Foreclosure Financing Options
Foreclosures are up 50% from 2007, the price of homes has dropped more than 20% in top markets, homebuilders hold more than one years worth of inventory, and stock indexes have fallen more than 20%. While this news sounds dire there is some good news; mortgage rates and home prices are down. Mortgage rates fell in the third week of July 2008 with 30-year mortgage rates dropping to the lowest level in six weeks. Home prices are down and listing inventories are up in the conventional real estate market and the foreclosure market. By all indicators the real estate market is currently a buyers market. As long as you educate yourself about financing and proceed with caution, 2008 promises to be a great year to buy a home. With the increased number of foreclosures on the market and several financing options buying a foreclosure has never been easier.
Buy A Home In One Of The Three Phases of Foreclosure
The pre-foreclosures phase starts when a property is just falling into foreclosure and ends when a judge or a trustee officially forecloses on a property and a notice of sale is filed at the county courthouse. When you buy in the pre-foreclosure phase you are negotiating directly with the homeowner and keeping the lender informed and up-to-date with any agreements you have made. The best way to contact the owner is by mail. When contacting a homeowner in pre-foreclosure always be compassionate. Be aware that they may still be in a state of denial and may not wish to speak with you. How you initially contact them and their first impression of you can directly affect how successful you are in purchasing their home. Find out from the homeowner and the lender if the loan in default is assumable, if you may be able to take over the payments under the current terms of the loan. If the loan is not assumable you will have to pay off the full amount owed on the loan in order to assume ownership. As you negotiate with the homeowner, remember to put any agreements, letters, and contracts in writing. Handshakes and verbal agreements do not hold up in court. Written agreements should always be read and approved by an attorney. Remember every state and court jurisdiction has its own set of rules and regulations. You want your contracts to be solid and withstand any court challenge. The mere fact that your contract is legally binding can stop someone from contesting it.
The auction sale phase represents the ending of the pre-foreclosure phase. Foreclosed properties are sold at public auction to the highest bidder. Depending on Foreclosure law auction sales are generally held at the county courthouse or a trustee’s office. The opening bid at an auction sale is based on the total amount owed to the foreclosing lender, interest incurred, late charges, penalties, outstanding liens, and fees incurred because of the foreclosure proceedings. In most states properties purchased at auction generally have to be paid with cash or a cashiers check on the day of the auction. In some states bidders are required to bring a percentage of the bid amount to the auction and pay the rest within 30 to 90 days. Remember if you are going to be buying a home at an auction sale you will be bidding against seasoned investors and other potential homebuyers. Do your homework in advance and know how much the property is worth, how much is still owed on the property and if there are any liens against the property. Always go to an auction sale with a set bid amount and try not to go over this amount.
The Real Estate Owned (REO) phase occurs after auction. If the property fails to sell or the lender buys the property at auction ownership rights of the property are transferred to the lender. In this phase properties are listed for sale through a network of real estate agents who help the lender dispose off the properties on the open market. Purchasing an REO can be as simple as working through an agent who will write up an offer and present it to the lender.
Foreclosure Financing
Nearly 70% of homebuyers choose Fixed Rate Mortgages (FRM) loans. The characteristic that makes this loan type so popular is its stability. A Fixed Rate Mortgage offers an interest rate that will never change over the life of the loan, regardless of any interest rate fluctuations in the future. As a result, monthly payments on the principle and interest throughout the life of the loan, whether 30, 20, or 15 years, are also fixed for the life of the loan. With a FRM mortgage the borrower will have a predictable monthly house payment for as long as they have the loan. The term of your FRM can be 30, 20, or 15 years.
- 30-year Fixed Rate Mortgage gives you the maximum tax advantage by having the highest interest deduction. Your payments will be lower and your tax deductions will be higher. For foreclosure buyers who are buying a home to live in, a 30-year FRM may be your best option
- 20-year Fixed Rate Mortgage has a lower interest rate than a 30-year FRM and shortens your mortgage by 10 years. This loan term is not widely offered by banks and lenders so you may have to shop around to find it. With a 20-year FRM your payments will be higher but your interest rates will be lower. The advantages of this term are that your mortgage will be paid-off earlier and equity in your home will increase at a faster rate then with a 30-year FRM
- 15-year Fixed Rate Mortgage has the same benefits as the 20-year FRM. Your mortgage is paid of faster, the equity in your home will increase at a faster rate, your interest rates will be lower, and your monthly payments will be higher than a 30-year FRM
Adjustable Rate Mortgages (ARMs) are loans that have an interest rate that changes periodically based on changes in a pre-selected index. As a result, the interest rate on the loan and monthly payments will fluctuate based on changing market rates and economic trends. There is always a floor cap, payment cap, and life cap on the rate. Arms initially offer lower interest rates and payments, but they don’t offer stability or a set monthly payment. While ARMs are tempting because of their initial offer of lower interest rates and monthly payments, they can prove devastating for the unprepared homebuyer. All rate increases are specified in the ARM disclosure received from the lender. Before signing an ARM agreement be sure that you read and understand all of the terms and conditions of the mortgage. An Adjustable Rate Mortgage is fine for foreclosure investors, or a short-term homebuyer but is not recommended for homeowners who plan to live in a home for a long period of time.
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA approved lenders. Since its inception in 1934 The Federal Housing Administration (FHA) has insured over 34 million properties. FHA mortgage insurance provides lenders protection against loses if homeowners default on their mortgage loans. The FHA will pay a claim to the lender in the event of a homeowner defaults. Loans must meet requirements established by the FHA to qualify for insurance.
- The FHA insures mortgages on single-family, multi-family, and mobile homes
- FHA insured loans have a low 3% down payment and money can come from a family member, employer, or a charitable organization as a gift
- FHA insured loans have competitive interest rates because the Federal Government insures them
- Allows a first time homebuyer, who might otherwise not qualify for a home loan, to obtain a loan because the risk is removed from the lender by the FHA mortgage insurance
- FHA insured loans are available to anyone and can be used to purchase or refinance a home
- FHA does not provide direct financing nor does it set the mortgages it insures
- FHA insured loans are assumable, allowing a person or lender to take over the mortgage without the additional cost of obtaining a new loan
- FHA insured loans may require less income to qualify, as they will exceed the conventional debt ratios
- One of the advantages of a FHA insured loan is that the credit qualifying criteria for a borrower is not as strict as conventional loan
- When compared against conventional loans, FHA insured loans have lower down payment requirements, less money required to close, and a lower monthly payment
- FHA insured loans will allow the borrower who has had some credit problems or those without a credit history to buy a home
A Balloon Mortgage initially offers a low interest rate, low monthly payments, and other flexible terms for five to seven years. At the end of the agreed upon term the entire remaining balance is due. Monthly payments remain low because they are amortized at a low interest rate for the first five to seven years. This loan type is a great deal if you plan on selling your foreclosure quickly, or if you plan on refinancing your loan before the balloon payment is due.
Subprime loans have a finance rate that is higher than the prime rate offered by conventional lenders. These loans are generally offered to borrowers that have a poor credit history, no credit history, or other issues that might justify a higher rate. If you have past credit problems this may be the loan for you. Beware these loans have adjustable interest rates, monthly payments and other hidden features that might be difficult to handle at as the mortgage matures.
Alternative Foreclosure Purchase & Financing Options
- Get pre-approved. If you want sellers to be receptive, make sure to pre-qualify for a bank loan. A good mortgage lender will pre-approve you up to a certain amount and send you off with a pre-approval letter
- Assume the existing mortgage loan. Homeowners do not want to loose their home to foreclosure. You can help them avoid foreclosure by assuming the homeowners existing mortgage. This financing option depends on the length and terms of the current homeowners mortgage. If the homeowners’ mortgage is an adjustable rate mortgage think carefully about assuming the loan. Read the mortgage document carefully. Make sure you fully understand all of the terms and conditions of the existing mortgage before you finalize any deal
- Borrow from your life insurance policy. If you have had your life insurance policy for a number of years you can use the cash in your policy to buy a foreclosure. Another option is that you can borrow money from a lender using the cash in your policy as collateral and assign ownership of the policy to the lender
- If you own a home take out a home equity loan to purchase a foreclosure
- Find a partner to help you buy a foreclosure
- Take out several smaller loans from different banks