The Mortgage Debt Relief Act of 2007  (MDRA) has been a tool utilized by many consumers who utilize the option of a short sale, deed in lieu of foreclosure, or principle reduction with a mortgage for their primary residence.  In each of the three aforementioned, early delinquency intervention options, a consumer benefits in their use of the MDRA since they are not required to claim the debt cancellation granted by their lender as income for the year when they file their taxes with the IRS.  The MDRA has been extended each year since its inception benefiting many distressed borrowers, and is scheduled to expire at the end of this year.  The Act has a strong chance of being renewed, but there is speculation regarding congress’s ability to pass any legislation before the presidential election or the approach of a “fiscal cliff” of 2013.  A fiscal cliff would trigger automatic spending cuts and tax increases this January unless congress avoids this by extending certain parts of the 2010 Tax Relief Act, changing the 2011 Budget Control Act or both, making the deficit larger by reducing taxes and/or increasing spending.

Without the protection from the MDRA, many distressed home owners may loose the incentive from staying in their home or working with their lender to avoid foreclosure and simply “walk away” from their obligation.  This would increase the amount of homes that are sold for less than their fair market value, further depreciate the value of other homes it the community, and prolong any rebound in the housing market.  Members of congress should recognize the detrimental impact that their own inability to extend the MDRA would have on the homeowners within their communities.  This leads me to believe that they would take the necessary steps extend the Act, but certainly not before this year’s presidential election.    

2/27/13

Low and behold, those necessary steps were taken. The Act that was scheduled to expire on December 31, 2012, was extended in the American Taxpayer Relief Act until December 31, 2013.  In my opinion, this should accelerate the pace at which distressed properties are released back on to the market for sale and will add to a limited inventory. At what pace? Well, not too quickly because that might depreciate the fair market value of homes (performing assets) within the portfolios of larger investors such as Fannie, Freddie, and other, non-GSE’s.

A 20% down payment is NOT required

There are many options for a buyer looking to qualify for a mortgage if they have little or no money to use as a down payment.  A loan with the Federal Housing Administration only requires a down payment of 3.5%.  If a buyer is a Veteran of the US Armed forces, they have the ability to qualify for a VA loan which allows a purchase with as little as 0% for a down payment.  And additional loan programs let  buyers purchase a home with 0% down and even allow the financing of the closing costs if you can fit into a particular niche.  By working with a mortgage broker, a borrower can explore these various options to finance a home with the guidance of a professional.    

Perfect Credit is NOT required

Credit scores range anywhere from 300-850 and many believe that a credit score of 760 or higher is needed in order to qualify for a home mortgage.  This is not the case.  Although a higher credit score will enable a borrower to obtain a lower interest rate, a borrower could qualify for an FHA loan with a credit score as low as 580 in certain circumstances.  Applications with low credit scores are examined more thoroughly, but a lower score would not automatically prevent one from qualifying for a loan. 

Debt to Income Ratios

A debt to income ratio is determined when a borrower’s monthly gross income is compared to the sum of their potential mortgage payment (PITI) plus their minimum payment obligations for all creditors that appear on their credit reports.  Traditionally lenders are more comfortable if a borrower’s debt to income ratio does not exceed 42%.  However, the computer programs that are used to automatically underwrite loans for Fannie Mae, Freddie Mac, and the FHA have been noted to qualify a borrower with debt to income ratios of 45-55% if they have positive, compensating factors that help to outweigh the risk.

If you have any questions that arise regarding a home purchase, refinance or any real estate matter, it is always the best decision to trust the information provided by a professional in the business.  At Coast Village, we pride ourselves in our financial expertise and stake our reputation on the advice that we provide as consultants in a changing market.     

The purchase of one’s home often is the largest financial transaction of a lifetime.   You should work with a real estate broker or agent who has the patience and time to devote their personal attention required to answer all of your questions.  Asking the right questions will instill the confidence needed to successfully make the right decisions.

Listed are 7 questions that should be asked before an offer is made by the buyer.

1) What is the Fair Market Value of the home?

Any real estate agent you work with should have access to the Multiple Listing Service (MLS).  TheMLSprovides a record of properties listed and sold and is used by any appraiser in determining the value of a home for sale.  Your real estate agent can provide a comparative market analysis that will compare the property you are interested in to other similar properties in the same neighborhood that have sold within the last 90 days.  This information can be used to choose how much you would like to offer for the purchase of the home.  It is also a good idea to ask how long the home has been listed for sale because the longer the listing period the higher the chances are of that home being overpriced.

2) How flexible is the seller on the asking price?

You may ask this question to the seller’s agent or have your agent ask on your behalf.  This is a good question to ask because if you make an offer that is too low below the asking price, you may insult the seller.  In today’s market it is also common to inquire whether the seller would be willing to contribute to any of the closing costs.

3) What is wrong with this house?

All sellers’ agents are required to disclose any defaults within the home that they are aware of.  It is always recommended and often required that a buyer obtain a home inspection to determine the structural integrity of the home.  This will let you know if there is any defect that may need to be fixed before you move in or that would need to be addressed shortly after you move in.  Many sellers will have obtained an inspection before they list the home and if they have, then an interested buyer should certainly request to see a copy. 

4) Can you describe the neighborhood?

You will want to visit the home at different times of the day and different times of the week to get a feel of how the neighborhood feels.  A seller’s agent should be able to provide a list of relevant demographic information for the neighborhood such as public school information, public transportation, crime statistics, local sales trends, etc.

5) Will the seller allow a short sale?

In today’s housing market with the amount of distressed home owners attempting to sell their homes, one may come across a home listed as a “Short Sale”  This means that the owner is attempting to sell their home for less than what they owe to their lender due to some financial hardship.  This type of sale is more common nowadays, but requires the approval of the seller’s lender.  If a home has been listed for a short sale without the approval of the seller’s lender, then the chances of a successful close of escrow is much less likely.

6) Do I need a pre-approval?

A pre-approval is a loan commitment from a lender which indicates that a borrower is qualified to obtain a mortgage for a specified amount.  This will help establish the parameters of your search and help you to avoid spending your time researching homes that are not in your price range.  Most real estate agents will require that you have a pre-approval letter from a lender before they spend time helping you search for properties.  A pre-approval letter is attractive to a seller who evaluates your offer since it will show that you have the ability close the transaction quickly.

7) Why is the seller moving?

There could be a variety of reasons why somebody may be selling their home.  A seller could be moving to a more tranquil and remote environment to retire, they could be downsizing, was there a problem with the neighbors, or there might be a hardship that does not allow them to afford the payments.  Asking this question may provide some further insight into your selection process.

Overall, you will want to make sure that you are working with a professional that is willing to walk you through the home buying process by answering all questions you may have, and establishing a trusting relationship to negotiate a successful purchase.  The more inquisitive the buyer is and the more questions that are answered, the more satisfied they are with their purchase.

Many consumers today are taking advantage of the historically low mortgage interest rates in order to purchase and refinance their homes.  In one’s search to obtain the most competitive rates, they have the choice to work with many different lenders.  Having worked as a consumer advocate for over ten years, I always recommend that consumers include a mortgage broker within their loan application process.

 It is important to understand the differences between working with a loan officer from a bank and working with a licensed mortgage broker.  A loan officer at a bank is similar to a call center representative who is limited in the loan options that they can offer.  The bank’s loan officer is required to work within the strict underwriting guidelines of the bank and can only offer a limited choice of products for the financing of your home.  This creates severe limitations on your loan rate, cost and financing options. 

A mortgage broker has the flexibility to work with a multitude of different lenders (including institutional banks) in order to shop for the most competitive loan product from a much larger assortment of options that will fit the needs of the consumer.  They have the ability to provide these services at a discounted rate from the larger institutional lenders. 

A mortgage broker is required to be licensed with the Nationwide Mortgage Licensing System and Registry (NMLS).  They must pass a state and national exam which enables them to act as a consultant regarding the most current lending practices, regulations, and consumer rights and responsibilities.  The NMLS requires the continuing education of their licensees allowing an understanding of any changes within legislation and guidelines.   

It would be a wise decision to work with a mortgage broker in order to obtain the best financing on what may be the largest financial transaction of your lifetime.  A mortgage broker is required to meet the highest level of training, continuing education, fingerprinting, background checks, and employment requirements in order to maintain their license.  These pre-requisites allow a mortgage broker to establish a lasting relationship with their clients in order to help them meet their financial goals.

If you have any questions or feedback, please email us at info@coast-village.com.

We have a talented crew whose first mission is to assist you in evaluating real estate and real estate lending issues.  Please send us your questions and requests.

Need a reality check?  Just bounce your questions our way and we will give you the straight scoop.  What we have not experienced in the last few decades, we can research and use the best data available along with common sense and an agenda-free orientation to help you navigate your way.

Stay tuned for helpful hints and timely information.  Send your questions!  Nothing would make us happier than to help.

Jeff, Steve, Andrew, Debbie, and Joanie.  The Coast Village team.