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Guest Post: Managing your finances before homeownership to save your home from a foreclosure

Managing your finances before homeownership to save your home from a foreclosure

Are you planning to purchase a new home? If yes, you have to buck up your finances so that you don’t fall in trouble in the near future and then risk losing your home to a forced foreclosure. Managing your finances is the most important job that you have to do when you plan to take out a home mortgage loan from a bank. The mortgage loan entails your home as collateral so that when the borrower defaults to make the payments on time, the lender can foreclose the house and recuperate the money. How much house can I afford is the most important question a borrower should ask himself before taking the plunge. Here are some important steps that you should take in order to manage your finances once you plan to take out a home loan.

  • Stop all the unnecessary expenses: Whenever you contemplate buying a new house and forget paying further rent, you should stop making all the unnecessary expenses that you can do without. If you don’t read magazines, stop the monthly subscriptions to magazines. If you can cook well, stop dining out every weekend as this will save your dollars in the long run. You can even do without the cable connection at home. If you can build an emergency fund, you can easily take out a mortgage loan at an affordable rate.
  • Stop using your credit cards: Are you aware of the fact that the mortgage lender will check your DTI ratio or the debt-to-income ratio that is the ratio between the total monthly debt obligations with your monthly income. If you keep on purchasing things with your credit cards, you’ll drown in unsecured debt and thereby be forced to take out a home mortgage loan at an unaffordable interest rate. Therefore, stuff your wallet with cash so that you may stop buying things when you’re exhausted.
  • Save enough money: Yes, this is the ultimate secret that will take you to the path of a smooth mortgage loan approval. The mortgage loan underwriter will check the amount you’re paying down while taking out the loan amount. The more you pay down, the lower will be the rate offered to you. You should save enough money so that you can at least pay down 20% of the loan amount and avoid paying PMIs later on.
  • Keep track on your credit score: Don’t take any wrong step that can hit your credit score. Pull out a copy of your credit score time to time so that you know where you stand financially. Repair your credit as much as possible so as to grab the best mortgage loan at the most covetable cost.

When you’re dreaming of homeownership, make sure you follow the money tips mentioned above. By taking all the tips mentioned above, you can get the most appropriate loan in accordance with your affordability. Don’t forget to ask yourself “how much house can I afford” before taking out the loan.

How to take advantage of a short sale

If you’re shopping for a home with a bargain-basement price, a short sale could be the answer.

This is where a lender allows borrowers who can’t keep up with the mortgage payments to sell their home
for less than they owe on the property. The bank or mortgage company takes whatever you pay to purchase
the home and forgives the remaining debt.
Short Sale
How low can you go and still expect a lender to approve the deal?

Lenders usually will accept offers that net at least 82% (after expenses) of the home’s  current fair market value, regardless of what the borrower owes, says Tim Harris, co-founder of Harris Real Estate University in Las Vegas.

Why would a lender do that?

Because it will lose less by allowing a short sale than by going through a foreclosure.

Taking advantage of a short sale is less risky than buying a foreclosure, because so many repossessed homes need tens of thousands of dollars’ worth of repairs. The worst of the bunch have been deliberately vandalized by angry owners just before they were evicted.

Here are 4 smart moves for buying a short sale property:

Smart move 1. Make sure you’re a good candidate for a short sale.

Short sales are all about presenting the lender with a deal it can’t refuse. Banks and mortgage servicing
companies are most likely to approve buyers that:

•  Have a substantial down payment.

•  Have been preapproved for a mortgage.

•  Place no contingencies on their contract, such as having to sell their current home before
proceeding with the purchase.

Smart move 2. Hire a real estate agent who’s experienced in short sales.

You need someone who can steer you away from short sales that aren’t likely to succeed.

Vincent Bindi, a real estate broker for ShortSalesASAP in Orange County, Calif., says your real estate agent should interview the listing agent to determine whether the seller has done everything that’s needed to win lender approval.

You need to know whether the home has been aggressively marketed — the bank won’t like it if the seller hasn’t made a good-faith effort to get a reasonable bid — and whether the bank has received a broker’s price opinion, which it will use to determine the home’s market value.

Smart move 3. Offer the right price.

Short sales aren’t the time or place to do a lot of dickering.

Lenders don’t have the time or staff to evaluate an endless bunch of bids, each a little higher than the last. If you deliberately lowball a bank or mortgage company, it will just write you off as a waste of time.

You need to come up with a cheap but reasonable offer, which the bank or mortgage company will accept, in one try.

Start by estimating the fair market value of the home for yourself, using comps (values of comparable properties that have sold near the home in the past few months).

Take the condition of the home into account and reduce your estimate if the home needs repairs. It’s a buyer’s market, and you don’t have to treat a fixer-upper like it’s in pristine condition.

Calculate 82% of the home’s value, throw in a few thousand dollars to cover the lender’s cost of doing a short sale (ask your agent what that typically is for your area), and you have a good starting point.

Now look at the quality of your comps.

If they’re straightforward deals, and the homes spent at least three or four months on the market, then you’re good to go.

But if all of the comps are foreclosures that sold within a few weeks of hitting the market, you’ve got to assume those were damaged homes being dumped at fire sale prices.

You’ll have to adjust your offer upward, perhaps all the way to the full fair market value calculated with those comps.

Check how close your offer is to the asking price on the home. Remember, the sellers won’t get any of the money, so they have no incentive to demand an unreasonable price.

They’re just trying to find a price you’ll pay, and the bank will accept, to relieve them of their debt.

If you’re close, then you’ve probably come to the same conclusions as the sellers and their real estate
agent.

If not, then your agent needs to have another talk with their agent to find out why.

Smart move 4. Be patient.

It almost always takes longer to close a short sale, because it takes so long for lenders to review and accept
your proposal.

We’ve heard of deals closing in as little as five weeks when the lender has preapproved the short sale and asking price and you agree to meet that price.

But that rarely happens.

Most sellers don’t seek the lender’s approval for a short sale until they have a signed purchase contract in hand. (Here’s a step-by-step look at what sellers must do to complete a short sale.)

More often than not, it takes two to four months to get a “yes” or “no” from the bank or mortgage servicing company.

Although lenders say they’re trying to process these requests more quickly, there still aren’t enough loss mitigation specialists to deal with the rising demand for short sales, and we’re not seeing a big improvement.

By Bonnie Biafore  |  Interest.com Contributing Editor