Tag Archive for 'home equity'

The rules change when the economy goes south. Whatever you heard from NPR or Grandma, like always pay more than the minimum on your credit cards, retire your mortgage as soon as possible, and a home equity line of credit (HELOC) is the best second mortgage because of its flexibility, isn't necessarily true when times get tough.

HELOCs have always been touted as the best way to fund many projects--anything that doesn't require a large sum all at once. You can use a HELOC to provide emergency cash flow for a business, finance an extended, do-it-yourself home improvement project, pay annual college tuition, or just have it open in case of emergency. The beauty of a HELOC is that you can use it and reuse it, and you only pay interest on the amounts you use.

Well, the new rule of the HELOC is use it or lose it. Lenders are cutting off HELOCs faster than faster than Jimmy Swaggert shuts down adult book stores. Homeowners are finding themselves at a loss. Imagine relying on a HELOC for your business, only to find out that your credit has been cut off and your payroll checks will bounce? As housing values fall, lenders are trying to minimize the potential for balances to exceed property values, and even borrowers with perfect repayment habits are finding their credit cut off at its knees--well, it would be if HELOCs had knees.

So, if you have a HELOC, tap it--all of it--while you still can, and stick it in savings until you feel financially secure. If you are looking for a home equity loan, consider a straight loan that delivers the entire sum at closing and can't be reduced if your home's value falls. Or get a HELOC but take all the funds right away. You can also look into a cash-out refinance--FHA allows you to mortgage up to 85% of your home's value. But get whatever you need as soon as you can--in this economy, cash is truly king.

It's nearly impossible to refinance your house these days without the lender requiring an appraisal (unless you're a lucky FHA borrower getting a streamlined refinance--and we'll talk about that tomorrow). And normally the biggest part of determining what your home is worth is the sales prices of nearby homes. But should the prices of foreclosure and short sale properties be counted when calculating what your property is worth?

The National Association of Home Builders doesn't think so. And neither do I--here's why. Foreclosure sales are associated with many risks--there is a chance that the title might not be clear, the previous owners may have vandalised the property, and the home is often not worth what the lender initially asks. So the only way to get a foreclosed property unloaded, knowing that buyers are taking substantial risks when they open escrow, is to offer significant discounts to entice an investor. A buyer that would not have to worry about these issues if he or she was buying YOUR house.

Same thing for short sales. There is a reason that only about one in ten of these go through. The banks want to minimize their losses but are also overwhelmed with problem loans and understaffed to deal with them. So the process takes months. Lenders won't even tell the homeowner if they'd consider a short sale until an offer is presented. So the buyer doesn't even know if the bank will allow a sale. Many banks even have a policy of requiring more than one offer before making a decision.

And some just prefer to foreclose and get it over with. A local Realtor here in Reno told me about a short sale home listing that received SIX offers, two of them unconditional, all-cash deals. She called the lender every day for over five months. The employee assigned to the house finally said, "I have had this hanging over my head for months. But I can get it off my desk right now if I foreclose on it. And that's what I'm going to do right now." And she did, and the bank immediately listed the house for less than four of the offers had been. So people who buy short sale property only do it if the rewards are worth the hoops they will have to jump through--a substantial discount Which, again, they would NOT have to do were they buying YOUR home.

So, while I think that the trends in a neighborhood (prices increasing or decreasing, how long does it take to sell an average home, and the percentage of homes in foreclosure) should have a bearing on the lender's requirements, they should not be used to value YOUR actual home. The lender could simply require more equity if your credit, income, assets, or other factors aren't up to snuff. And if you are trying to sell YOUR home, don't you want it to be evaluated based on it's features and condition, rather than an artificial situation created by someone down the street who may have been an irresponsible borrower?

Lease options, otherwise called rent-to-own transactions, can help you buy a home you want when you can't make the purchase right away because your credit isn't up to snuff, you need more time on your job to get your mortgage, or you're still saving your down payment. They can also empty your wallet and make you homeless! So enter these transactions carefully.

Why would a seller consent to a lease option? Well, right now there are several reasons. In a slow market, many find that offering a lease option makes their home more competitive. But in addition, there are some sellers who are just evil and have discovered a way to take advantage of people. Some of these creeps "sell" their homes several times a year!

It is critical that your lease option specify what every cent you give your landlord is for. Typically, there is an option fee. You pay this for the privilige of being allowed to purchase the home at an agreed-on price within a specified time. Sometimes, this fee is applied towards the down payment if you exercise your option. But only if that is specified in your agreement. This is important because a lender may not give you credit for what you thought was a down payment when you try to complete your purchase.

Better never than late: Some landlords (the ones who like to sell their homes over and over) have very tough restrictions--and violating even one of them even once can get you evicted and your money lost! Even one late rent payment can cost you everything. So if you aren't absolutely sure that you can make every payment on time or meet whatever condition the landlord / seller imposes (a bad guy might kick you out for having a goldfish if there was a "no pets" clause in the agreement), then just don't go there.

Dirty Tricks :

This is what bad guys love to do to ignorant buyers:

1. Demand a large up-front option payment (non-refundable for any reason), and a large monthly premium (ditto).
2. Include the right to cancel the deal if the payment is received in as little as ten days late!
3. Demand payments in person, then make themselves hard to find.
4. Evict!
5. Resell!

Smart Buyers:

1. Have a real estate lawyer draw up or at least look your documents over before you sign them. Worth a few hundred dollars every time. There are things you must do at the start of a lease-option if the lender is to recognize your equity an the time of purchase.
2. Have a loan officer look over your finances, tell you what you need to do to qualify for financing, and make sure you'll be capable of exercising the option by the time it expires.
3. Never turn down a free or low cost option.
4. Take care fo the property. If you have a "triple-net" lease, make sure the taxes, home owner's dues, insurance, and other expenses are paid--because typically those will be your responsibility. One missed payment and you're out.
5. Take care of the property. Neglect it and you investment value drops or you may be evicted and you lose your money.
6. Never, never, never let an option expire without getting the property appraised. What you was kind of pricy in the beginning might be a real bargain near the end of the option.
7. Make sure the documents get recorded as public records. You don't want your seller loading up your property with loans you don't know about.

When you're finally ready to make that home truly yours, find a loan expert who has the experience to get you the best loan, present your application properly to underwriters, and close the deal with minimal hassle.

It takes home equity to get a home equity loan, and the worse credit you have, the more equity you need. Your lender wants to know what your home is worth, and the appraiser is going to determine that.

There are three ways to determine what a house is worth.

Cost: This is what it would cost to replicate the home--its replacement cost. The cost method is generally only used when the home is brand new or nearly new and there are no comparable sales to use in determining its worth.

Sales Comparison: This is how your home stacks up compared to similar property recently sold in your neighborhood. Appraisers look at sales nearby, then make adjustments based on your home's age, condition, quality of construction, lot size, quality of view, square footage, number of rooms, and extras like oversized garages, swimming pools, landscaping, etc. The appraiser quantifies the differences between yours and your neighbors' property; for example, she may determine that your view is worth $30,0000 more than your neighbor's, but your smaller yard nets a $10,000 deduction. When all adjustments are complete, your home's value is determined.

Income: This method determines the value of the property based on its rental income and expenses, as well as prevailing rents in the area. This method is used when the property is being purchased for use as a rental.

Your appraiser will include all three methods of valuing your property on the appraisal form. He concludes which method is most accurate and best serves the purpose of the appraisal, and states his reasons for drawing that conclusion. If it's a Fannie Mae Uniform Appraisal Form 1004, the final valuation is presented on the bottom line of page 2.

An appraisal involves a human attempting to form an opinion of how valuable something is and then quantify it (turn subjective impressions into hard numbers). To be sure of getting a fair evaluation, you need to make a good impression.

* Clean it up It doesn't have to be perfect, but a clean home that smells nice makes a good first impression.

* Fix it up Minor repairs undone hint at major neglect. Don't open that can of worms whether selling or refinancing.

* Be there. You can answer any questions that come up.

* Brag. If you have made improvements, make sure the appraiser knows about them. Upgrades won't increase the value by their full cost, but they do count.

* Keep pets and kids out of the way. Let the appraiser do her job without interference.

* Don't be pushy. It's the appraiser's job to determine the home's value, not yours. Saying that your place "oughtta be worth twice as much as the dump down the street" won't win you any points.

* Be nice. The appraiser isn't trying to be rude--measuring, checking out views, and evaluating the property condition is his job. But if you can help--by providing the plans from a recent remodel, for example, it is appreciated.

With a few thousand dollars in home value determining whether you can refinance or not, it makes sense to get the highest value from your appraisal that you can.