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How to Buy a Home in Cash With No Mortgage

Lynnette Khalfani-Cox — 2011-03-28T10:25:00 00:00

A record 33 percent of all home buyers in the U.S. pay in cash, according to the National Association of Realtors. How do these people come up with the loot to buy a home - often in the hundreds of thousands of dollars - without a bank loan?

Well, some of them are investors and wealthy individuals with big chunks of money at their disposal. Others are foreigners capitalizing on weakness in the U.S. real estate market. But most of them are move-up buyers able to take money from the sale of a previously-owned home and pay for a new house in cash, without a mortgage.

But what about first-time buyers and others lacking deep pockets?
If you're a renter hoping to make the leap to homeownership, or even a would-be repeat homebuyer, rest assured that it is possible to buy a home with cash. It just takes hard work, strategizing, and yes, some serious sacrifice. Part of the sacrifice may mean working lots of overtime, being willing to scrimp and save for years, or just being open to the idea that your "dream" home could be a cute, more modestly priced two or three-bedroom house as opposed to a more extravagant, expensive four or five-bedroom McMansion.

And lest you think that all that effort and sacrificing couldn't possibly be worth it, consider the benefits of buying a home with cash.

o. You can avoid having to jump through the strict lending standards banks are requiring (everything from having to fully document your income to showing a high FICO credit score)
o. Not having a mortgage means you'll have a higher net worth since you're not taking on mortgage debt
o. You'll have improved monthly cash flow
o. You won't have to pay interest on a home loan - interest that could wind up making you pay two or three times the purchase price of your home, as is commonly the case for homeowners with 30-year fixed rate mortgages

So instead of lamenting about how banks aren't lending, or how hard it is to save, if you're serious about getting a home, start planning instead for how you can join the ranks of the nation's all-cash buyers.

To get you started, here are a few tips to come up with the money to buy a home without a mortgage:

1. Put your money to work. Do some research about the market value of homes in the neighborhood you've had your eye on and calculate how much homes there cost. That will give you a financial range as a general target to hit. Knowing how much money you need to save for will help you set a specific goal and make adjustments to your budget accordingly.

While you're amassing your cash, put your money to work by moving it to high-yield savings

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accounts or, if you have a nice lump sum now, consider a certificate of deposit. With CDs, you can choose the length of the certificate and time it so that you have access to those funds when it's time to make your home purchase.

Plan on saving for a few years, like this couple, who came up with $143,000 cash, or a 20 percent down payment for their home near Washington, D.C. Though real estate prices tend to be much higher in the Northeast, in many parts of the country, that kind of money can buy you an entire house, since the National Association of Realtors says the national median home price is now $156,100.

2. Get a second job. Invest some of your spare time towards a second job (or maybe a side business) to make a steady side income just for your home purchase. Make sure all of the money you earn from this job actually goes towards a savings account assigned to the new home purchase. It may take some time and energy to reach your goal, but keeping your goal in mind while you work hard to reach it can help you stay motivated.

3. Sell some personal assets. Whether you host a garage sale or put up items for auction, now would be a good time to take inventory of your personal assets and see what you can live without. Make a list of items that you no longer need, want or use, and estimate the value of each. List the items for sale on eBay, Craigslist or at a local community board to drum up some cash, fast. If you can stand to part with big ticket items, like a car, that will raise a bigger chunk of money more quickly.

4. Ask for a raise. While a modest raise won't make you rich within a year's time, every little big helps and the compounding effect of a raise can pay off in years to come - especially if you can keep getting raises. A raise can also make it easier to save money by increasing your cash flow. Just make sure you allocate the extra money coming in directly into your savings account set up for your home purchase.

5. Pay off debt. Free up some cash and reduce your monthly payments by paying off some of your debts. Paying off high credit card balances and loans before you invest your savings towards a home purchase can put you in a better financial position in the long term. When the debts have been paid off, put the money that you were paying towards each debt directly into a savings account for your new home.

If you are determined to pay for your home with cash, remember also that you'll have increased negotiating power when you are finally ready to go house-hunting.

Many sellers would much rather sell to a homebuyer who can pay for a house with cash up front, as opposed to a buyer who has to cross his fingers that a bank loan will come through. So with any luck, maybe one day you'll be at the settlement table, getting the home you want, with no mortgage whatsoever.

For more insight on mortgages and refinancing see these AOL Real Estate guides:

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Mortgage Lender to Aid Struggling Military Personnel

Lynnette Khalfani-Cox — 2011-03-15T15:57:00 00:00

Filed under: News,Economy,Foreclosures,Refinancing

Starting next month, leading mortgage lender Bank of America - as well as a new national, nonprofit network - will both begin offering financial relief to military personnel struggling with their mortgage payments.

Under the Bank of America program to launch April 1, the nation's largest lender will offer service members two primary forms of assistance: partial home loan forgiveness and reduced mortgage interest rates.

Loan forgiveness will be provided to certain military borrowers whose homes are under water - meaning they owe more on the homes than those properties are worth. In a statement, Bank of America said it would consider reducing those home loan balances to the current market value of the properties.

Additionally, Charlotte-based Bank of America said it will lower to 4 percent the interest rates on home loans for some military personnel. That's an even better deal than the 6 percent interest rate provided by the Service Members Civil Relief Act.

Both active duty members and those leaving active duty are eligible for the bank's new program. But not all loans qualify; only those loans that are still held in Bank of America's portfolio - and that haven't been sold in the secondary market to investors.

"Our new Military Loan Modification Program builds on our long-standing commitment to the United States military forces and will help address the heavy burden of financial matters at home that can weigh on those who are protecting our freedoms," said Terry Laughlin, executive vice president for Bank of America.

"Military men and women face extraordinary circumstances, and they make unique sacrifices for all of us. For these reasons, we want this combination of tools to address their needs and help them when they need it most."

Indeed, observers say efforts like these - and other financial-help programs - are badly needed to help America's service members stay in their homes and avoid foreclosure.

Despite the 18 percent decline in the number of homeless veterans reported by the Veterans Adminstration, affordable housing is a big challenge for ex-military members.

"Over the course of a year, 200,000 veterans are homeless," says Christine Truhe, founder and

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president of Bonds of Courage, a Summit, N.J.-based nonprofit that provides educational, career and financial services to post 9/11 troops, veterans and their families.

Consequently, other groups are marshaling resources to also supply housing-related financial assistance and other economic aid to military personnel.

One such major effort, which will also launch in April, is the Yellow Ribbon Registry Network being spearheaded by a Florida-based non-profit agency called VeteransPlus.

Currently, when military members face financial difficulty - such as being behind on a house payment - they are frequently referred to databases such as the National Resource Directory, an online list of non-profits and other agencies who are there to assist military personnel with a range of issues.

The problem with such directories, however, is that they tend to be more like yellow-page or white-page listings of thousands of organizations.

So when a service member - or his or her spouse at home - hits an economic rough patch, they will often go online to apply for aid at one of these programs listed in the National Resource Directory and encounter a very time-consuming, labor-intensive process.

Individual applications - complete with a slew of identification forms, military orders, discharge notices, and other paperwork have to be emailed or faxed over and over again for each submission. Even more frustrating, after the process is completely, military personnel are often told that they don't qualify for a given program for one reason or another.

The Yellow Ribbon Network hopes to change all that.

Rather than serve as an just an aggregator, or listing of non-profits and other sources that offer housing and financial aid to military personnel, the Network will operate as a centralized source and clearinghouse where military members can fill out just one request for help and have their application quickly submitted to numerous entities. The result is a streamlined process that helps more readily connect those in need with programs offering support. Even individual citizens will be able to provide donations through the Network.

Col. David Sutherland, of the Joint Chiefs of Staff, sizing up the issue in a white paper called "The Sea of Goodwill: Matching the Donor to the Need," said the problem for so long hasn't been getting dollars to help military members. The problem is that up until now no one group has stepped up to efficiently coordinate the flow of these dollars to America's service members.

No doubt that financial need - especially for coordinated housing assistance - is particularly great.

There are roughly 60,000 non-profits nationwide that help active duty members and veterans. Nearly 50% of the dollars provided to those members of the military - via emergency assistance funds - are for mortgage issues, VeteransPlus officials say.

The growing housing and economic needs of military members help explain, in part, why VeteransPlus in 2010 serviced over 28,000 service members at 260 financial education seminars, workshops and events in 26 states, according to John Pickens III, Executive Director of VeteransPlus.

During those 260 events, "a lot of questions come up about mortgage issues" says Pickens, adding that "there are lots of credit challenges in the military community.

Credit and financial readiness is a sensitive issue in the military, Pickens explained, because: "If you have credit issues, you could be pulled from an assignment. You're also not promotable. And ultimately, you could be discharged."

For questions about Bank of America's soon-to-launch mortgage relief program contact the bank's customer service unit at 888-325-5357.

For more information about the upcoming debut of the Yellow Ribbon Registry, either to get financial and housing assistance or to register a nonprofit group's resources in the network, contact VeteransPlus at 888-488-8767.

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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New Year's Resolutions for Homebuyers

Lynnette Khalfani-Cox — 2010-12-28T11:00:00 00:00

Filed under: News,Buying,Economy

Like many homebuyers, you sat on the sidelines for the past few years -- watching the real estate market go from boom to bust -- and now you're just about ready to jump in.

What renter wouldn't be at least toying with the idea of homeownership, with interest rates well below 5 percent and home prices having dropped more than 20 percent in many areas of the country?

But just because conditions have tipped in favor of homebuyers doesn't mean you should run out and snatch up the first "great deal" you come across. Instead, if your goal is to become a homeowner in 2011, position yourself for long-term success by making these five New Year's Resolutions for renters who are aspiring homeowners:
Resolution #1: I will come up with a meaningful down payment for the house I want to buy.

You already know that the days of no-money-down loans are largely gone. These days, lenders want to see that you have some skin in the game. That means you should be prepared to come to the table with some cash of your own.

You don't necessarily have to come up with a 20 percent down payment, like this couple did. But a 5 percent or 10

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percent down payment for a conventional mortgage would be nice. Even with a government-backed loan, such as an FHA loan, you'll need to have at least a 3.5 percent down payment. The good news is that, with all your scrimping and saving, you'll walk in the house with equity in the property.

Resolution #2: I will get my credit in the best possible shape before applying for a mortgage.

No matter where you go to get a loan, somebody's going to check your credit rating. Ideally, you want your FICO credit score to be 700 or higher. That puts you in the running to get the best possible loan terms and interest rates. Some banks are even demanding FICO scores of 720 or 740 for the best rates. Whatever the case, you need to know where your credit stands.

Haven't checked your credit reports recently? That's not surprising. The National Foundation for Credit Counseling says that two-thirds of all adults in America haven't taken a peek at their credit reports in the past year; even fewer have checked their credit scores. You can get your Equifax, Experian and TransUnion credit reports free of charge at AnnualCreditReport.com. Don't know your FICO score either? Read this article on how to get your FICO credit score free.

Resolution #3: I will become a record-keeping guru - at least for as long as it takes to document my loan.

Documenting your application is the name of the game to get a mortgage in this credit environment, in which lenders are skittish about getting burned by borrowers who don't repay their debts. So be prepared to fully document everything: your income, your assets, your liabilities, and even aberrations -- like that mysterious (at least to your lender) $1,000 holiday gift from your rich uncle that was deposited into your checking account this month.

Resolution #4: I will consult reputable professionals for help.

Buying your first home isn't a task best left to novices to navigate alone. As I explained in my book, Your First Home: The Smart Way to Get It and Keep It, you will likely fare much better in the home-buying process if you let the pros help you in a variety of areas.

For instance, a trusted real estate broker can get you into properties in your desired area, show you market comps for homes available for sale, and draw up an offer to buy to present to a home seller. Likewise, a home inspector can point out hidden flaws and alert you to structural or environmental defects you might not see in that home, condo or townhouse you've fallen in love with.

Resolution #5: I will take a homeowner education course to better prepare myself for the rights and responsibilities that go along with homeownership.

Every state in the country, as well as most cities and counties, offer some kind of first-time homebuyer education program. Many of these courses take just a few hours, but you'll be greatly enriched by them. They teach you the ins and outs of mortgages. They tell you how to spot and avoid predatory lending. And they counsel you on what to do if you run into financial trouble down the road, after you've bought a home.

Not only will you learn about what it takes to become - and remain - a successful homeowner over the long haul, but you may also qualify to get government-sponsored financial assistance just for taking the course. This aid is free money, often in the thousands of dollars, can be used for a down-payment or towards your closing costs.

So if you're currently renting, any of these New Year's resolutions will make your 2011 a great year, especially when you finally do move into the house of your dreams.

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Down Payment: You Need One, Start Saving

Lynnette Khalfani-Cox — 2010-11-02T14:48:00 00:00

Filed under: News,Economy

When 30-year-old Kimberly Palmer, and her husband, Sujay Dave, purchased a townhouse this year in a suburb of Washington, D.C., they may have seemed like typical first-time homebuyers. Young, educated and hard-working, the couple also had a newborn daughter, Kareena.

But they were different from most first-time homebuyers in a critical way. They were able to come up with a 20 percent down payment -- $143,000, to be exact -- to buy their dream home. And they amassed that down payment the old-fashioned way: through years of saving, sacrifice and smart financial decisions.

Five years ago, amid the housing boom, 43 percent of first-time homebuyers had no down payment. Though that figure shrank to just 15 percent in 2009, mainly due to tighter lending practices, the overwhelming majority of first-time homebuyers still struggle to put 20 percent down.

According to the National Association of Realtors, the typical homebuyer (including first-timers and repeat buyers) had an average down payment of just 8 percent in 2009, the latest period for which full-year data is available. For first-time buyers, the average down payment was even smaller - just 3 percent. And first-timers accounted for 47 percent of all homebuyers in 2009, a

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record high. Yet many of those first-time buyers used government-insured FHA mortgages, which only require a 3.5 percent down payment. In 2009, nearly 40 percent of all mortgages were FHA loans.

For Palmer and Dave, their road to homeownership started after the couple graduated from college.

Unlike many 20-somethings entering the workforce, Palmer and Dave continued to live like college students until they were in their late 20s. For five years, they didn't buy many new clothes, decided to have one car instead of two, and kept the same one-bedroom apartment -- right down to the same well-worn futon they'd had while in graduate school. "We were so frugal," Palmer recalls. "We barely drove, cooked almost all our meals, and rarely splurged on anything. Even after we got new and better jobs, we didn't upgrade our lifestyle so we could just save more money instead."

Those five years of saving paid off in January, when the couple closed on a 2,400-square-foot townhouse that cost $715,000 and features three bedrooms and 3½ bathrooms. The home's Bethesda, Md. location - just across the border from the nation's capital - is an added bonus.

"It's about a 15-minute walk to the closest subway stop, so we could stick with just one car," notes Palmer, who is a writer and the author of a book called "Generation Earn: The Young Professional's Guide to Spending, Investing and Giving Back."

Asked whether she recognizes how unique she and her husband are, Palmer acknowledges that their accomplishment took hard work. But she thinks that they are part of a growing breed of young, first-time buyers who are more fiscally conservative because they've spent their entire adults lives dealing with economic downturns - first after the Sept. 11 attacks and more recently during the Great Recession.

Her generation, Palmer says, is keenly aware of the fact that millions of Americans are struggling with house payments that they can not afford, and that one out of four U.S. homeowners is underwater or facing foreclosure. As a result, many of her friends are also buckling down to save over the long haul for a home - rather than rushing into homeownership with a small down payment.

"From our conversations, it seems like they all agree it's better to put 20 percent down, just to minimize the risk of being overly leveraged in your home," Palmer says.

"That's a goal a lot of my friends have," she adds. "It might mean waiting longer to buy, though -- that's the sacrifice."

For more insights on home buying, see these AOL Real Estate guides.

First-Time Homebuyer's Guide

Vacation Homes: Is Now the Time to Buy?

How to Buy Foreclosures

How to Get a Low Mortgage Rate

Hhomebuyer's Remorse: How to Avoid and Cure

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Credit Scores Sink 1/3 of Possible Homebuyers

Lynnette Khalfani-Cox — 2010-09-28T11:16:00 00:00

Filed under: News,Economy

Even though home prices and interest rates have come down dramatically, many Americans aren't able to qualify for mortgages because they have low credit scores, a new survey reveals.

According to a recent study, nearly 30 percent of all Americans searching for home loans are effectively locked out of the conventional mortgage market because their FICO credit scores fall below 620. (See AOL Real Estate's guide on "How to Get a Home Loan With Bad Credit.")

The fact that so many Americans have poor credit ratings isn't necessarily new information. Experian, one of the big three credit bureau, and Fair Isaac, creator of the FICO credit score, have each found that about 40 million to 45 million Americans have bad credit, or scores of of less than 600.

What is different -- and most telling -- about the study by Zillow Mortgage Marketplace is that it analyzes not just a generic group of Americans, but specifically those Americans who are actively looking for a home loan.

And for such would-be borrowers with low credit scores, the news was disturbing. They couldn't get a single lender to offer a quote for a home loan -- not even for a mortgage with a high interest rate.

Zillow Mortgage Marketplace fields in excess of 300,000 loan requests monthly from potential borrowers. Users can anonymously request mortgage quotes from hundreds of lenders nationwide. Lenders then supply loan quotes based on each consumer's circumstances.

Among applicants with low credit scores, however, Zillow's analysis showed that these borrowers were unlikely to receive even one quote for a 30-year, conventional fixed-rate mortgage. This was the case even among applicants who had lots of cash on hand, and could put a 15 percent to 25 percent down payment on a home.

"We are in an era of historically low mortgage rates, reaching levels not seen in decades," said Zillow Chief Economist Dr. Stan Humphries. "Coupled with four years of home value declines, homes are more affordable than we've seen for years. But the irony here is that so many Americans can't qualify for these low rates, or can't qualify for a mortgage at all.

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Not surprisingly, people with good credit ratings were able to readily score loan offers on Zillow. The lowest interest rates were offered to individuals with the best credit scores, or FICO scores, of 720 or higher. Borrowers with 720 or better scores received an average annual percentage rate of 4.3 percent for conventional, 30-year fixed-rate mortgages. For those with scores that fell between 620 and 719, the quoted APRs depended on the exact score, but ranged from 4.73 percent and 4.44 percent.

Zillow's analysis took into account more than 25,000 quotes submitted between Sept. 1 and Sept. 15, 2010.

Zillow's research highlights yet another reason it may take a long time before the country's struggling housing market rebounds.

It's one thing to have a lack of willing buyers, as is the case among 25 percent of all renters recently surveyed by Trulia, who said they planned to rent forever. But it's another matter when willing potential buyers are shut out of the conventional loan market. And since bad credit is the issue -- whether due to divorce, layoff, financial irresponsibility or something else -- only two alternatives exist for these prospective homeowners.

They can seek out FHA loans, which now require a minimum FICO credit score of 580. Or they can simply wait until they re-build their credit ratings. For many homeowners, the latter would no doubt be the smarter, more sustainable path to homeownership.

But in an era where people buy first and learn later about the rights and responsibilities of homeownership, I doubt that will be the option most will choose. Instead, FHA loan programs will simply continue to surge in popularity.

Plus, "if someone has a 580 score, they will still get the same 96.5 percent financing," from FHA, after putting down a low 3.5 percent down payment, notes Ray Kuplaste, a mortgage broker and sales manager at United Capital Lenders in Southampton, Pa.

At the very least, though, if you have spotty credit, you should review your credit files before applying for loans to see what problems might be fixed ahead of the mortgage loan process.

The National Foundation for Credit Counseling says that a shocking two-thirds of adults in America haven't actually checked their credit reports in the past year, let alone their credit scores -- even though credit reports are free of charge at AnnualCreditReport.com. You can also get a free FICO credit score, via myFICO, Fair Isaac's consumer website.

And if you're seeking either a conventional loan or a government-backed FHA loan, it's certainly worth the time and effort to at least know where your credit stands before you apply for that much-needed mortgage.

For more tips on this and related topics see these AOL Real Estate guides:

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Homebuyer's Remorse: How to Avoid and Cure

Lynnette Khalfani-Cox — 2010-09-27T15:32:00 00:00

You've just bought a house. Friends and family are congratulating you and sending housewarming gifts. Everyone else is popping champagne corks, but you just feel queasy. What's going on?

You could be suffering from buyer's remorse, that nagging feeling that perhaps you made a mistake, got in over your head, or for some reason shouldn't have bought that home after all.

The feeling is not uncommon. Experts say that 5% to 10% of all homebuyers -- and maybe more--regret their home purchase.And since a record 41% of U.S. home buyers are now first-timers who've never owned property before, according to the National Association of Home Builders, the potential for buyer's remorse has never been higher.

To keep you feeling confident about your home purchase, AOL Real Estate asked three housing experts for advice. Here are their tips for preventing real estate buyer's remorse, along with some advice about what to do if you come down with a case of it.

1. Stay focused on the long view

According to real estate attorney Corliss Franklin, a solo practitioner in Plainfield, N.J. with 20 years experience, it's normal to have some second thoughts about buying a house, considering it's likely the biggest financial purchase of your life.

"I generally see the nervousness manifesting itself at the very beginning, when the buyer is focusing on the cost of the home," Franklin says. "People think, 'I'm going into debt for $300,000,' and they sometimes fret over that huge financial commitment."

The trick, says Franklin, is to stay focused on the long view. Even when people get cold feet at the closing table, she says, most buyers get over it by reminding themselves that "they're fulfilling their dream of getting a home."

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2. Make sure you know what you're getting

Once you've closed on a home purchase, there's virtually no way to get out of it, says Jim Randel, a Westport, Conn.-based real estate attorney and author of books including "The Skinny on the Housing Crisis" and "The Skinny on Real Estate Investing." So make sure you get all of your questions about the property answered to your satisfaction up front.

With a couple of exceptions, by the time you get to the settlement table, it's too late. "If you think you got tricked, you can sue somebody for fraud," Randel notes. "For example, if there were major physical problems with the house that were not disclosed, disputes with neighbors over property lines, or encroachments of the garage into a neighbor's property that weren't revealed."

Another area where you may have some recourse is the issue of "psychological impact." Sometimes, "a person feels they got defrauded if they weren't told that there was a murder or a serious crime committed in a house and they bought the property," Randel says. That's the case right now for Anthony and Rita Bucklew, who unknowingly bought the former rental home of a serial killer in Colorado and now want out.

Short of these scenarios, however, you won't be able to undo a deal -- no matter how much buyer's remorse you experience. "It's going to be extremely difficult to cancel a transaction and come out of it unscathed," Franklin says. She notes that reneging on a real estate deal after you've signed a contract to buy the property could mean losing an earnest money deposit or facing the threat of a lawsuit from the other party.

3. Do a walk-through and prepare for closing

You can help avoid jitters at settlement by doing a final walk-through of the house to inspect it one last time before your closing date. Arrange this walk-through after the seller has moved out, so that you can view the home, make sure everything is in order, and be 100 percent confident in your purchase.

Another way to avoid buyer's remorse -- and unnecessary stress -- on the day of settlement is to know what's coming at the closing and to be prepared for the unexpected. For example, you should know the players who will be present at closing. Will the sellers attend the settlement or just their attorneys? Also, will you have a lawyer present, or only your real estate agent? Your agent's job is to make sure that no surprises end up short-changing you in this whole transaction. Your agent will also negotiate on your behalf if any issues arise with the seller.

Representatives from a title company might also be in attendance. They're present because sometime earlier in the process a review of the seller's title was done to make sure there were no impediments to that person's selling you the home. Additionally, that individual, or someone from the title company, might have reviewed the title search, prepared a title insurance policy or conducted other title-related services.

4. Factor-in ongoing expenses

Sometimes buyer's remorse doesn't kick in until weeks or months after the purchase, when the new homeowner has a financial awakening about the costs of living in the property. "Some people get don't get buyer's remorse until they've moved in and they get those first utility bills," says Rodney Anderson, a Plano, Texas mortgage banker with Supreme Lending and the author of "Credit 911."

Others regret their home purchase after they've moved to suburbs or far away from their jobs. "All of a sudden, the commute to work costs an extra $5 a day. Or they have to drive further to get to church or take their kids to football practice," Anderson says. "It can all really add up, especially when gas prices rise."

For some homeowners, homebuyer's remorse kicks in once they realize that their property taxes keep increasing -- sometimes dramatically -- year after year. "All these things are budget-busters that can cause buyer's remorse," says Anderson.

Your best defense here is to think realistically about the true cost of homeownership so you know what to expect before you sign on the dotted line. "Most real estate transactions really do go smoothly," says Franklin, the Plainfield attorney. "It's the anomaly where you have an individual, either buyer or seller, who wants to back out of the deal."

Closing on a new home? Make sure the process goes smoothly with the help of these AOL Real Estate guides:

More on AOL Real Estate:
Find out how to calculate mortgage payments.
Find homes for sale in your area.
Find foreclosures in your area.
Get property tax help from our experts.

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Credit Repair Scams Hurt Prospective Homebuyers

Lynnette Khalfani-Cox — 2010-09-14T12:57:00 00:00

Filed under: News,Economy

So you want a mortgage to take advantage of record-low interest rates, but your credit score is low? Then you stumble upon a possible solution: a credit repair company that claims it can fix your credit. Not so fast.

Regulators and consumer advocates alike are warning Americans about a growing number of credit repair scams nationwide. Just this month, the Federal Trade Commission reached a $14.4 million settlement with a Florida-based credit repair agency, which made big promises to consumers and offered little in return.

The FTC's actions were part of a larger, two-year crackdown, called Operation Clean Sweep, in which the FTC has joined with 24 different state agencies to clean up the credit repair business.

Since 2008, the FTC has charged at least 36 credit repair businesses with making bogus claims and/or cheating consumers out of money.

Most of the companies targeted by the feds were guilty of collecting upfront fees for credit repair services, or telling consumers things like: "We can scrub your credit report clean and get rid of all negative information."

So even if you need to improve your credit for a home loan (see AOL Real Estate's guide on Credit Scores and Home Buying) or for any purpose, read carefully when dealing with a company that promises to boost your credit rating. Here's why:
Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling asks: "Why pay for something that you can do for yourself for free? If rebuilding credit, know that time is your friend, as the farther you move away from the financial distress, the less negative impact it has. Follow with responsible behavior with your new credit, and you'll soon have a solid credit file." (See AOL Real Estate's guide on "How to Get a Home Loan With Bad Credit.")

Meanwhile, here's how to spot a credit repair scam, and what to do if you're victimized by one:

4 Ways to Spot a Credit Repair Scam

1. Exaggerated claims about results. Beware of any company that claims its services are "guaranteed" to work or that it can wipe out negative information from your credit report - even if that information is accurate.

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2. Upfront payments before services rendered. Don't ever fork over money to a credit repair business before they've actually performed services. It's illegal for credit repair companies to demand such upfront payments. In the recent FTC case in Florida, which involved a company called Clean Credit, consumers were charged $400 in upfront fees.

3. Using illegal tactics. Some shady credit repair services will claim that they can enhance your credit rating by getting you a new Social Security number or new "Personal Identification Number." Don't ever do this. It's against the law and you could wind up facing charges for such illegal activity.

4. "Government" e-mails or phone calls. Did you learn about the credit repair company via an e-mail or phone call that suggested it was a government-based program? It's surely a scam. The government isn't in the credit repair business. Fraudsters nonetheless frequently try to have official-sounding names or imply that they're somehow linked to state or federal programs. Steer clear of these.

If You're Victimized

If you've been scammed by a credit repair business:

Request a full refund if any company you paid doesn't perform services as promised. Keep all receipts and document all correspondences. Also be sure to put your complaint in writing.

If you don't get results, report offenders to the Federal Trade Commission, the Better Business Bureau or your state attorney general.

It is possible to achieve perfect credit - over time and through legitimate means.

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Identity Theft More Likely When Moving to a New Home

Lynnette Khalfani-Cox — 2010-08-05T13:20:00 00:00

Filed under: News

If you're planning to buy a house, rent a different apartment or relocate your family anytime soon, chances are you didn't think that moving could make you the victim of identity theft.

But during a move, homeowners and renters alike are particularly susceptible to identity theft -- a crime which is especially prevalent during the summer, since half of all moves in the United States take place between Memorial Day and Labor Day.

So in addition to packing and coordinating with the moving trucks, you also need to safeguard yourself from fraudsters.

"Regardless of what people say, you can't prevent ID theft. But you can be a lot more aware and take some strong precautions," says Steve Schwartz, executive vice president of consumer services for Intersections Inc., an identity protection company.

Schwartz provided a rundown of simple steps that you can take to minimize your risk of identity theft and maximize your safety and security before, during and after a move:

Top 10 Safety Steps for Homeowners and Renters on the Move

1. Write everything down

Before you move, make a list of all the personal mail you routinely receive. Tell your banks, financial institutions, creditors and others of the move and redirect all correspondence, statements and sensitive mailings to your new address.

Be sure to notify:
a. Retirement accounts/banking institutions/credit card companies
b. Utility companies (electric, gas, water, cable, etc.)
c. Insurance companies (medical, property, renters, fire and auto)
d. Local government agencies, federal agencies & the IRS
e. Healthcare providers
f. Schools
g. Publications to which you subscribe (magazines, newspapers, etc.)
h. Clubs you have memberships in

Alternatively, consider switching to online statements. According to the 2010 Identity Fraud Survey Report from Javelin Strategy & Research, consumers with electronic statements needed less time to detect fraud and paid lower consumer costs ($116 vs. $274) than those monitoring paper statements.

2. Submit a change of address form to the U.S. Post Office

Once your form has been filed, double-check the confirmation from the Postal Service to make sure that they list your new address correctly. Your mail should start being delivered to your new residence within seven to 10 business days after you submit a change-of-address filing.

3. Shred all sensitive documents that you won't take with you

Don't leave behind any paperwork, including credit card offers, that con artists can use if they go through your trash. Instead shred them yourself. A good shredder will cost just $50 or so.

4. Thoroughly research your moving company

Mover fraud is on the rise nationwide. To thwart this crime, properly investigate local moving companies by getting recommendations from trustworthy friends, family members, and real estate agents. Also, check a mover's rating with the Better Business Bureau. Finally, only pick a mover that is registered with the Federal Motor Carrier Safety Administration (FMCSA) and that has a U.S. Department of Transportation (USDDOT) number. The most reputable ones will supply you this information on request.

5. Remain present during the entire move

This may not always be possible, but just being there with the movers could help deter potential identity theft. Plus, you'll get to oversee any remaining packing or moving activities to make sure things are being handled properly.

6. Transport important physical documents properly
Transfer all sensitive documents - like wills, insurance policies, stock certificates or bonds - to a safe and secure place, such as a locked box, and keep these items with you personally during the move; don't hand them off to your moving company. You can also transfer sensitive documents to an online secure vault.

7. Lock down your computer

Don't make the mistake of leaving your computers (desktops and laptops included) readily accessible to your movers. Instead, secure those items before the movers even arrive. Take all computers, hard drives and other external storage devices with you during the move.

During his last move, "I packed my computers myself and they went in my car," says Schwartz, adding, "That's not a box you want to go with the mover."

8. Monitor bank and credit card statements

After your move, watch for unexplained charges or suspicious activity on your debit and credit cards. But also be aware that credit-related fraud "accounts for only about one-third of identity theft," Schwartz says. Non-credit related problems actually make up the bulk of problems, with thieves stealing your personal information in order to open new cell phones or bank accounts, establish utility services, or even get payday loans and fake driver's licenses in your name.

9. Verify all mail, post-move

Use your previously-created checklist to make sure that everyone you notified about your move has, in fact, started sending your mail to your new address. If something is missing, follow up immediately to make sure mail isn't still being routed to your old address.

10. Create a secure zone

After your move, even though there may be loads of boxes and furniture everywhere, carve out a secure zone - preferably one that's off-limits to movers and others. This is where you'll store computer items, check your data files or do personal financial record-keeping, like balancing your checkbook or reviewing credit card statements.

Regardless of whether you're relocating across town or clear across the country, a move can be hectic and stressful. But by taking some or all of the steps above, you'll help ensure that one important thing - your identity - doesn't get overlooked during your busy transition.

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5 Reasons to Buy a Second Home Now

Lynnette Khalfani-Cox — 2010-07-27T10:56:00 00:00

Filed under: News,Economy

If you already own a house, you probably have a pretty good idea about the rights, responsibilities, and financial obligations of homeownership. And if your experience as a homeowner has been a generally positive one, you might have toyed with the idea of buying a second piece of property.

Why should you consider buying a second home? Four reasons spring to mind: finances, fun, family and the future.
A rental property can boost your finances, giving you cash flow each month. A vacation home can be loads of fun, serving as a nice getaway spot for you and your loved ones. Many people buy property for family members, too, including investment buildings that are rented out and later sold when their heirs come of age. Lastly, you can buy a second home for your golden years, locking in your future retirement home at today's prices.

Oh, and there's one other reason to purchase a second home sooner rather than later: With the soft real estate market nationwide, right now you can get a real bargain on a home.

According to the National Association of Realtors, in June 2010, the median national price for an existing home averaged $183,700.

"Buyers can still take advantage of today's low interest rates and competitive prices to get a home they may not have been able to purchase just a few years ago," says Bob Jones, chairman of the National Association of Home Builders and a developer in Bloomfield Hills, Mich.

Of course, purchasing a house is a huge financial commitment, and one that shouldn't be taken lightly. So here are some pointers to keep in mind if you do decide that a beautiful beachfront residence or even a cozy cabin in the woods is in your future.

Location, Location, Location

We've all heard the real estate maxim that location is everything. Well, that truism is especially important when it comes to buying a second home.

Nobody buys property with the expectation that it will decline in value. Unfortunately, however, that's a fate that can happen if you're not selective about where you purchase. To increase your odds of having great resale value, stick to properties in popular areas, like near beaches, lakes or mountains.

Another location tip: think globally when it comes to second-home opportunities, especially if you're considering a home that you may retire in. Why be bound solely to America, when exotic and low-priced areas of the world also beckon?

Some of the world's most affordable housing markets -- including Canada, the Caribbean and Central America - are all relatively close to the U.S., yet dramatically cheaper. That fact, combined with growing American angst about everything from job security to social security, means that more pre-retirees in particular are expanding their real estate horizons.

A 2010 survey by International Living magazine found that 96 percent of those polled are more likely to move out of the U.S. now than they were in 2009.

Says Elaine Finnegan, events director of InternationalLiving.com, "There seems to be a groundswell of discontent in the U.S., and we're seeing a record number of people who are ready to vote with their feet and get out while they can still afford to do so."

It's a Pity It's Not Just PITI

Of course, cost is a major consideration when contemplating a second home.

Mortgage interest rates are at historically low levels - around 4.6 percent. However, interest rates on second homes typically run about half a percentage to a full percentage point above rates for your principal residence. Insurance costs can be higher too, particularly if you buy a vacation property in a hurricane-prone locale, such as Florida.

The most important cost consideration, however, is one that most people probably never think about. It's the overall true cost of owning and maintaining a second home. Don't make the mistake of underestimating the real cost of homeownership for a vacation property, or even a piece of rental real estate.

Common wisdom tells you to think about PITI - Principal, Interest, Taxes and Insurance - when purchasing a house. With a second home, however, you'll need to think well beyond those parameters. An additional home could mean that you'll have to pay for some, or all, of the following:

o. Advertising for renters
o. Appliances
o. Carpets, flooring and rugs
o. Chimney servicing
o. Fees to a landlord or professional property manager
o. Furniture
o. Gardening supplies
o. Home improvements (additions, renovations and upgrades)
o. Lawn care
o. Lighting fixtures
o. Maintenance
o. Moving costs
o. Repairs
o. Supplemental insurance (earthquake, flood, hurricane or tornado coverage)
o. Utilities
o. Window treatments

This laundry list of costs represents hidden expenses that all contribute to the true cost of homeownership. You'd be wise to set aside money in a Home Expense Fund each year. Stash away at least 2 percent of your home's value in order to pay for the items above without going into debt.

Don't Forget the Tax Man

When you rent out a second home, you'll have to adhere to strict IRS rules in order to reap the biggest possible tax benefits from your real estate investment. Tax laws concerning second homes are complicated, so you'll definitely want some professional advice in this area. However, you don't need an accountant to teach you the basics.

First off, there's the capital gains exemption. With your primary residence, you are allowed to exclude up to $250,000 in capital gains when you sell your house. The exemption is even larger ($500,000) if you are married. Unfortunately, that same capital gains exemption doesn't apply when you sell a vacation home. To get the tax break, you'd have to make that vacation property your primary residence for at least two years.

Then there's what I call the "14 day rule." This refers to the number of days that you rent out a second home. If it's 14 days or fewer, you don't have to report that rental income to the government; thus you don't pay taxes on that income. The downside, though, is that you can't write off any expenses you might incur for renting out your property.

If you rent out a second home for more than 14 days, you are legally permitted to deduct expenses. Your deduction is limited if you use the home for personal reasons for more than 14 days a year, or if at least 10% percent of the total rental days are for personal use.

As with most things tax-related, IRS rules can get complex, so be sure to enlist the services of an accountant to minimize your tax burdens - and stay on the right side of the law.

Armed with this information, and the above-mentioned financial tips, you can enjoy the benefits of not just your current home - but a second home as well.

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Foreclosure Rescue Scams: How to Recognize Bogus Mortgage Help

Lynnette Khalfani-Cox — 2010-07-09T17:21:00 00:00

Filed under: News,Economy

If you're a cash-strapped homeowner, an offer to modify your mortgage or help you avoid foreclosure no doubt sounds tempting. After all, you may be behind on your home loan. Credit card bills could be past due, as well. And you're likely struggling just to make ends meet.

But when someone comes along promising to help you save your home, how do you know whom to trust?

Fortunately, there are reputable organizations available to help financially troubled homeowners - as well as some telltale signs that can tip you to a foreclosure rescue scam.
Despite the bona fide assistance out there, it's harder than ever for many consumers to separate trustworthy foreclosure assistance companies from the bogus ones. And with unemployment and mortgage delinquencies remaining stubbornly high, con artists from coast to coast are increasingly preying upon Americans going through hard economic times.

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This year, for instance, officials in California indicted two San Diego men on charges of illegally collecting $900,000 from desperate homeowners looking to avoid foreclosure. Authorities said the men billed people $2,500 to $3,000 for loan modification services, then did nothing.

The duo made their operation appear official by pretending that their offices were located near the White House, and sending out letters marked with the seal of the U.S. Capitol. They also claimed that they had forensic accountants and lawyers on staff. In reality, the two men worked out of Southern California and had no accountants or attorneys on the payroll.

Meanwhile, in New York, Attorney General Andrew Cuomo recently sued two loan modification companies, and shut down two other foreclosure rescue firms for alleged illegal practices.

Red Flags on a Foreclosure Rescue Scam

As mentioned, there are some surefire ways to spot a fraudulent - or potentially bogus - mortgage modification or foreclosure rescue offer.

According to Loan Scam Alert (a national program from NeighborWorks which is designed to help homeowners avoid scams and report them), here are six red flags that indicate you may be dealing with a scammer.

1. A company/person asks for an upfront fee to work with your lender to modify, refinance or reinstate your mortgage. The person may just take your money and do nothing.

2. A company/person guarantees that they can stop a foreclosure or get your loan modified. No one can guarantee that they'll save your home from foreclosure or get a loan modification. Legitimate, HUD-approved counseling agencies will just promise to try their best to help you.

3. A company/person advises you to stop paying your mortgage company and pay them instead. This is a huge red flag. Never send a mortgage payment to anyone other than your mortgage lender.

4. Someone pressures you to quickly sign over the deed to your home, or sign any paperwork that you haven't had a chance to read, and don't fully understand. Reputable agencies and legitimate housing counselors don't use such high-pressure tactics.

5. A company claims to offer "government-approved" or "official government" loan modifications. Don't fall for anyone claiming to be approved by, or affiliated with, the government. Also, remember that real government programs don't require you to pay any fees to use them.

6. A company/person you don't know asks you to release personal financial information online or over the phone.Only give sensitive information to those you know or trust, like your mortgage lender or a HUD-approved counseling agency.

"NeighborWorks America is the most active nonprofit in the fight against foreclosure," spokesman Douglas Robinson told me. "We are managing more than $410 million in grants to nonprofits in order to help homeowners avoid foreclosure. The loan scam alert campaign is our latest program."

Another tip: Be aware that most loan modification and foreclosure rescue scams fall into two categories:

Equity skimming/property theft scams

With this ploy, a homeowner is convinced to quit claim his or her property over to the foreclosure "rescuer." The homeowner is allowed to continue to live in the home, paying rent. The homeowner is also told that the home will be deeded back to him or her once the individual gets back on their feet financially.

Instead, what ends up happening is that the con artist records the quit claim deed, and sells the property from underneath the unsuspecting homeowner.

Advance fee scams

Under this scenario, homeowners pay upfront fees to people who promise to provide any number of services, but never deliver. Most commonly, the scammers purport that they will "negotiate" with a lender on the homeowner's behalf. So the con artist warns the homeowner not to contact the lender directly, since doing so would allegedly "jeopardize" the negotiations.

In the end, the homeowner forks over several hundred or several thousand dollars, and they're no closer to fixing their mortgage dilemma than they were before.

So if you're ever looking for help with a burdensome mortgage, always start with a free, non-profit HUD-certified housing counselor. If you can't find one in your area, contact the HOPE Hotline (1-888-995-HOPE), Fannie Mae at 1-800-7FANNIE (732-6643) or your own loan servicer for help. To prevent or report a foreclosure scam, visit loanscamalert.org,preventloanscams.org or stopfraud.gov.

Ultimately, you can avoid the vast majority of foreclosure rescue scams by arming yourself with information, working only with trustworthy professionals, and using common sense in dealing with anyone promising to relieve you of your financial problems.

Here are a few well-known, legitimate foreclosure-prevention groups:

NACA, the Neighborhood Assistance Corporation of America
HOME Ownership Preservation Fund
NFCC, National Foundation for Credit Counseling
NeighborWorks America
Hope Now

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Home-Buying Lessons From Owners of Mega-Mansions

Lynnette Khalfani-Cox — 2010-06-29T14:35:00 00:00

Filed under: News,Economy

A handful of mega-mansions - all recently listed or sold in the U.S. for $50 million or more - carry such astronomical price tags and boast so many lavish amenities that it's hard for most people to picture themselves in these upscale properties or identify with the owners of these grand estates.

But existing and would-be property owners from all economic backgrounds can nonetheless learn some important lessons from these luxury homes and their owners, all of whom have a story to tell:

Lesson #1: Bigger Doesn't Mean Better

One common theme among owners of gargantuan, high-end homes is this: They've come to realize that they simply do not want or need enormous-sized estates, particularly amid a tough economy. Thus, many individuals selling humongous properties are doing so in order to "downsize" and simplify their lives.

Case in point: Designer-developer Mohamed Hadid, who this month sold his 48,000-square-foot mansion in Bel Air, Calif. for more than $50 million. The exact sales price of the home, which resembles a French chateau, hasn't been disclosed. But Hadid did confirm to the Los Angeles Times that it went for between $50 million and the $72 million asking price - making it the priciest home sold in America thus far in 2010.

When asked why he was unloading the mammoth property, Hadid said he was "downsizing" his lifestyle.

He's not alone.

The National Association of Home Builders reports that homeowners everywhere are now opting to buy smaller homes. According to NAHB, the size of a new, single-family home sold in 2009 shrank by nearly 100 square feet to 2,438 square feet - a decline that reversed a 30-year trend toward bigger houses.

Like Hadid, homeowners nationwide seem to have a growing recognition that they can be perfectly happy in a more modest-size residence - as opposed to a very large one.

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Owners of smaller homes save money and reduce financial stress too, since smaller homes typically result in smaller mortgage payments, lower property taxes, and fewer dollars shelled out for utilities, furniture, maintenance and other home-related expenses.

As Michael Rubin, a certified financial planner in Portsmouth, N.H., puts it: When it comes to your home, and your finances in general, "You don't have to be cheap; you just have to be fiscally responsible."

Lesson #2: Don't Buy or Keep a Home Based on Wishful Assumptions

Albemarle House, a 26,000-square-foot English country manor which belongs to Virginia socialite Patricia Kluge, lies on 300 acres. Originally listed last October for a hefty $100 million, the home's price was slashed this past spring to $48 million.

In putting the 45-room home on the market, Kluge said she too wanted to downsize, as well as travel more and focus on her winery business. Kluge now lives with her husband in a five-bedroom, six-bathroom Colonial built in 2008.

More telling, though, is that Kluge is also selling because she finally accepted the fact that her 26-year-old son, who lives and works in New York, would not be returning to Virginia to make his home at Albemarle House.

"I had to decide one of two things: One was to hold on and hope he changes his mind, making me in effect his caretaker, or live simpler and focus on growing our brands, nationally and internationally," Kluge told The Associated Press. "I opted for the second."

Most people will never buy a palatial mansion like Albemarle House. Indeed, only 1 percent of all U.S. homes cost $1 million or more.

Yet countless Americans still buy or hang onto larger, more expensive houses on the assumption that the kids or grandkids will one day move back home. In reality, as Kluge has learned, when children transition into adulthood, they typically want to move out of the house in order to gain their independence, build their careers or start their own families.

Lesson #3: Your Home Will Always Be a Work in Progress

Jaws dropped last week when timeshare mogul David Siegel put his 90,000-square-foot residence in Windermere, Fla., on the market. The sheer enormity of this monumental house, which Siegel nicknamed Versailles, led the Wall Street Journal to say that the home "raises the bar on excess."

Still, the most-discussed aspect of this new listing wasn't the gigantic property's 23 bathrooms, 13 bedrooms, 11 kitchens and three pools. Nor was it the children's wing -- highlighted by theater facilities, a video arcade, a two-lane bowling alley and a roller rink -- that set tongues wagging.

What was most shocking to many observers is that Siegel's mansion is still under construction (see photo above). Despite being sold "as is," the unfinished abode is priced at a staggering $75 million.

The asking price skyrockets to $100 million if a buyer wants the Siegel mansion to be finished.

Forget about price (if you can), and set aside (momentarily, at least) the obvious criticisms about whether Siegel or anyone "needs" or "should" construct a home of hotel-like proportions. And what's left?

This super-sized home certainly offers a reality check about when "enough is enough." Most important, it provides a much-needed reminder to everyone about a basic truth of homeownership: Like Siegel's mansion, all homes are a "work in progress" and require an enormous amount of time and energy - not to mention money - to maintain.

So if you're buying or building a home, you likely won't be constructing a 6,000-square-foot master suite like Siegel did. But don't be fooled. You'll be pouring plenty of cash and sweat equity into your property too -- for years on end.

Whether it's painting, replacing a roof, renovating a kitchen or bathroom, adding a new room, finishing a basement, bumping out or building up, or simply tending to a front lawn or backyard garden, there's a never-ending list of things to do to properly care for a home.

This truism applies to both older homes and brand new houses. It's also equally true for mega-mansions, even when their owners can afford to pay for help in maintaining these huge properties. Kluge, the 61-year-old owner of Albemarle House, has said that as she's gotten older, keep up with her sprawling luxury home has been "exhausting."

Lesson #4: Homeownership Doesn't Guarantee Profits or Riches

Greg Oberland, an executive vice president at Northwestern Mutual, notes that during the housing boom, many people used their homes as piggy banks and bet that home prices would continually escalate. "We had this period where people thought it was OK to buy a home beyond your means, fix it up even more, and then it would be a huge asset that would help you achieve your financial goals, like paying for your kids' college education or funding your retirement," Oberland said.

Those days are gone, thanks to falling home prices and tighter bank-lending practices.

In fact, many people who over-improved their homes - even owners of trophy properties - are losing money when they sell their houses, or never getting to fully enjoy their homes the way they'd planned. That's the case with real estate businessman C. Frederick Wehba Sr., who spent four years and $65 million building a Beverly Hills mansion - only to conclude he doesn't want to live there after all.

According to the Los Angeles Business Journal, Wehba and his wife decided to sell the 36,000-square-foot property, and never lived in it, "because such a prominent display of wealth no longer made sense during the protracted economic slump."

Even if Wehba gets his $68.5 million asking price, he will still probably lose money on the deal, after paying a Realtor's commission, transaction fees and holding costs. In the long run, though, he likely made a shrewd economic decision to extricate himself from home in which no expense was spared.

The L.A. Business Journal reported: "While many parts of the house are complete, some fixtures are still being installed, including a hand-carved marble fireplace in the library, an 11-foot by 9-foot crystal chandelier in the two-story circular foyer and 24-karat, gold-plated front door knobs that weigh 15 pounds apiece."

"We were never trying to flaunt, but it looks like it now," said Wehba, 63. "We were trying to have it as a house that is open for fund-raising for our church so that people can enjoy it. Maybe times will come back like that, but times are recessionary."

That's the reality -- and a lesson, too -- for the ultra-wealthy crowd and average wage earners alike.

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FHA Reform Bill to Allow Smaller Down Payments, Higher Fees

Lynnette Khalfani-Cox — 2010-06-14T08:30:00 00:00

Filed under: News,Economy

The Federal Housing Administration reform bill overwhelmingly approved in the U.S. House of Representatives last Thursday will strengthen the housing finance agency, but will likely prove to be mixed blessing for homebuyers.

The legislation, passed by a vote of 406 to 4, would raise fees for borrowers, give the FHA the power to oust lenders that are costing the agency too much money in claims, and make it easier for the FHA to protect itself from fraud-related losses. On the positive side, it will also allow borrowers to get mortgages with smaller down payments.

The primary purpose of the reform legislation - introduced by Rep. Maxine Waters (D-Calif.) - was to shore up the deteriorating finances of the FHA, an agency whose prominence in the mortgage business has skyrocketed lately.

The FHA doesn't make home loans; instead, it insures lenders against default. Less than four years ago, it was handling only 4 percent of home loan volume. Today, the agency insures roughly one-third of all new mortgages in the U.S.

Last year, however, the FHA reported that its reserves had fallen to just $3.6 billion as of Sept. 30. That represented a scant 0.53 percent of the $685 billion worth of FHA-insured loans at that time. By law, the reserves in FHA's Mutual Mortgage Insurance Fund must be at least 2 percent of all FHA loans.

So the House bill will bolster the FHA's capital by allowing agency to nearly triple the caps on annual mortgage insurance premiums it charges to 1.50 percent from 0.55 percent of a mortgage. Those premiums are paid by borrowers over the life of their home loans. The FHA says the premium increase will cost the average borrower about $42 a month.

For borrowers, the tradeoff for paying higher fees is that homebuyers will have more ready access to credit and can get mortgages with smaller down payments of just 3.5 percent, versus the 5 percent to 20 percent down payments typically required by conventional mortgage lenders.

Industry groups applauded the move, saying it will safeguard the FHA and help it continue its role of providing affordable housing to low-to-moderate-income Americans.

"We hope the Senate will be empowered by the House action and will consider similar legislation quickly," said Robert Story, chairman of the Mortgage Bankers Association.

No companion legislation on FHA reform has been introduced yet in the Senate. But it's expected to take up the matter after the July 4 recess.

Several Amendments Defeated

In many ways, the House version on FHA reform is as notable for what was not included in the bill, as for what did make it into the final legislation.

In passing the FHA legislation, the House defeated three other hotly-debated proposals:

A proposal to raise down payments on FHA loans to 5 percent from 3.5 percent.
An amendment by Republicans to scale back by 2012 the FHA's market share to 10 percent of all newly originated mortgages.
An amendment to lower FHA loan limits, which are now as high as $729,750 in high-cost areas of the country.

It was the proposal to raise down-payment requirements, though, that was the most contentious. The amendment was introduced by Rep. Scott Garrett (R-N.J.), who had argued that bigger down payments would promote responsible, sustainable homeownership by making borrowers more committed to their mortgages and less likely to walk away from underwater homes.

Garrett wasn't the member of Congress to first to try to push through the idea of larger down payments for FHA loans. Multiple attempts in the Senate by Sen. Richard Shelby to increase the FHA minimum down payment to 5 percent also have failed.

The Mortgage Bankers Association, the National Association of Home Builders and the National Association of Realtors all supported efforts to keep down payment requirements at 3.5 percent.

"The current 3.5 percent down payment represents a significant financial commitment and sufficient investment to insure a borrower's seriousness about homeownership," said NAR President Vicki Cox Golder.

She added that raising down payment requirements would "have an especially harsh impact on African American and Hispanic borrowers, who traditionally have much lower accumulated wealth and have benefited from the opportunities offered by fully documented, standard FHA loans with low down payments."

In 2009, the FHA was by far the largest source of financing for minority borrowers, insuring 52% of all loans made to African-American homebuyers and 45% of mortgages to Hispanics.

A Compromise on the Down Payment Issue

Ultimately, the prospect of raising down payment requirements at the current time appeared to be unpalatable politically and economically. Such a move before a midterm election could have proved unpopular with voters. Moreover, toughening mortgage requirements for borrowers - by demanding bigger down payments - runs contrary to the federal government's efforts to help bolster the U.S. housing market.

President Barack Obama and his advisers, who have struggled to come up with effective widespread solutions to the country's housing and foreclosure problems, explicitly opposed the idea of raising down payment requirements.

FHA Commissioner David Stevens told a House Financial Services panel in March that the Obama administration "determined after extensive evaluation that such a proposal would adversely impact the housing market recovery."

By the FHA's own analysis, raising the down payment requirements would have precluded some 300,000 borrowers from buying a home and added just $500 million to the FHA's coffers. By comparison, other FHA changes, including raising fees on borrowers, would generate some $4.1 billion.

Nevertheless, the issue of forcing home borrowers to make larger down payments, and have "more skin" in the game won't be going away any time soon. Indeed, lawmakers struck a bit a a compromise on this topic in passing FHA reform.

One provision successfully injected into the House reform bill requires the agency to examine down payment requirements annually and submit yearly reports to Congress on the matter.

So even though borrowers may still be able to secure low down payment FHA mortgages now, there's certainly no guarantee that FHA requirements won't be toughened in the future. So, prospective home buyers considering FHA loans in 2011 and beyond should position themselves for the possibility of having to make bigger down payments.

Future Givebacks to Borrowers?

FHA's health is critical not to just borrowers who get FHA-insured loans, but to the entire housing market and taxpayers everywhere.

FHA's market share, combined with loans backed by Fannie Mae and Freddie Mac, means that the government now directly or indirectly backs more than 95 percent of the U.S. mortgage market. Without a fix to FHA's financial woes, observers feared that the agency might have to receive a government bailout - as did Fannie and Freddie, which were seized by federal regulators in 2008.

Coming up with a down payment has historically been the biggest impediment to becoming a first-time homebuyer. So it's no surprise that many prospective mortgage borrowers have been flocking to FHA loans amid the credit crunch.

The reform legislation - if passed by the Senate as well - may hold out one other attraction for FHA borrowers. The FHA says if it ultimately wins the power to raise annual premiums, it will lower another charge imposed on borrowers: an upfront premium, which is now 2.25 percent. The FHA plans to slash that premium to just 1 percent.

Want to learn more about the state of home mortgages and your personal finance concerns? Get more of Lynnette Khalfani-Cox's insights on home finance at the upcoming panel "What Works Now: Smart Moves When Buying a Home," created by AOL Real Estate in partnership with Bank of America Home Loans and broadcast on AOL June 23. Sign up at realestate.aol.com/home-buying-answers to get an e-mail reminder of the event.

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All-Cash Home Purchases: Looking Behind the Numbers

Lynnette Khalfani-Cox — 2010-06-03T15:02:00 00:00

Filed under: News,Economy

All-cash home purchases are growing significantly in the real estate market - thanks to tighter bank lending practices, repeat buyers who are opting to forgo the mortgage process, and investors gobbling up distressed real estate.

For every month so far in 2010, all-cash buyers comprised either 26 percent or 27 percent of home purchasers, according to the Realtors Confidence Index from the National Association of Realtors. That's nearly double the cash buyers (15 percent) from a year ago, and about three times higher than previous years, when all-cash buyers ranged from just 7 percent to 9 percent of the market.

With a glut of foreclosures and short sales hitting the real estate market, one might be tempted to think that those paying cash for homes are mainly real estate investors.

But digging beneath NAR's numbers tells a different story - and so do Realtors.

Move-up buyers and baby boomers who are scaling down their lifestyle actually represent the biggest numbers of those who are snatching up homes with all-cash deals, experts say.

Jed Smith, an economist and managing director of quantitative research at NAR, broke down the numbers for HousingWatch:

Wealthy foreigners: 2 percent
Investors: 12 percent
Repeat buyers: 86 percent

Right now, NAR is forecasting 5.4 million existing-home sales in the U.S. for 2010.

According to Smith, foreigners account for about 4 percent of all U.S. existing-home sales. Investor activity makes up roughly 18 percent all of property sales. The remaining 78 percent of home purchases are made by first-time buyers (40 percent) and repeat buyers (38 percent).

Since about half of all foreigners pay outright for real estate, Smith says, that means wealthy foreigners represent a total of 2 percent of all-cash buyers. Based on Realtor feedback, Smith says a majority of investors are paying cash. So he estimated that about 12 percent of the all-cash market is derived from investors. The remaining 86 percent of all-cash buyers is from those with enough assets to buy without a mortgage.

Who make up that last group? They certainly aren't first-time buyers. Most first-timers have a hard enough time coming up with a down payment; recently, most have been putting down 3 percent to 5 percent to buy their homes, and then getting a mortgage to finance the purchase.

According to Smith, real estate agents around the country report that the repeat buyers who purchase homes with 100 percent cash generally fall into two categories: move-up buyers purchasing bigger homes, and baby boomers who are trading down to smaller ones.

Among the baby boomer crowd, many buyers are selling homes in more expensive areas, such as New York and California, and using the proceeds from sales to make all-cash offers in less expensive regions of the country.

Smith said that in addition to Florida, there has been stepped-up demand for real estate in Tennessee, North Carolina and Arizona - all of which have relatively affordable housing.

"For those who are selling or downsizing, and have equity in their house, this is predominantly the place that cash is coming from," says Smith.

"And given decreased credit availability, more buyers are paying cash," he adds. "As you move up the scale, in terms of house price, the banks scrutinize the loans even more than they do at the lower end of the market."

Melissa Jenkins, of Weichert, Realtors in Bridgewater, N.J., echoes that sentiment. Jenkins works with both investors and owner-occupants seeking property in the Garden State.

Like Smith, Jenkins said it's tougher to get jumbo mortgages (i.e. home loans above roughly $729,000), so she wouldn't be surprised if well-heeled buyers who could afford to do so wound up avoiding mortgages, just to have fewer hassles in the home-buying process.

Jenkins says she closed on three homes in the past two weeks - but not before each of her buyers had to jump through last-minute hoops with their banks.

"With each of my clients, three days before closing they all got e-mails - from three different banks - saying they couldn't close on the date scheduled," Jenkins said. Fortunately, Jenkins was able to save one closing by calling a lender and getting a documentation issue resolved. With the other two deals, the closings were briefly postponed, including one transaction that closed two weeks later.

Meanwhile, Jenkins recalls: "A colleague of mine last year had a cash buyer who bought a $5 million home in Basking Ridge," Jenkins said, noting that the all-cash deal was one of the priciest home sales in the region for Weichert in 2009.

For her part, Jenkins just had an all-cash buyer, too - in this case an investor - who plunked down $150,000 for a property in Plainfield, N.J.

"Most investors are buying properties under $200,000, renovating them and renting them," she says.

Adds Smith: "The foreclosure problem in America is a really miserable situation for people involved. On the other hand, it's a great time if you're an investor."

Lynnette Khalfani-Cox, a former reporter for the Wall Street Journal and New York Times is also the author of the best-selling personal finance book Your First Home: The Smart Way to Get It and Keep It. See Lynnette Khalfani-Cox on our upcoming online event What Works Now: Smart Moves When Buying A Home in participation with Bank of America Home Loans, premiering on AOL Real Estate at 7:30pm on June 23. Sign up here for an email reminder to tune into the event.

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