Sara’s Homes

If you're thinking about applying for a home mortgage this year, here's some important news: Beginning June 1, your lender is likely to order a second full credit screening immediately before closing.

The last-minute credit report will be designed to find out whether you've obtained — or even shopped for — new debt between the date of your loan application and the closing. If you've made applications for credit of any type — for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card — the closing could be put on hold pending additional research by the lender.

The June 1 changes are part of a new effort by mortgage giant Fannie Mae to cut down on slipshod underwriting by lenders and frauds by borrowers. Fannie's so-called "loan quality initiative" will require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of borrower occupancy plans for the property, Social Security numbers and Individual Taxpayer Identification Numbers, among other changes.

"There's an almost irresistible urge" for many mortgage borrowers to spend, said Don Unger, chief executive of Advantage Credit Inc. of Evergreen, Colo. "The lender says, 'OK, you're approved for the loan,' and you immediately think about shopping for all the things you need for the house."

Borrowers may go to a retailer and put in a credit application. In the past, that might not have raised an eyebrow, or even been detected. But under the new double-check policy, when the application shows up as a "hard" or borrower-initiated inquiry on a credit report, Unger said, the lender is going to have to contact the merchant and determine whether credit was extended, in what amount and how this might affect the applicant's home-financing transaction.

Marc Savitt, president of the National Assn. of Independent Housing Professionals and a mortgage broker in Martinsburg, W.Va., says it's not an uncommon scenario. "Most often the new debt involves furniture or other goods for the house," Savitt said. "However, we have seen debt for new cars and other major purchases."

Terry Clemans, executive director of the National Credit Reporting Assn., recalls one case where home buyers "went out and gorged on $40,000 worth of new furniture and all types of stuff" after their loan approval — resulting in monthly payments far beyond what they could afford. Under the new policy, they'd probably be shot down before closing.

Fannie Mae spokesperson Janis Smith said lenders "will have to look for things like new credit accounts, increased credit lines, increased balances on existing accounts, undisclosed or newly recorded liens, second mortgages — anything that may have changed since initial application that might impact a borrower's debt-to-income ratio."

As a practical matter, some lenders are likely to ask their credit-reporting vendors to perform the investigations when new debts or inquiries pop up on borrowers' files. Fannie Mae's instructions say that "lenders must determine that all debts of the borrower incurred or closed up to and concurrent with the closing" are considered in the final loan analysis.

Unger, however, said all this may not be as straightforward as it sounds. For example, if the credit report is pulled immediately before closing to comply with the "up to and concurrent" requirement, there may not be sufficient time to check out inquiries — especially those where no actual drawdown of debt has been reported to the national credit bureaus. He also questioned whether entire loan packages might need to be re-underwritten — a time-consuming process — based on credit data discovered at the 11th hour.

How should home buyers and refinancers prepare for the new credit-check procedures? Lenders and credit reporting company executives say everybody needs to follow just one basic rule: abstinence. Between your application for a mortgage and the date of closing — which might be a span of 45 to 60 days or more — resist spending.

And don't apply for new credit unless you discuss it in advance with your lender and get a green light.

New short sale rules are impacting homebuyers as well as sellers and lenders.

Recently, the federal government instituted the Home Affordable Foreclosure Alternatives program, or HAFA, which is intended to streamline the short sale process, at least for transactions in which the home sellers have mortgages owned or guaranteed by Fannie Mae or Freddie Mac.

While most HAFA rules affect only the home sellers and their lender, a few of the streamlined rules impact buyers. They include:"Buyers of short sales have had to wait months and months and still not always have their offer approved for a short sale," says Lisa Matykiewicz, a Realtor and Certified Distressed Property Expert in Gilbert, Ariz. "Now there will be defined parameters as to what the lenders will accept and a timeline for when the contract needs to be approved or denied."

• Buyers must present documentation of funds or a preapproval letter from a lender with their offer for a short sale; sellers need to present this to their lender within three days of receiving the offer.

• Lenders must approve or deny the offer for the home within 10 business days of receiving the offer.

• Settlement must take place within a reasonable period of time after the offer is made, but the lender cannot require a closing earlier than 45 days from the date of the sales contract unless the home seller agrees.

• Buyers cannot sell the property again for 90 days. This is meant to prevent investors from "flipping" homes by purchasing at a low price and selling at a quickly inflated price.

• Short sale transactions through HAFA must take place at "arm's length," meaning the home sellers cannot sell the property to a relative or anyone else with whom they have a closer personal or business relationship.

Matykiewicz anticipates fewer foreclosures in 2010 and more short sales due to the streamlined short sales rules.

"I think more short sales will be available in 2010 than in 2009 because everyone is cooperating to avoid adding more foreclosures to the market, from the government to the lenders to the homeowners," says Matt Martin, CEO of Matt Martin Real Estate Management in Vienna, Va.

Better bet?

"In reality, short sale properties are priced at what the market will bear because the bank wants to recoup as much as possible of the loan value," says David Liniger, Re/Max International chairman and co-founder.

Still, shoppers may find a short sale a better bet than buying a foreclosure, he says.

"Short sales are usually in much better condition than a foreclosure because they have an actively involved seller who is living in the property," Liniger says. "Most people would prefer to buy a home in good condition at a reasonable price as opposed to a property in bad condition which will require considerable time and money to make livable."

Not all short sales fall under the HAFA program. Homeowners with loans owned by lenders other than Fannie Mae or Freddie Mac will need to negotiate short sales on an individual basis.

"One problem that will continue even with the streamlined short sale process is that homebuyers do not know where the homeowner stands in terms of approval for the short sale," says Martin. "Some real estate agents go ahead and list a home as a short sale even before the lender has approved one."

If, on the other hand, the home sellers have been preapproved by HAFA for a short sale, "the process should work better," Martin says.

Homeowners struggling to sell their homes in a short sale are getting some relief, thanks to the federal government's Home Affordable Foreclosure Alternatives (HAFA) program.

Up to now, many short sales — in which the lender accepts a sale of the property for less than the full amount owed -- have taken months to complete. Sometimes, the complex and lengthy process has failed, resulting in foreclosure.

HAFA establishes streamlined short-sale rules and provides incentives for borrowers and lenders to work together to avoid foreclosure. The rules — in effect between April 5, 2010, and Dec. 31, 2012 — also are intended to speed up the short-sale process.

"The streamlined short-sales process will definitely help homeowners," says David Liniger, Re/Max International chairman and co-founder.

Before HAFA, homeowners often listed their home for sale without an idea of what the lender would accept.

"A lot of sellers and their Realtors have not been able to sort out the problems with short sales and have given up on the process because, even after sending in the correct paperwork, they have sometimes waited three or four months for their lender to respond," Liniger says.

Under HAFA, borrowers receive pre-approved short-sale terms from the lender before putting the home on the market.

Lisa Matykiewicz, a Realtor and certified distressed property expert in Gilbert, Ariz., says the updated short-sale rules establish an easy-to-understand process with defined steps that "make it easier for everyone to understand."

To be eligible for HAFA, homeowners must first apply for a loan modification through HAMP. Owners who do not qualify for a loan modification or miss payments during the initial loan-modification period qualify for HAFA.Eligibility requirements
The HAFA guidelines apply to lenders that voluntarily participate in the Home Affordable Modification Program (HAMP). The Department of Housing and Urban Development says more than 100 servicers have signed up to participate in HAMP, covering more than 89% of mortgage debt outstanding in the country.

Other HAFA requirements include:

•  Property is principal residence.
•  Mortgage originated before Jan. 1, 2009.
• Mortgage is owned or guaranteed by Fannie Mae or Freddie Mac.
• Borrower is delinquent or default is foreseeable.
• Homeowner demonstrates hardship.
• Borrower's total monthly housing payment exceeds 31% of gross income.
• Unpaid principal does not exceed $729,750.

According to HAFA rules, lenders now must offer a short sale in writing to the borrower within 30 days if the borrower does not qualify for or complete a loan modification. Borrowers then must respond within 14 days to the lender's short-sale agreement.

"I think it's great that the lenders in this program have to offer a short sale before going to foreclosure," Matykiewicz says.

When a purchase offer is made, borrowers must submit the sales contract to the lender within three days, along with the buyers' mortgage pre-approval and the status of negotiations with other lien holders on the seller's property.

Finally, lenders must approve or deny the contract within 10 days.

HAFA rules also state that lenders must release borrowers from the obligation to repay the difference between the sales price and the loan amount. No deficiency judgments are allowed for a first or second loan.

Other incentives
In the past, short sales were especially difficult for homeowners with more than one loan on their home, since the home sale typically repaid only the first mortgage. HAFA's financial incentives include a payment of up to $3,000 for second mortgage holders.

Other HAFA financial incentives include $1,000 to loan servicers to cover administrative fees, up to $1,000 for mortgage investors who agree to share short-sale proceeds with second lien holders and $1,500 to the homeowners for relocation."Second trust lien holders are often owed five or 10 times that $3,000 payment," Liniger says. "But if the property goes to foreclosure, the second trust holder is not likely to get any money at all. This at least guarantees they get something."

"The moving expense allocation acts as an incentive for them to stay in the property until the short sale goes through," Liniger says. "Owner-occupied properties are usually in better condition than vacant homes."

Buying a home is the biggest purchase most people will ever make, yet many go into it blind. Here are the 6 most common -- and costly -- mistakes homebuyers make.

1. Not knowing your credit score

If you're even toying with the idea of buying a home, you must find out exactly what your FICO score is. If you find it is less than ideal, wage a systematic campaign to raise it. Too many borrowers ignore this step and get surprised when they get interest rate quotes.

Once you've pored over your credit history and corrected any errors, your next step is to pay down revolving debt balances to no more than 30% usage. That will help raise your score significantly.

Why does it matter?

The lower your score, the higher your costs of borrowing. Fannie Mae and Freddie Mac, for example, charge higher up-front fees to borrowers with credit scores below 740.

For a buyer with a credit score between 680 and 700, the fee comes to 1.5% of the mortgage principal. On a $200,000 mortgage, that adds up to $3,000. Someone with a 740 score pays nothing.

Lower-score borrowers also get saddled with higher interest rates, about 0.4 percentage point more for the below 700 borrower. That costs an extra $62 a month -- $744 a year -- on a $200,000, 30-year, fixed rate loan.

2. Buying a car before a house

Anytime consumers open new credit accounts -- credit card, auto loan, etc. -- their FICO score could drop, according to Craig Watts, a spokesman for Fair Isaac, the creator of FICO scores.

"Hence the admonition to not open other new accounts while your mortgage application is in process," he said.

A big purchase would use up a considerable proportion of a borrower's total credit limit, which results in a drop in the score. Lenders often continue to check credit scores in the weeks before closing.

"The lender will likely slam on the brakes if the applicant's credit scores have suddenly dropped below the minimum required for the requested loan rate," Watts said.

3. Skimping on home inspection

Buying a pig in a poke can cost buyers big bucks -- just when they can least afford it. So It's vital to find all the costly flaws before you buy.

Many homes on the market today are distressed properties -- foreclosures and short sales -- and that only increases the importance of good inspections, according to David Tamny, president of the American Society of Home Inspectors.

"The owners usually didn't have the money to keep up these homes," he said. "There's a lot of deferred maintenance."

A home inspection can find problems with the foundation, electrical, plumbing, roof, attic insulation, and heating and air conditioning. In some states, separate licensed inspectors offer mold or termite inspections.

Often homebuyers, who may be strapped for cash, stint on inspections and look for the cheapest way to go. That can lead to disaster.

"The cost of repairs far exceeds the cost of inspection," said Tamny.

4. No lawyer

Nearly everyone involved in a real estate transaction -- the seller, the buyer's real estate agent, the seller's agent and the mortgage broker -- has a vested interest in getting the deal done because they only get paid when the house is sold. So they may push a deal even if it's not in the best interest of the buyer.

One of the best defenses against making am expensive purchase you'll regret is to hire a real estate attorney -- even in cities where it's not standard practice. These professionals charge flat fees and their advice is objective.

It's nice to have someone on your side.

5. No contingencies

When signing a sales contract, buyers usually have to put up 1% to 3% in "earnest money," which they don't get back if they pull out of the deal except under certain conditions spelled out in the contract.

Sellers try to limit the grounds for canceling, and inexperienced buyers may sign contracts that don't include common exceptions, such as uncovering major problems during the home inspection, failing to obtain financing and failure of the house to appraise.

Failure to obtain financing is common these days because lenders have become very picky; underwriting is very strict.

Even if your mortgage company is still willing to finance your purchase, the house itself may be worth less than you've contracted to pay for it, and the lender will pull its approval.

With residential real estate markets still slow, sellers usually accept contingency clauses, but if they resist, it may be better to rethink the deal. Losing a deposit of $2,000 to $6,000 on a $200,000 home hurts.

6. Not budgeting for insurance

Don't underestimate insurance costs and fail to budget for them.

Many homebuyers don't understand just what is -- and what is not -- covered. Standard policies pay for theft and wind, fire, lightning, hail and explosion damage. Not covered is flooding, earthquake damage or problems caused by neglect of routine maintenance, according to Jeanne Salvatore, spokeswoman for the Insurance Information Institute, an industry-sponsored educational group.

"The most important thing is before you buy a home, find out what it will cost to insure it," she said. "Insurance needs to be calculated into the cost of owning a home. Unlike a mortgage, which you can pay off, you'll be responsible for the insurance costs forever."

For flood insurance, most buyers use the National Flood Insurance Program. Earthquake coverage may be available through a state authority or some private companies.

Depending on location, flood insurance can run into a lot of money. The cost of $250,000 worth of government flood coverage on the building and $100,000 of its contents can go as high as $5,714 in high-risk, coastal areas.

This spring, opportunity is knocking hard for home buyers. Aside from the soon-to-expire tax credit worth as much as $8,000 (you must have a contract by April 30 and close the deal by June 30), affordability has returned to pre-boom levels and mortgage money is cheap, with the 30-year fixed rate hovering around 5%.

Before you leap, you'll have to weigh the risk of further price declines in your market. The median price for single-family homes is $163,600, according to the National Association of Realtors -- about what it was in 2002. Fiserv Lending Solutions, a research company in Cambridge, Mass., forecasts that it will fall another 6.4% in 2010. But the price trend varies a lot by city. For example, prices in Washington, D.C., could fall another 12%, while prices are predicted to rise 1% in Pittsburgh, Pa. The biggest predictors of further price declines in most markets are joblessness and distressed sales. More foreclosures and short sales (properties sold with the lender's okay for less than what's owed on the mortgage) are coming, but they'll ease their way onto the market instead of hitting it like a bomb.

The supply of homes for sale nationally has drifted downward from its peak in 2008 but is still stacked in favor of buyers -- although in many cities the inventory of entry-level homes has dropped quickly, as first-time buyers and investors have scooped up bargains. On the new-home front, most builders have burned off their existing supply of homes and reduced or eliminated concessions and incentives. They may pay closing costs, but later this year Federal Housing Administration (FHA) rules will limit the seller's contribution to 3% of the purchase price. You can still get upgrades, but you'll pay for them upfront, says Jody Kahn, vice-president of John Burns Real Estate Consulting.Unless your area is rife with foreclosures that promise to drag down prices, there's little reason to wait to buy. Mortgage rates are likely to head higher -- the 30-year fixed rate may hit 5.7% by year-end, according to Freddie Mac -- which may negate any benefit you'd get by waiting for lower prices. Suppose you buy a home with a $300,000 mortgage now and lock in a 5% rate. Your monthly principal and interest payments would be $1,610. If you wait until prices drop 6% and borrow $282,000 -- but have to pay 5.7% on the loan -- your monthly payment would be $1,637.

If you need to sell a home before you can buy again, your best strategy is to price it realistically to move it fast (see 3 Keys to Selling Your Home). That was Andy May's strategy when he sold his condo in Rochester, Minn., for a loss before he and his fiancee, Lexi Davis, moved to Salt Lake City. In their search for a home, the couple started their shopping on the Internet. Once they began to tour homes, they discovered that many properties that had looked good online didn't cut it in person -- because of unappealing floor plans or unacceptable commutes. In home buying, what you want -- or not -- evolves after you actually see the homes, says May.

After visiting at least 20 houses, they put a bid on a home with four bedrooms, three bathrooms and a big yard for their dog. The home was listed for $250,000 and had been for sale for six months. The couple offered $230,000, and after negotiating settled on a price of $238,500 with $3,500 in seller-paid closing costs -- including a home warranty and a year's worth of homeowners insurance. They put down $7,000 and took out a 30-year, fixed-rate FHA mortgage with a rate of 4.75%. As a first-time home buyer, Davis qualified for a tax credit of $8,000.