Trend in Real Estate; Is it the Right Choice for You?

As common as short sales are, they are equally a mystery. Many people have heard the term but have no idea what a ‘short sale’ actually means. Does it mean that the contract is shorter? Or that the length of time in which the loan has to be paid off is less? Neither. A short sale is basically a solution that homeowners have been tapping into lately, designed to ease the burdens of the present economy’s negative impact. By doing a short sale, people are able to save their home from going into foreclosure – and in the process soften the impact on their credit and future home-buying capability.

How Do I Know If a Short Sale is Right for Me?

Not everyone qualifies for a short sale but if it IS right for you the benefits will have a long-lasting and ultimately positive impact on your financial outlook, as opposed to losing your home to foreclosure. People in dire financial situations are usually the ones to have their applications approved. The most common reasons people seek short sales are:

• Loss of employment
• Relocation or insufficient equity
• Health circumstances 
• Divorce
• Unseen sudden increase in living expense

How Does a Short Sale Measure Up Against Foreclosure?

There are three areas where the difference is felt between a short sale and a foreclosure – and these areas weigh heavily in homeowners’ decision on which route to take when facing difficult financial circumstances. Your credit score, credit history and eligibility to purchase another home are each impacted by both decisions.

Credit scores for a short sale are affected significantly less than as with a foreclosure. Choosing the former will only result in a drop of 50-90 points, whereas a foreclosure will lower your score by as much as 250-300 points.

Purchasing another home after you’ve been through a short sale is relatively easier, since you can start that process as early as two years from the date of the short sale. Foreclosures hinder your ability to venture into a new home for at least 7 years.

Whenever your credit suffers a blow there is always a recovery period that goes along with it. The time it takes to recover from a foreclosure is typically ten years and it can go even longer than that. A short sale is unreported, giving you the added benefit of having a “paid in full” status showing on your credit report.

What Would Make a Lender Accept LESS Money?

Given the choice, less money is better than no money and with a short sale the lender is at least coming out somewhat on top. Clearly, the options for homeowners in a financial bind are either a loan modification or a foreclosure. Here are some of the things lenders have to deal with in foreclosures that they are otherwise spared by going the “less money” route:

• The cost of legal proceedings for eviction or repossession
• Loan payment loss during foreclosure proceedings and until the home is resold
• Maintenance and repair of home prior to resale
• Government penalties in terms of loan-freezing when reselling in the market

Commonly Asked Questions about Short Sales:

If a property needs work, can I still do a short sale?

Lenders are more motivated to do a short sale on a property that needs work than on one that doesn’t because they know the risk of loss is heightened with foreclosure when much work is needed on the property.

How long does it take to complete a short sale?

Several factors affect the time required to complete a short sale, including the number of mortgages tied to a property since it would take longer to negotiate with two or more lenders. It takes about 8 to 15 weeks for the lender to receive and evaluate the proposal. Home buyers and sellers should keep in mind that this is a lengthy process. Also, working with a specialist who knows how to manage the transaction is extremely useful. Sometimes, the buyer may get cold feet at the last minute causing the transaction to fall through.

Why do lenders accept less than they are due?

On average, they lose tens of thousands of dollars less on a short sale versus a full foreclosure. When faced with the situation of a failing loan, lenders opt for the lesser of the two evils and choose to accept a short sale.

What is a Short Sale Packet and What Needs to be in it?

A short sale package it used to determine whether a homeowner can afford the property. Our team will work with you and your realtor to gather the information needed to meet the bank guidelines and streamline the process as efficiently as possible. Below are some of the standard items needed to complete a short sale proposal:

  1. The Listing Agreement
  2. Authorization to Release form (to allow agent to discuss with bank)
  3. Mortgage Coupon of First loan (and Second loan if applicable)
  4. Hardship Letter (see “How to Qualify” above)
  5. Financial Statement
  6. Two months of current Bank Statements
  7. Tax returns and or W2’s or 1099’s
  8. Seller Net Sheet (a copy of the HUD form with offer)
  9. Contract (when offer is accepted)
  10. Buyer’s Proof of Funds (with offer)

One very simple way to look at this entire process, which will also help to understand the lender’s perspective: You applied to get the mortgage and you will have to apply to get out of it. Just like with the original application, you will have to supply ample documentation explaining why they should accept your reasons to do a short sale.

Lenders lean favorably toward those applications that fulfill all documentation requirements. Pricing your property competitively, your undivided cooperation during the proceedings and transaction plus working with a quality, experienced short sale specialist are all excellent ways to achieve success in your quest to save your home from foreclosure.

Final Thoughts about a Short Sale

Your bank is not in the real estate business and does not want to own your property. However, you originally applied to get a mortgage and you must also apply to get out of one--the process requires you to submit documentation just like you did when you bought the property. Failure to comply with your lender's guidelines is a recipe for prolonging the process or getting your short sale application rejected and being foreclosed on. The best way to speed your path to the finish line is to fulfill all document requirements quickly and completely, price your property competitively, work with experienced people and cooperate with everyone involved in the transaction.