Month: November 2014

In your search for a home, you may find yourself in the position of making an offer on what is called a “distressed” property.

This term has less to do with the condition of the property and more to do with who owns it.

“Distressed” here means that the property is either close to being taken back by the lender, usually because of missed payments, or is already there.

There are three main types of distressed properties that you may encounter in your home search: short sales, foreclosures, and REO (real estate owned) properties.

Short sale

A short sale occurs when the lender allows the property owner to sell it for less than is owed on it. The current owner may be still be making mortgage payments and living in the property but wants to get out from under that payment. The lender may prefer this route as opposed to going through the long and expensive foreclosure process, especially if they stand to take less of a loss in a short sale than in a foreclosure.

Foreclosure

In a foreclosure, the lender is in the process of taking back the property, and the owner may or may not be living in the property.

REO

With an REO, the lender has already taken back the property, and it is almost certainly vacant.

When looking at these types of properties, you must realize that you’re going to need a lot of patience. Because you are dealing with a lender instead of a homeowner, another layer of complexity is added to the mix.

The lender may well be dealing with a large number of distressed properties, and depending on how many, the purchasing process could take a long time.

Once you’re past the lender, however, financing a distressed property is almost identical to financing a traditional property. Contact your mortgage professional for more details.

Fair Isaac Corporation (FICO) is responsible for credit-scoring models used by the three credit bureaus – Trans Union, Experian and Equifax – and a large proportion of lenders in determining your credit worthiness.

The bureaus collect data from creditors such as banks, credit card companies, and auto finance companies. Each bureau enters the data into a scoring model and generates a credit score. Lenders take the middle of these three scores and use that number as your “score” when qualifying you for a mortgage.

Scores range from the mid-300s to the mid-800s. You want to be in at least the 640 range; anything below that will require you to use other things to offset the low score, such as a higher down payment. Anything above 740 will get you into the premium lending programs with lower interest rates (and lower mortgage payments).

Fair Isaac Corporation has devised a new credit scoring model, FICO09, with changes that could impact buyers who have had trouble qualifying for a mortgage because a collection appears on their credit score.

In the new model, a settled collection won’t be considered in calculating a credit score, and less weight will be placed on unpaid medical collections.

As even a small increase in a credit score can have a positive impact, the result could be that more people will be able to purchase a home.

FICO09 is available this year; however, it is not known yet whether credit bureaus and lenders will use it. Stay tuned.

When you purchase a home, you’ll likely want to get a home inspection. This is a very thorough review of all the working systems of the property, including electrical, plumbing and heating, among others. And it ensures you aren’t buying someone else’s problems.

If there are challenges with the property, now is the time to find them, so that you can raise them with the seller. Your sales contract should offer you the option of getting a home inspection.

If there isn’t one, ask the seller why, and explain that you’d like it added. If the seller is hesitant and you have concerns about the condition of the property, consider paying for an inspection yourself.

If issues do turn up during the home inspection, you’ll likely want them addressed before you move ahead with the process of purchasing the property.

The seller isn’t obligated to address any of the concerns you have, but if the issues are significant, and more than you are prepared to deal with yourself, you have the right to walk away from the property.

If you are prepared to handle the issues identified through your home inspection, you can often negotiate the repairs into the deal as a price reduction or seller’s credit. This, of course, hinges on how motivated the seller is.

To find a good home inspector, use your network: Ask your friends or family, your mortgage professional, or your real estate agent to recommend an inspector they may have used or worked with.

You may believe that buying a home directly from a seller is your cheapest option, as you’ll save on the commission that would otherwise be paid to a real estate agent.

However, buyer beware: There are plenty of traps for the unwary in buying a For Sale By Owner (FSBO.)

The selling price

Take the value of the property: In an FSBO, the seller sets the price, usually without consulting an agent. However, regardless of what either you or the seller think the property is worth, it still must stand up to the scrutiny of a lenders’ appraisal.

Why? Because lenders, who have their own appraisal review departments, will only lend money against either the lower of the appraised value or the contract price.

As the buyer, you usually pay for the appraisal; if the property turns out to be overpriced, and the seller is adamant that, regardless of what the appraisal says, the asking price is fair, you’re not going to be able to borrow the money to purchase the property from that lender…and you will have spent money on an appraisal that is non-refundable.

The way to establish the true value of the property is through a Comparative Market Analysis (CMA), which is available through a real estate agent.

This is a review of what similar properties in the same area have sold for recently, and it will give you an idea of what to expect on an appraisal.

The sales contract

Secondly, there are many variables inherent in the process, particularly in the sales contract. If you were purchasing a home using a real estate agent, you likely would have a good real estate attorney. This is even more important in purchasing an FSBO. You will need to hire an experienced real estate lawyer to ensure the contract is properly written.

Better still, think twice before you sign on for an FSBO.