

### Home Buying Guide

### Realestate.com

Copyright 2012 RealEstate.com

Smashwords Edition

### Table of Contents

Introduction

Chapter 1: Money, Money, Money

Chapter 2: This is Not a DIY Project

Chapter 3: Let's Go Shopping

Chapter 4: Making an Offer They Wouldn't Dream of Refusing

Chapter 5: Victory is Sweet: They Accepted Your Offer

Chapter 6: Guide to Foreclosures

Chapter 7: Short Sales 101

Appendix

Introduction

At one time, and for many decades, homeownership was the proxy for the American dream. That all changed in 2008 with the crash of the housing market, and owning a home became a nightmare for many Americans. It became the "American Delusion," according to Grace W. Bucchianeri of the Wharton School of Business.

The good news is that the vagaries of the recession have passed, and Americans are once again getting into the housing market. Homebuyers are savvier this time around though, and go into the process better educated and armed with information. The recession taught some hard lessons, but lessons well learned.

This e-book contains some of the most information-packed articles written by The RealEstate.com team of investment experts, mortgage wizards and overall real estate gurus. Our aim is to help you on your quest to learn everything you can about buying a home.

No matter how bad things were in the past, one thing hasn't changed: Buying a house is exciting! So let's get you going.

### S hould I Buy a Home Now or Wait?

It doesn't require tea leaves, a crystal ball or any other form of hocus-pocus to take the first step in determining if this is a good time to buy a home. While market conditions should play a role in your decision, the first step toward deciding whether to buy a home now or wait starts with you and the state of your finances.

Will Your Personal Finances Allow You to Buy a Home Now?

How's your credit? Lenders have tightened their FICO® requirements. Even FHA has raised the lower end of their acceptable FICO® range.

How long have you been in your current job? Lenders now want to see at least two years with the same employer, and no decrease in income.

Next, do you have the cash to put down on a home? You'll need at least 20 percent of the list price of the home if you go with a lender. If you obtain an FHA-backed loan, the down payment requirement has a lot to do with your FICO® score.

That said, lending has become so tight that sometimes a stellar FICO® score can't make up for lower income, a spotty job record and even a huge down payment, according to recent news from the Wall Street Journal.

Consider These Factors When Timing the Housing Market

If you're trying to time the market so that you purchase at the bottom, good luck. Nobody knows when it will bottom out. In fact, real estate agents in some parts of the country say their market has already hit bottom and is now on the way back up.

There are signs in the economy, according to some experts, that the real estate market may have a rosier near future than previously thought. These signs include:

1. Unemployment

Housing market prognosticators keep a close eye on unemployment numbers. It's only natural that people worry more when their jobs aren't secure. This anxiety tends to make them hold off on spending money. Consumer confidence typically lags right along with low employment numbers. When the jobs situation improves, so does the confidence of Americans and money begins flowing again.

So watch the unemployment numbers in your city because when they drop, housing prices may rise. But unemployment numbers only help us figure out part of the story.

2. The Housing Inventory

A "shrinking inventory" is a real estate term that describes a market in which the number of homes for sale decreases. Think of it as supply and demand. When there are fewer homes on the market, prices tend to rise, which is a good sign if you plan on selling your home.

But it's not a good sign for the homebuyer. First, prices go up when the inventory shrinks so you'll be forced to pay more if you wait. Then, there's the fact that there will be fewer homes on the market from which to choose. So, while a shrinking inventory may be a glimmer of hope for the health of the housing market, for you its proof that you waited too long to buy.

3. New Housing Starts

Homebuilders sit out tight economies. When people are back to work and spending money again, builders begin new developments. While national new housing starts are important, keep an eye on your state's trends and those in your local area.

While it's wise to monitor economic indicators to help time your home purchase to coincide with the bottom of the market, there's also a danger in that. The only sure-fire way to know that we've hit the bottom of the market is when prices start rising. By then, it's too late.

Real estate markets move in cycles and can take excruciatingly long to change, or transform almost overnight. The ideal time to buy a home is when both prices and interest rates are low.

### A  Guide to Buying Your First Home

Buying real estate, while once touted as a wise investment toward your future wealth, has become somewhat of a scary prospect to first-time buyers. The entire process is confusing; the market is a mess.

Home buying is a process and, like any other, there are steps you should take to get you to your goal. While it's natural to be anxious about buying a first home, take the time to follow the steps and, before you know it, you'll be in your own home.

Financing a First Home

One of the unpleasant tasks in the home buying process is figuring out how much house you can afford and then finding a lender to loan you money at an attractive rate and good terms.

You'll need cash for the down payment and, unless you find a seller who is willing to help with them, the closing costs.

If you're on a tight budget, consider some of the government programs. The United States Department of Housing and Urban Development (HUD) backs low-cost, first-time homebuyer loans through the Federal Housing Administration (FHA).

Aside from a conventional FHA-backed loan, you might want to consider purchasing a low-cost fixer-upper and using HUD's 203(k) program. This program provides one loan that pays for both the house and the work required to fix it.

No matter which route you decide to take, you'll need to shop for a loan. Take your time when looking for a loan, as rates and terms may vary widely between lenders.

Be a Smart Shopper Before Buying Your First Home

Real estate buyer's agents will tell you that making a wish list is one of the most important steps to take before looking at houses. You'll actually make the list and then edit it several times. If you're half of a couple, you should both make your own lists.

Your original list should be an exercise in dreaming. Write down everything your ideal home would have – even if you think these items may be too expensive. Let your imagination run wild. After it's complete, go back over it with a more realistic eye. If you're on a tight budget, you may wish to cross off the stables and tennis courts.

Once you've whittled the list down so that it fits your real world, choose one or two items on which you will not compromise. Then, compare your list with your partner's.

Anything that shows up on both lists is a "must have." That, along with your top must-have and your partner's can't-live-without, gives your agent a clear idea on which types of homes to show you and which to exclude.

Next, you'll need to decide on a neighborhood. If you have children, proximity to your chosen schools may be the deciding factor. Perhaps a location that provides for a quicker commute to work is your ideal. Decide on several areas and use RealEstate.com to run a quick check on housing prices to make sure you can afford to live there. Make a list of at least three neighborhoods that you're interested in seeing.

Now you're ready to choose an agent. Ask friends, family, co-workers and neighbors for recommendations. A direct referral from someone who has experience with an agent is the best way to find a good one. When you meet with the agent, hand her the list of must-haves and the neighborhoods in which you wish to view houses, and let her get to work finding you a dream house.

You've Found a Home – Now What?

Finding a house you wish to purchase is the first step toward what may be smooth sailing or an absolute nightmare. Prepare yourself for the worst and, if all goes well, consider yourself lucky.

First you'll make an offer. Determine what you want to offer on the house and then follow your agent's advice as to how appropriate the offer is. If the housing market is moving fast, with multiple offers on houses, make your highest and best offer at the outset, as you don't have time to bargain. If the market is slow, you may want to make a low offer and plan for some back-and-forth negotiating. Again, your agent is your best ally in this process.

Once the offer is accepted it's important to adhere to the time limits in the contract. Order your home inspection and shop for homeowner's insurance immediately.

You hold the key to a smooth real estate transaction. By preparing adequately and choosing the right professionals to help you along the way, you guarantee your success. Welcome home!

### 5  Things to Consider When Buying a Home

The list of the features you want in your new home is personal and, no doubt, as long as your arm. The most important of these items are known as "hot buttons" in the real estate business, and not all buyers have the same ones. From the must-have hardwood floors to the I'll-just-be-miserable-without-a-gourmet-kitchen, hot button lists help homebuyers narrow down the list of houses to view. If you're planning on buying a home, compile your list of what to look for, whittle it down to only those items on which you will not compromise, and then make sure your real estate agent gets a copy.

1. Put the Horse Before the Cart

Figuring out how much house you can afford and then getting financing for your purchase are the first considerations when buying a home. Before you can look for that perfect kitchen, you need to make sure it fits in your budget. To determine what you can afford, you'll need to calculate:

■ your available cash for a down payment

■ your current debt

■ your monthly income

■ other ongoing monthly expenses

Some buyers check their credit reports and obtain their FICO® score to get an idea of where they stand financially. If there are only a few dings on your credit history, it's a good idea to take care of them before applying for a loan. Better credit means a lower rate on your mortgage loan.

2. Choosing Your Community

Choosing your ideal town or city is only part of the decision-making process. Now, it's time to narrow down the choice to a particular area, then a neighborhood or two. Local crime statistics can be had by visiting online sites such as the Department of Justice, or by placing a phone call to the local police department. Drive through neighborhoods during different times of the day and week to look for traffic flow, noise levels and other activity. If you get lucky, you may find neighbors outdoors and you can stop and chat with them about what it's like to live in the neighborhood.

3. Don't Forget the Exterior Features

It's easy to be overwhelmed by a house you've fallen in love with and become blinded to the more practical aspects of actually owning it. Lot size and landscaping are important considerations when buying a home and often overlooked in favor of the home's interior. Who is going to mow that acre of lawn? Are the trees going to lose their leaves every autumn, and, if so, do you think you'll be in the mood to dig out the rake and clean them up? Or, will gardener's fees be in your future? If so, you may need to do some research to determine the monthly cost of a gardener and add that to your potential house payment. The same goes for the pool. Pools require weekly to bi-weekly maintenance. If you don't know how to do it yourself, you'll need to hire someone, adding more to the monthly cost of owning the home.

4. Energy and Utilities Add Up

If you'll be moving to a new area you most likely aren't up to speed on how much residents typically pay for utilities every month. Depending on where you are buying a home, your power, gas and water bills may come as a shock. Las Vegans, for instance, pay upwards of $300 a month to cool their homes in the summer – a $500 power bill is not out of the ordinary. Ask the seller how much she uses her utilities and what her average bills are. Power companies may also divulge this information.

If you are concerned about high energy costs, look for homes with improved weather-proofing, energy-efficient appliances and updated electrical wiring.

5. Consult a Psychic... or at Least Consider Resale Value

This home may be the biggest investment you make in your life, so dig deep down inside to find your inner investor. Just as you wouldn't pour a ton of money into the stock market before performing due diligence, don't purchase a home purely on emotion. Do some research to try to determine the home's future desirability. The city planning office is a good place to look for information. Ask about future development plans for the area. Nearby electric power plants, transformer stations and landfills may depreciate the value of the house you want to purchase, so consider carefully what may happen in the future.

### H ow Much Down Payment Do I Need for a House?

Lenders like to see the borrower have some skin in the game. With borrowers upside down on their homes simply mailing their keys back to the bank, and sticking lenders with negative equity rather than toughing out the down market and keeping their homes, lenders now want to know that you've got a personal stake in the deal.

By the way... those "no money down" property flippers? The ones who were so obnoxious about six years ago? Yeah, those people and their amateur mortgage brokers are making your lattes at Starbucks now – and sending their tips to a bankruptcy trustee, in many cases.

As such, unless you fall into a couple of special categories, chances are you're going to have to come up with some cash as a down payment on your home.

Underwriting Standards Have Tightened

Don't count on trying to get cute. The days of trying to camouflage the fact that you have no personal stake in the property by taking out a piggyback loan to boost your down payment from 3 percent to 10 percent are pretty much over. That didn't work out well for lenders, and we're in a back-to-basics market now. "Ever since the collapse, if you will, there's no real creative financing like there used to be four or five years ago," says Erick Perpich, a Sacramento-area loan officer with Republic Mortgage.

"I haven't seen a piggyback loan in years," echoes Kimberlie Snyder, a Washington, D.C. underwriter with Bank of America, who primarily handles VA and FHA loans. "I know on conventional loans, we don't do piggies either."

No Down Payments on VA Loans

You can still do a no-down payment mortgage via a Veterans Administration home loan. This is because the federal government stands behind the nation's veterans, guaranteeing the lender against loss if the veteran should default on the loan. VA home loans have the additional advantage of allowing the borrower to avoid paying primary mortgage insurance premiums, or PMI. This can easily save a borrower over $1,000 per year in many markets. Otherwise you'd have to pay these premiums until your loan-to-value ratio reached 80 percent.

The downside to VA loans is that, normally, you cannot discharge this debt in bankruptcy, as you can with other kinds of debt.

One alternative no-money-down option you may wish to explore: The USDA Rural Development Loan. This program will allow you to borrow up to 100 percent of the property, if you qualify, just like a VA loan. The program only covers homes in certain designated rural areas. Your family income must fall below 115 percent of the median income for your area. Loans are for 30 years at a fixed rate of interest, and you can roll expected repair and improvement costs into the price of the loan. This isn't a giveaway program: You have to have decent credit to qualify.

Funding for this program tends to run out midway through the fiscal year, though. For best results, try to apply early in the U.S. government's fiscal year which begins October 1 every year.

How Much Down Payment is Needed for FHA Loans?

If you obtain your loan under Federal Housing Administration auspices – the so-called "FHA loan," you may get into a home with just 3.5 percent down. This still means you'll need $7,000 in cash to put down on a $200,000 house, which can be a tough nut to crack for some borrowers. However, FHA loans come with a handy twist: You can receive your down payment as a gift – say, from parents or a rich uncle – and still qualify for the loan. Your benefactor should be prepared to document the source of funds.

The Federal Housing Administration imposes limits on the loan amount, which vary according to the property's location. You can check the HUD website to find the FHA loan limit for your area.

The federal government has long allowed state governments and private charities to provide down payment assistance to those in need. In each case, you may be able to get some or all of your 3.5 percent down payment offset via one of these programs. Your mortgage representative or real estate agent may have more information on programs available in your area.

One insider tip: In both cases – VA loans and FHA loans – you will still have to come up with closing costs, which are frequently 3 or 4 percent of the loan on the buyer's side. The FHA, however, stipulates which closing costs the buyer can pay and the rest must be paid by the seller. One idea that Snyder, a U.S. Navy veteran, used when buying her own home, is to ask for a 4 percent sellers' concession. In a buyer's market, the seller may agree to get the deal to happen. "I got money back at the closing," says Snyder.

Down Payments for Conventional Loans

A conventional loan, in nutshell, is any mortgage that doesn't come with a federal guarantee. We're back to the 5 percent to 20 percent down payment these days on conventional loans. Specifics vary with the lender and by location, as well as by whether the loan is "conforming," that is, within the underwriting standards established by Fannie Mae and Freddie Mac, the major mortgage buyers upstream from the lender. As Snyder mentioned, many lenders aren't buying the piggyback loan solution anymore – conventional borrowers will actually have to pony up real money.

There are advantages to putting more money down: If you can reach the 20 percent threshold, you won't need to pay PMI. Plus, more home equity helps your credit score, counts as an asset on your balance sheet that you can actually borrow against (if you can qualify when you actually need the money!), and puts you in a better position to rent the property on a cash-flow positive basis if things don't break your way in the future.

What About Down Payments for Investment Properties?

If the home is not your primary residence or a second home, then you can expect to have to come up with more – at least 20 percent, in most cases, depending on the nature of the property. Lenders require the higher down payment because mortgage insurance typically only covers primary residences. For the best interest rates, think closer to 25 percent or more – plus reserves against the possibility of vacancy.

If you want to hold your property in an IRA, then you will need to come up with at least 35 percent down, plus reserves, advises James Hitt, an advisor in Asheville, North Carolina whose company, American IRA, LLC, specializes in real estate and other nontraditional holdings in retirement accounts. "The less you put down, the greater the risk," cautions Hitt.

### T he Importance of Loan Pre-Approval

Today loan pre-approvals are often more like the girlfriend or boyfriend from hell instead of a dream date come true – you can't live without them, but they can be a big headache too.

So how tough is it to pick up a loan pre-approval today, why are you just teasing yourself by attempting home shopping without one, and why is this the most important and controversial piece of paper since the pre-nup?

You Can't Get a Date Without a  
Pre-approval!

How critical is the importance of a loan pre-approval? You probably had a better chance of dating the hottest cheerleader or hunkiest quarterback at high school – back when you had pizza-like acne – than getting an appointment to even look at a home without a mortgage pre-qualification letter today.

No educated real estate agent or seller is going to waste their time showing you a home unless you can prove you have the cash on hand via a proof of funds letter for the entire purchase or a pre-qualification letter. Most won't even bother to talk to you until you go get one.

Save Yourself a Lot of Heartache

For homebuyers, the main importance of obtaining a loan pre-approval upfront ought to be recognizing that it can save a ton of time and crushed dreams. You don't want to take your partner out looking at their idea of a dream home only to have to downgrade them from a million dollar waterfront estate to a one-bedroom condo without a view.

Get pre-approved, find out how much you qualify for and then streamline your home search.

Note that just because you are approved for $X, that doesn't mean you have to or should max that number out. There are always unexpected extra bills, especially as a first-time homebuyer. It's better to sleep at night than to never be able to enjoy your new home and eventually lose it to foreclosure.

The Importance of a Pre-approval for Getting Offers Accepted

The best homes at the best prices always sell quickly and often receive several offers within hours of going on the market. Even if you have managed to get in to see a home without contacting a lender and getting pre-approved, no one is likely to take your offer until you have.

You don't want to miss out on your dream home because you kept putting it off.

In reality most "pre-qualification" letters are completely worthless. You may not want to let your seller or agent in on this secret, but as a buyer you had better know it.

Most of you reading this have received a "pre-approved" offer of credit for something in the mail, only to find out you aren't when you respond. Unfortunately, the same principal applies here.

Loan officers and mortgage brokers desperate to capture your business and put new deals in their pipelines will often send you an official looking pre-approval letter based on a five minute phone conversation and a credit check. What this normally means is that, based on your statements about your income and assets and your credit score, you should qualify for a loan. In reality there are many more variables involved which won't be analyzed until you have made a formal application and some that may be specific to the property you are buying, which is unknown at the time of approval. In other words, they are worth less than the paper they are printed on.

The Importance of a Loan Pre-approval You Can Count On

While you may be fine with winging it, providing your offer gets accepted, an unreliable qualification letter can cost you big time. First, if your loan falls apart, you may lose thousands in deposit money. It could also mean paying a lot more than you expected in mortgage fees and rates after you are committed to buying. If you don't or can't buy or can't keep up with these higher payments, guess who ends up homeless?

How can you avoid this? No matter how busy you are, take the time to prepare and provide your lender with as much detailed information about your finances as possible, even if he doesn't ask for it. Provide W2s, tax returns, paystubs, bank statements, the works. This will help the lender identify and alert you to potential issues later.

You can't afford to be lazy – remember how much is on the line.

### D efining Loan Types for Mortgages

What is a Mortgage?

If you're in the market for a house but don't have the savings to pay for the entire property with cash, you can get a residential mortgage to cover the difference between your down payment and the sale price of the house.

A residential mortgage is a common legal agreement in which an individual borrows money from a bank or person to buy property such as a house or a condominium. A mortgage agreement typically states that the borrower must repay the borrowed money and any interest to the lender on a predetermined schedule. Should the borrower fail to pay per the contractual schedule, the lender typically has a legal right to take possession of or foreclose on the property. Below you'll find definitions of loan types for some of the most common mortgages available.

Fixed-Rate Mortgages

Fixed-rate mortgages are the safest bet if you always want to know what you owe. Generally repaid over a period of 15, 20 or 30 years, the interest rate and monthly payments of principal and interest for fixed-rate mortgages are locked in for the duration of the loan. If you can secure a fixed-rate mortgage, you limit the volatility of your loan and know exactly what your payment will be for the lifetime of the loan.

Adjustable-Rate Mortgage (ARM)

Also known as variable rate or tracker mortgages, adjustable rate mortgages are designed to adjust to match the market after an initial fixed rate period. For instance, a 5/1 arm will start to adjust to an index such as the one-year Treasury or the Cost of Funds Index after a five-year period at a fixed loan rate. ARM loans can be appealing because they are often packaged with low initial rates, but once the rates adjust they can potentially cause dramatic and unpredictable swings in mortgage payments that are difficult to budget for.

Interest-Only Mortgage

If you expect your income to improve over time and are bullish on the real estate market and your ability to match a growing mortgage payment in the future or refinance, interest-only loans can be a good option. In the initial five- or ten-year period of the loan, the borrower only pays interest – no principal – meaning a smaller overall mortgage payment. At the end of the interest-only period, either a balloon payment for the balance of the mortgage principal may be due or the payments may increase to pay off the principal within the remaining period of the loan.

Private Financing

Private financing, also referred to as private money, can be a good option for people who have been through bankruptcy, foreclosure or other financial troubles and are looking to buy a house. This is a financing method where a company or individual person may provide a mortgage loan to a non-conforming residential buyer who does not qualify for a bank loan. These typically are considered high risk and therefore are likely to carry higher interest rates especially if the loans are high-risk. They are also largely unregulated. Lenders are required to comply with lending laws at the state and local level but not necessarily with banking regulations.

Seller Carryback and Hard Money Loan

Another option for properties that don't qualify for traditional bank financing but have a potential buyer with enough cash for a down payment, seller carryback and hard money loans are possible options for advancing a residential property sale. A seller carryback is when the seller of a property finances a percentage of a loan. Hard money loan is when a mortgage is designed to cover just the loan-to-value ratio on a property. Typically, a down payment or some other kind of collateral is required from the borrower to secure this type of loan.

VA Loans

Only available to eligible service members who meet specific requirements, home loans from the Department of Veterans Affairs are popular among those who qualify as they require no down payment. Additionally, there are limits on lender feeds such as closing, origination and appraisal fees. No private mortgage insurance (PMI) is required to secure VA loans, even if service members opt not to provide a down payment.

FHA Loans

The Federal Housing Administration, a division of HUD, insures some types of loans to make homeownership more accessible through lower down payments and closing costs along with more flexible credit requirements. If you are buying a first home or a fixer-upper, you may be eligible for an FHA insured loan. The FHA also provides reverse mortgages for senior citizens who have paid off most of their mortgage and want to turn their home equity into cash for living expenses.

This is only the beginning! There are many other loan types for mortgages, including jumbo loans, second mortgages, reverse mortgages and rural development services loans.

For more information on how to shop for loans and understand your rights as a homebuyer, visit HUD.gov, the website of the Federal Housing Administration.

W hat is the VA Home Loan Program and What are the Requirements?

The VA home loan program offers one of the few remaining 100 percent financing mortgage options alive. Why have VA loans been ignored and how do you get one?

Why Haven't You Been Offered a VA Home Loan?

During the recent boom years many mortgage brokers steered their clients toward subprime loans even if they could have been eligible for a VA loan. Why?

There are four main reasons:

1. Brokers often made more on subprime loans and exotic mortgages.

2. Subprime and exotic loans were easier to qualify for than VA loans.

3. Many smaller mortgage brokerages weren't authorized to make VA home loans.

4. Some loan officers simply don't understand veterans home loans.

If you or a spouse has served in the military, then you should absolutely ask about a VA home loan. Let's be honest, not nearly enough is done for our veterans. The VA home loan program is perhaps one of the few great VA benefits that really has value, so take advantage of it.

Why You Need a VA Home Loan

■ No money down mortgages so you can take advantage of today's low prices

■ VA home loans normally offer lower rates than other types of mortgages

■ Easy to qualify for

What is the First Step Toward Getting a VA Home Loan?

The U.S. Department of Veterans Affairs does not make loans directly. Instead you may apply for a VA home loan through any one of hundreds of banks and mortgage companies across the country.

Items you will need to provide include:

■ Pay grade if still in the armed forces

■ Tax returns for last two years

■ Most recent pay stubs showing year-to-date earnings

■ Copies of two most recent month's bank statements

■ Valid photo ID

■ Certificate of Eligibility (COE)

Do You Meet the VA Loan Eligibility Requirements?

Your VA loan eligibility depends on how many days you were active in the military. These requirements vary depending on when you served and whether it was during war or peace time. Selected members of the National Guard and reserves are also eligible. Spouses of those who died during service or from service-related disabilities as well as those who's spouses are classified as POW or MIA can also qualify for VA benefits including VA home loans. In fact, even those who served for the armed forces of another government who were allies of the U.S. during World War II can qualify for a VA home loan.

In order to get your Certificate of Eligibility you can have your lender obtain one on your behalf or apply online through the VA's website.

What are Other Options Besides VA Home Loans?

Those unable to obtain a Certificate of Eligibility or who do not qualify for veterans home loans for other reasons may still be able to find a low down payment home loan solution.

USDA home loans also provide 100 percent financing in many areas of the country. FHA mortgages require as little as 3 percent down payment but may also be combined with grants and local government assistance to reduce that number even further.

### W hat is an FHA loan?

The United States Department of Housing and Urban Development, better known as HUD, is a government agency that oversees the Federal Housing Administration (FHA). Created in 1934, FHA does not make loans, but provides mortgage insurance made by approved lenders.

FHA has come a long way since its inception almost 80 years ago. It offers a variety of loan programs to meet the needs of low-to-moderate income and retired Americans. Because FHA insures the loan's repayment should the borrower default on the mortgage, lenders are able to offer low closing costs, attractive interest rates and loans with smaller down payment requirements.

Let's take a look at some of FHA's most popular loan programs.

First-Time Homebuyer Program

With down payments as low as 3.5 percent and most of the closing costs rolled into the loan, FHA's 203(b) program is ideal for the first-time buyer.

Two years ago FHA changed the program, establishing minimum FICO® score requirements:

■ FICO® score of 500 and below – ineligible for an FHA-insured mortgage.

■ FICO® score between 500 and 579 – eligible for the loan program but the down payment on the home must be 10 percent of the purchase price.

■ FICO® score of 580 and above – eligible for the maximum loan amount and a 3.5 percent down payment.

Remember, these are FHA's requirements only; lending institutions have additional requirements. Because of this, it may be close to impossible to obtain a mortgage loan with a FICO® score under 580 and very difficult to obtain a loan with a score between 580 and 620.

FHA suggests that, because there are costs associated with applying for the loans, buyers with a low FICO® score may want to postpone applying for an FHA-backed loan until their FICO® scores increase to at least 620. Don't forget that it is possible to repair your credit and raise your score.

If you feel you're ready to apply for a first-time buyer FHA-guaranteed mortgage, you will find a database of FHA-approved lenders at their website.

Fixer Property Program

One of the more intriguing FHA-backed loans is the 203(k) program. Basically, this is a loan for the purchase of a fixer, or handyman special, which not only covers the purchase price of the home, but the repairs needed to make it habitable as well.

Available only to purchasers who will be living in the home, the loan carries a 3.5 percent down payment to qualified buyers.

Steps to obtain a 203(k) loan include:

■ Submit a purchase agreement on a property stating the purchase is contingent on 203(k) loan approval.

■ Choose an FHA-approved 203(k) lender (listed at FHA's website).

■ Compile a proposal outlining the scope of work to be performed, including an itemized list detailing the estimated cost of each repair or improvement.

■ An FHA appraiser performs an appraisal to determine the property's future value – the value after renovations are complete.

■ If the loan is approved, it closes and the construction begins.

The loan amount will include the purchase price, remodeling costs, "allowable" closing costs and a reserve fund of 10 to 20 percent of the total cost to repair the property. The reserve fund is used for unforeseen repairs that may come up during the construction process.

All funds are kept in an escrow account and disbursed according to a pre-determined schedule.

Manufactured Home Financing

HUD defines a manufactured home as a structure that is capable of being transported in one or two sections. In what they call "traveling mode," the home must be a minimum of eight feet in width and 40 feet in length.

If you are considering the purchase of a manufactured home, FHA may be able to help you with the Title II program.

To qualify for the program, the home must be labeled as compliant with Federal Manufactured Construction and Safety Standards. Additionally, the home must:

■ Be larger than 400 square feet

■ Have been built after June 15, 1976

■ Be classified as real estate but need not taxed as real estate

■ Be built and remain of a permanent chassis

■ Have a permanent foundation built to FHA standards

■ Have a finished grade elevation beneath the home at or above those in Flood Zones A or V

The mortgage loan on the property must cover both the home and the site and be for no longer than 30 years.

While lending requirements are stricter than they were before the housing bubble, FHA-guaranteed loans still provide low-to-moderate income Americans a chance to purchase a home when they otherwise may not be able to.

### H ome Buying and Bridge Loans

Bridge loans have been used for home buying and property investment for decades in order to fill the gap in capital when cash is tied up in other real estate. But do they still exist? And if so, how do you get one?

How They Work & Why You Need One

Bridge loans have often been used in the past to fund down payments and finance home buying until equity in a held property can be liquidated.

Example: You want to purchase a new home but need a 20 percent down payment which you will only have access to once your current home is sold. A bridge loan could give you the money you need to purchase your new home right away, and then you could pay it back once you sell your old residence.

Where Can You Get a Bridge Loan?

Speeding up the home buying process and using bridge loans sounds great right? The bad news is if you try calling around to local mortgage brokers or most lenders you find advertising online, they will tell you that bridge loans don't exist for residential properties anymore. They have proven just too risky or unprofitable for most lenders in the past. So what's the point in teasing you with this article?

You haven't just been Punk'd. You may find some bridge loans available from local banks if you have a great relationship with the manager and a healthy bank balance. However, there are actually many other options available for those interested in home buying and bridge loans to take advantage of current fire-sale prices on real estate and rock-bottom interest rates. They are just called by different names.

Creative, Alternate Solutions for Finding Bridge Loans

Don't worry, you don't have to be a modern day Sherlock Holmes or get involved in any mortgage lending mischievousness to find alternate solutions for getting the cash you need to lock down that sweet real estate deal you have your eye on.

Bridge loan options:

■ Take out a home equity loan.

■ Refinance your current home to tap the equity.

■ Get a hard money loan.

■ Apply for a secured line of credit.

■ Take out a signature/unsecured personal loan.

■ Take out a new mortgage loan cross-collateralized by other properties you own.

Which is right for you really depends on what your credit looks like and how much equity you have in your current home. Home equity loans are likely the least expensive, while hard money loans can be the easiest to get if you have bad credit. Personal loans can be used even if you don't have any equity in your current home.

Are Bridge Loans Easier for Real Estate Investors to Find?

The short answer is yes. Various breeds of bridge loans exist for both commercial and residential real estate investors.

Large commercial lenders frequently provide bridge loans for acquisitions and developments. These loans, like hard money loans, are generally cross-collateralized and based on the equity in existing property portfolios. They can provide much needed liquidity and often less paperwork and hoops than a residential mortgage loan, but loan-to-values are often very restricted. These loans can be used to buy and build hotels, multifamily apartment buildings, churches, strip malls and more.

What about home buying for investors interested in flipping houses like on one of those reality TV shows? Perhaps one of the best things that has come out of the recent housing and lending crisis is the rise of transactional lending. An increasing number of transactional lenders are now providing gap loans with up to 100 percent financing, no credit check and no appraisals for those flipping houses and who already have qualified buyers ready to take over their properties. This has brought back true no-money-down real estate investing for those who know how to use it correctly. You don't even have to buy one of those awful late night infomercial courses either.

Real Solutions for Repeat Homebuyers in Today's Market

The biggest problems for home buyers seeking financing and bridge loans today are a lack of equity and the fact that it can take so long for their homes to sell in the current market. You can negotiate smaller earnest money deposits today and qualify for low down payment programs like VA home loans, FHA loans and even USDA home loans. Though let's be honest, even if you have stumbled onto your dream home for sale, you don't need to be paying two mortgages, or you may end up losing both to foreclosure. So what to do?

If you are really determined not to let that home buying opportunity go and bridge loans aren't an option, and then make sure you rent out your current home on a month-to-month basis while you are waiting for it to be sold. Then consider leasing with an option to buy on your dream home so that you don't have to take out expensive temporary financing until your old home is cashed out, but you can still move in right away.

### T he Pros and Cons of Interest Only Mortgage Loans

Interest only mortgage loans promise a lot more house for your money, but if you aren't careful they could mean losing your slice of the American dream overnight.

Let's take a look at the real interest only mortgage pros and cons to see if this type of home loan is your ticket to fame and fortune or nothing more than your own personal Bernie Madoff-style pyramid made of straw.

What Types of Interest Only Mortgages are Still Available?

Even though many other types of exotic mortgages have gone the way of the dinosaur in the last half dozen years, interest only home loans have managed to hold out and hang on for dear life.

It may be a little more difficult to find interest only mortgage loans today, but there are several varieties to choose from, depending on your situation and personal financial goals, and many lenders still offer them.

Types of interest only mortgages include:

■ 3/1 ARM

■ 5/1 ARM

■ 7/1 ARM

■ 30-year fixed-rate loans with 10-year interest only period

■ Option Arms

■ HELOCs (Home Equity Line of Credit)

Interest Only Mortgage Pros: Is IO Right for You?

Interest only home loans can get you into a lot more home for your money. This can mean getting into the home of your dreams and not having to settle for less or pay two sets of extra closing costs when you trade up later.

If style is everything and you have to look good and have impressive digs to entertain, then an interest only mortgage may be exactly what you need. Need a seductive bachelor pad to win the girl of your dreams? A waterfront mansion to keep her? Or a palatial penthouse to win over bosses and new clients? Then seriously consider one of these loans. In fact, the bigger the home you buy the more you will save every month.

Even if you have the cash to buy your next home outright, rates are very low right now, and interest only payments mean being able to take a tax deduction for the entire amount of your payment. Plus, smart investors can take their extra pocket money and invest it for much higher returns than today's record low mortgages rates, which offsets any interest paid and can provide the additional cash to pay off the home earlier.

For those with other outstanding high-rate debts the monthly savings could be applied to paying those down and off. Although, Suze Orman fans probably won't find her promoting this strategy too often when it comes to putting your principal residence on the line.

Real estate investors who are locking into bargain priced homes and those who don't plan to stay put for the long term can find 5/1 interest only ARMs a perfect match. These allow them to profit from any appreciation while maintaining the lowest possible monthly housing payments.

Asked who the ideal candidates were for these types of loans, Jim McFadden, a private mortgage banking program manager for Wells Fargo, put it well:

"It would be an executive who earns a moderate salary and whose main income is from bonuses once or twice a year... an interest only mortgage would provide the lowest possible monthly payment for lean months, yet allow the executive to pay down big chunks of principal when bonus time rolls around."

However, it is also great for those who anticipate their income rising dramatically over the next few years.

Interest Only Mortgage Cons:

"Why Not Put on Your Concrete Boots & Take a Swim?"

Obviously, homeowners who took out these types of interest only mortgages during the recent housing boom now make up a large portion of the underwater homes that are being flushed away in the tsunami of foreclosures.

If you aren't careful, loans that do not amortize themselves and can lead to huge jumps in payments, or large lump sums of principal due can become extremely toxic to your finances. Next thing you know your sweet fiancé has gone bridezilla and is eloping with your attorney, who is helping her take your home and kids, while your business associates get you kicked out of the country club.

Make sure you know exactly what you are getting into, how your rate and payments can change, and have a plan in case you decide to stay in your home longer than you thought or can't sell. You may also want to invest in some better friends, and make sure you have a bulletproof pre-nup if you are taking out a loan like this.

Let the Fun Begin... Qualifying for Interest Only Mortgages

It should be no great surprise that qualifying for interest only mortgages has become a lot harder in the last couple of years as with any other type of home loan. However, Fannie Mae really took it to the next level in mid 2010 by making standards so stringent for qualifying for interest only loans that only those with the sexiest credit and most solid financial standing will be able to get into one. This has included raising the down payment requirement on home purchases to 30 percent and minimum credit scores to a ridiculously lofty 740.

Still, if you can get one, have truly educated yourself on interest only mortgage pros and cons, and know how to use them to your advantage – go for it!

### A pplying For a Mortgage Loan

Buying a home is not something the average American does every day. While the purchase process is second nature to real estate and mortgage brokers, it is somewhat mysterious to the rest of us.

When asked how to eat an elephant, a wise person once responded, "one bite at a time." While the home loan process seems like a gargantuan task, it's easier to understand when it's broken down into smaller pieces.

Act Like a Boy Scout — Prepare!

Wouldn't it be great if there were a one-stop shop where you could price-compare without having to run all over town? While a mortgage broker rather fits this bill, if you're more of a hands-on type of shopper, you'll need to do some legwork. Before you go lender shopping, or, before you visit the lender you've chosen, get your paperwork in order so that you know exactly where you stand financially and how much house you can afford. Submitting all of the required paperwork in an organized fashion also helps speed along the approval process.

Although the lender will order your credit reports, if you're curious about where you stand, credit-wise, it's a good idea to order your own reports from all three credit reporting agencies. You are entitled to one free credit report annually and the Federal Trade Commission cautions consumers to order those reports from the only authorized source, AnnualCreditReport.com.

Obtain your FICO® score from the Fair Isaac Corporation (FICO®). This is the score lenders use and it's compiled from your credit reports. With the FICO® score and credit reports, you should be able to ascertain what type of mortgage loan you'll be offered.

Then, gather up the necessary paperwork for the lender. Ask the lender exactly what you need to bring with you to the application appointment. Although this list is far from exhaustive, when you apply for mortgage loan the typical lender requires:

■ Copies of your last two tax returns

■ Bank and investment account statements from the last two months

■ A copy of your current mortgage papers or your landlord's contact information if you are a renter

■ Written explanations for any late payments or other negative marks on your credit report

■ A copy of your Social Security card and driver's license

■ Account numbers, balances and payments on any loans, credit cards, car loans, personal loans, student loans or other obligations

■ Verification of your income, such as pay stubs

■ Divorce information if you're making or receiving alimony or child support payments

■ Veteran certificate of eligibility and DD214, if applicable

■ Copies of bankruptcy papers, if applicable

■ A copy of your purchase agreement if you've made an offer on a new home

Steps to Mortgage Loan Approval

Depending on the housing market in your area and the lender's policies, getting a mortgage loan can be surprisingly quick, or it can be a somewhat lengthy process. Some mortgage loans may even get same-day approval if your credit is good and you meet requirements for the down payment and income-to-debt ratio.

Applying for a mortgage loan typically involves the following steps:

**Application:** You submit a home loan application form, along with documentation

**Verification:** The lender turns your loan package over to its processing department where all of the information included in the application is verified. From there, it goes to the underwriter who makes the decision whether or not to approve the loan.

**Good Faith Estimate:** The lender has three days after your application is submitted to supply you with a Good Faith Estimate (GFE), outlining the costs of the mortgage loan. You will also receive a Truth In Lending Disclosure, outlining the expected monthly payment, the APR and a list of all finance charges.

**Approval:** Once the loan is approved, the lender will send a commitment letter. This letter basically reiterates the information contained in the GFE and the Truth in Lending Disclosure. It also contains a deadline, or commitment period, after which the terms may change. The borrower typically needs to return a signed copy of this to the lender before the end of the commitment period. Read the letter carefully before doing so. If you have any questions about anything in the letter, run it by your attorney.

The time period from application to approval is stressful for the buyer. There may be requests for more information or other delays. Being fully prepared when you apply for a mortgage loan goes a long way in alleviating future problems and toward relieving your stress.

Preparation and patience - good words to live by whether eating an elephant or applying for a home loan.

### T he Home Loan Process

Getting a mortgage loan today can seem like a formidable obstacle course if you don't know what you are getting yourself into. Check out this quick guide to getting a mortgage in six easy steps.

1. Prepare for Mortgage Success

Set yourself up for success and an easy home loan approval by being prepared. Check your own credit and address any erroneous negative items to bump up your score in advance. Get together all of your documents including pay stubs, tax returns and bank statements so that you can get accurate quotes and pre-approvals.

Being organized will also help you get your loan closed faster and help avoid any last minute delays. A few extra minutes spent now could save you thousands of dollars and years of frustration later.

2. Shop for Mortgage Deals

It's always smart to shop around for the best possible mortgage deal. Armed with your documents in hand, seek out the best quotes based on your individual situation and your future goals. Remember that this decision shouldn't just mean the lowest interest rate but the best overall loan terms from a trustworthy mortgage lender. If you aren't sure how to make sense of all the different fees and rates, compare the APR, which is the fastest and easiest way to tell which loans are really the least expensive. Take your time to check out any lenders you are considering applying with, and make sure that they are reputable. After all, a low quote is meaningless if that isn't what you get when it comes time to close.

3. Apply for a Mortgage Loan

Once you have decided which lender you want to go with, make your formal loan application and submit any required documentation. Make sure that you understand everything you are signing, and do not hesitate to ask as many questions as you need to. Do not be pressured into taking on more loan than you can afford or misrepresenting any of the facts. The last thing you want is to wind up losing your home or spending the next 30 years behind bars instead of relaxing in your new home.

4. Get Busy

This is where your loan actually goes into underwriting and where most homebuyers or those seeking a refinance make the mistake of kicking back or going furniture shopping. You do need to get busy, but whatever you do, don't take on any new credit or you could throw off your score and wind up camping outdoors on your furniture for the next six months. What you need to be doing is ensuring that all of the third party items are being ordered and taken care of. This includes appraisals, home inspections, homeowners insurance and title insurance. Note that a great mortgage lender can help you with these items, but still shop around to make sure you are getting the best rates.

5. Clear Mortgage Loan Conditions

About this time you should be getting your official loan commitment, which specifies your final terms. Again, this is where most borrowers still think they are going to just skate through to closing on their new loan but get caught with surprises. Underwriters are a special breed of people. In fact, some poor loan officers and borrowers wonder whether some of them are human or have any common sense at all. What you need to know is that underwriters often don't appear to feel that they are doing their jobs unless they come up with additional items or documentation they want to see before they will sign off on the loan. Expect it and take it in stride. This is where a great loan officer or mortgage broker makes all the difference. They should be able to foresee potential issues and have you preparing letters or requesting documents ahead of time in anticipation of this. Plus they can also go to bat and try to get these items waived. So don't underestimate the importance of having the best batter on your team!

6. Close It!

Once you clear the underwriter's conditions it is time to schedule your closing. Regardless of whether you are purchasing a new home or are refinancing a current one, always request a copy of the HUD 1 Settlement Statement before you arrive at the closing so that you are not surprised or pressured into taking loan terms that are not exactly what they were supposed to be. Make sure that you have sufficient cash to bring to the closing if required, and ensure that you have valid identification in the form of a driver's license or passport to verify who you are.

Then sign and get out celebrating – because you just completed one of the toughest feats known to mankind!

### T he Many Fingers in the Mortgage Pie

While it's easy to imagine that the mortgage process involves only yourself and the guy or gal behind the desk who takes your application, there are many people involved, each with his or her own duties. So, just who has their hands in your mortgage and why?

The mortgage process typically has the following participants:

The Creditor

Colloquially known as "the lender," the creditor in a mortgage loan is technically called the mortgagee. This is the lending institution that provides the loan for the property you are purchasing.

The Debtor

A debtor is more commonly known as a borrower and technically called the mortgagor. This is the party that receives the loan, owing a debt to the creditor.

The Mortgage Broker

A mortgage broker is a person who brokers loans. That is, he or she shops a variety of lending institutions to find you the best rates and terms.

The Loan Officer

This is typically the first person you meet when applying for a mortgage loan. The loan officer takes you through the application process, counseling you on which documents to submit. She helps you fill out the application, answering any questions you may have. The loan officer acts as the lender's contact person for yourself, your real estate agent and other participants of the mortgage process.

The Loan Processor

The loan processor is the person employed by the lending institution to ensure that all of the necessary documentation is present and to verify it for accuracy. He then packages up the documentation and application and sends it to the underwriting department. You can read a description of this process on the FHA website.

The Underwriter

The underwriter is the most important person in the mortgage loan process, for it is he or she who determines whether or not you get the loan. The underwriter's primary duty is to determine the risk of lending you the amount requested and whether or not that risk is acceptable, according to standards set forth by the lender. To do this, the underwriter analyzes your capacity to pay for the loan - your income. He also analyzes your willingness to repay the loan, as evidenced by the payment history outlined in your credit reports. The underwriter also evaluates the collateral for the loan - the property you are purchasing - by having it appraised and determining if it is worth at least as much as the amount you want to borrow.

The Appraiser

While a licensed appraiser is typically available for hire by anyone, each lender subcontracts or employs its own appraiser. This person is responsible for determining the value of the property for which you need the loan. Generally, she uses the values of recently sold comparable properties, crunches numbers and comes up with a value for this property. Adjustments in valuation employed by the appraiser include the house's square footage, the lot size, location, upgrades and other features.

Escrow Company

The escrow company is an independent third party to the transaction whose duties include the receipt and disbursement of funds, based on the mandates of the contract. If your agent hasn't chosen a particular escrow agent within the company, one will be appointed and act as the contact during the transaction.

Title Company

In some states, such as Oregon, and in some regions, such as Northern California, the title company is also the escrow company. The title company is charged with the responsibility of checking the chain of title - the list of successive owners of a property - for anomalies and issuing the title insurance policy. The title insurance is the guarantee that the party selling the property is the true and legal owner, without impediments, such as liens. Depending upon region, it is the escrow officer, title company representative or an attorney who guides the transaction through the settlement process.

### I s it Just Me, or Are Lending Standards Getting Tougher?

It's not just you. The heady days of granting hundreds of thousands of dollars in credit to anyone with a driver's license and a pulse are over.

It wasn't just homeowners who took a bath when the mortgage crisis hit with full force in 2008 and 2009. Bankers got clobbered by the results of their seeming generosity with loans, even as the easy money resulted in home prices getting bid up beyond all reason.

Prior to 2006 or so, in the run-up to today's crisis, buying a home with next to no money down was commonplace. For example, in 2005, the median down payment on residential mortgages was only 2 percent – and 43 percent of borrowers put no money down on their mortgages. Even where underwriting standards nominally required the buyer to put some skin in the game on residential property, mortgage underwriters freely looked the other way as homebuyers borrowed the down payment from other sources, in so-called "piggyback loans."

Today, things are a lot different – with median down payment figures ranging from a low of 11 percent in North Dakota to a high of 14 percent in New Jersey.

Meanwhile, in some markets, at the height of the boom, at least half of new mortgages issued were interest-only loans with negative amortization. That is, loan balances were scheduled to go higher, even as buyers made the scheduled payments. As a result, thanks to relatively fixed front-end and back-end ratios, credit was awarded to more and more marginal borrowers, ranking lower and lower on the income scale. If you consider income a useful indicator of the borrower's ability to repay the loan, it was a recipe for trouble.

That was then, this is now. Fast forward to 2010, and we see that more than 26 percent of mortgage applications were declined that year – a modest increase from 2009, according to information published by the Wall Street Journal. The highest rates of declines in the country were in Mississippi (38.6 percent) Vermont (36.6 percent), and Texas (35.1 percent).

And that's not even accounting for selection bias – people are less likely to apply for mortgages in the first place compared to 2005 to 2006 and the height of the speculative frenzy in real estate.

The burden of tightened underwriting standards is falling particularly hard on the self-employed, who have trouble independently verifying their income.

Doug Duncan, Freddie Mac's chief economist, asserts that the current underwriting standards are just a reversion to the historical norm.

As tough as underwriters are now, however, the current rate of declination is actually lower than it was at its peak in 2007, when mortgage declines reached over 37 percent nationwide.

The top three reasons mortgage lenders cite for declining applications:

■ Insufficient collateral

■ Inadequate debt-to-income ratios

■ Poor credit

Some Light at the End of the Tunnel

A handful of lenders – 5 percent of them in 2010 and 8 percent in 2011 – report easing residential underwriting standards. This is an improvement over 2008 and 2009, when nobody was easing at all.

Meanwhile, the percentage of lenders who reported tightening standards in 2011 is a substantial 40 percent. That is, four out of 10 lenders are still clamping down the screws. To be sure, this is the lowest number since 2007. But looking at the data, it is clear that many lenders have imposed several rounds of tightening on their underwriting standards.

Why? Bankers are pointing their fingers at Freddie Mac and Fannie Mae, who have let it be known that they will stick originating banks with underperforming loans – by exercising their right to force banks to repurchase them from the mortgage market makers.

Credit Scores Matter

But with loans originated in 2005 and 2006 continuing to be a disaster for lenders, they have significantly tightened their credit score cutoffs for their best rates. While at one time you could get a loan on very good terms by signing your name and fogging a mirror, these days even a 700 score isn't enough to land the best terms, in many cases – 720 is the new 650.

### I s There Mortgage Help For The Self-Employed?

While mortgage rates remain at record lows, major news corporations have continued to report on how much tougher it has become for borrowers to get approved for home loans today. So what options and mortgage help is really available for the self-employed right now?

Business owners and other self-employed individuals have often found it more difficult to obtain mortgage financing than their salaried counter parts. This is largely due to the income and employment verification requirements and underwriting guidelines which need to be adhered to. Unfortunately, while these individuals may enjoy great income levels, verifying income can present an array of hurdles when it comes to getting mortgage help for the self-employed.

Even those who have established businesses and verifiable evidence of their incomes have been held back due to the way in which their income is calculated by lenders. This is because most lenders and loan programs base their income on the net, adjusted gross income on tax returns, which obviously is kept as low as possible to minimize tax liabilities. It is a catch-22 situation. Take less deductions, show more income, qualify for a larger mortgage and pay more taxes, or take as many deductions as possible and limit your home loan options.

During the recent housing boom we saw the introduction and growth of stated income mortgage loans. Sometimes demonized in the press as "liar's loans" and lumped in the same category of subprime mortgages which were blamed for the bubble, these loans were hugely popular with the self-employed. It enabled them to state their real income without having to pay more taxes and get into great stated income home mortgage loans with less money down and better rates.

Unfortunately, criticism and abuse of these loans as well as the ensuing regulations have essentially made stated income home loans illegal for the most part. Laws in states like Florida now specifically require that lenders request and consider proof of income when offering mortgage help for the self-employed.

However, exactly what documents are required to verify self-employment today can vary widely between lenders and depending on what type of loan is being applied for. Those seeking to purchase new homes with conventional or FHA mortgage loans are required to submit copies of tax returns for the last two years and execute a 4506T, which enables lenders to verify them. In order to qualify, the net, adjusted gross income for the last two years is averaged unless the most recent year shows declining income, in which case the lower number will be used. The new debt-to-income ratio (DTI) cannot exceed 50 percent of the borrower's monthly income.

However, in a recent interview, 20-year veteran mortgage professional, Lenny Silvestri Jr. of Alternative Mortgage Group in Boca Raton, FL revealed that there are more options. Firstly, he pointed out that an experienced and knowledgeable loan officer can help borrowers to increase the amount of their income that can be used to qualify by adding back items like depreciation and salaries which were paid to them through their businesses. Lenny also unveiled the fact that there are some alternative loan programs which will accept copies of bank statements and use deposit amounts to verify income versus tax returns. This is the perfect solution for those who have cash businesses or have been a little slow on filing their taxes or who simply have great accountants who have been able to minimize their tax liabilities. Of course, this type of mortgage help for the self-employed does come with above market mortgage rates, and while it may be a great way to cash in on the many current bargains on the housing market, the pros and cons should be weighed carefully.

With all this said about home loans for purchasing new homes it is important to recognize that the rules for refinancing can differ, especially when it comes to mortgage help for the self-employed who qualify under the government's Making Home Affordable initiatives. A call put into Bank of America's mortgage hotline revealed that, providing all other eligibility requirements were met, proof of self-employment and income may be simply limited to needing to provide a copy of a valid business license.

The bottom line is that anyone who is self-employed and who is considering purchasing a new home or who is interested in refinancing could find it a lot easier than they think if they take a few moments to speak with an experienced mortgage professional. Certainly, between historic lows on mortgage rates and rock bottom home prices, the opportunities for reducing housing payments and locking into great deals are just too great to let pass by without at least trying to take advantage of them.

### 7  Tips for Home Buying with Cash

Cash is king. If you are flush with cash and ready to make a deal, sometimes it's easier to get acceptance on a lower offer in a competitive situation. Because cash buyers get to skip over the treacherous loan qualification process, cash deals are considered to be a "sure thing" and therefore more attractive to sellers.

Here are five tips for home buying with cash.

1. Leverage your position to the max. Because cash buyers get to skip over the loan qualification process, cash deals are more attractive to sellers in many cases. Take advantage of this position and ask for terms such as a closing timeline, home repairs, cash allowances, or a homeowner's warranty. You can even ask sellers to cover closing costs as a cash deal contingency.

2. Work with a real estate broker or lawyer experienced in closing cash deals. This tip could save you money and prevent legal hassles down the line. You want someone on your side with experience and perspective on this kind of deal within your market. Even cash deals can hit snags and you want to ensure that you have all of your legal bases covered and that you have clear title on the property when the transaction is complete.

3. Make sure that buying a home with cash is right for you financially. Before you plow all of your cash into purchasing a residence, you want to carefully consider all of your investment options. By choosing a different financial instrument with a rate of return higher than the cost of mortgage interest, you may be able to make more on your money than a mortgage costs in interest. Before you tie your cash up in a home, be sure to have plenty of additional money stashed for emergencies and other needs. Also, do your due diligence and look for investments that could make you more than a mortgage would cost you (if you're eligible for a mortgage).

4. Give yourself an out with a "right to inspect." Because you'll have generally less information about the property prior to close, you definitely want to provide yourself with an easy out should the home end up being a lemon. While a home inspection may add a few days to the closing cycle, it is worth it if you're buying a home with cash. If you're feeling especially gutsy and the property has been on the market for a while or the seller seems desperate to close, ask them to pay for the inspection. Take advantage of your position! Remember, cash is king.

5. Estimate sale AND post-sale costs. Buying a home with cash can save a pretty penny on the cost of a transaction – and on mortgage interest over the lifetime of a loan. Cash buyers are able to avoid loan origination fees, the cost of a property appraisal, some closing costs and other lender imposed fees. Although you save a lot of money upfront, the transaction can end up costing you in the end. You'll make a purchase decision with less information – which could mean a lower valuation or higher taxes than anticipated down the line. It also might end up costing you in terms of unexpected home improvement costs or survey and title issues. You also may be getting less house for your money by forgoing a mortgage.

6. Understand the benefits of holding a mortgage that you may be sacrificing. In addition to the tax benefits that you'll be walking away from, mortgages for primary and secondary residences can provide a high-quality installment loan for your credit report. This type of "good debt" can make it easier to borrow money or get favorable rates on other financial products such as credit cards.

7. Ask your agent to check the "appraisal contingency" box on the purchase agreement and have the home appraised. Although the appraisal may cost a few hundred dollars, an appraisal is the only way to ensure that you are purchasing the home at its true current market value.

### W hat is Mortgage Insurance For?

For those of us who aren't able to manifest tens of thousands of dollars for the down payment on a home, mortgage insurance is usually in the cards. When a buyer can't afford a high enough down payment, mortgage insurance protects the lenders or investors from the possible default of a mortgage loan. Either the borrower or the lender can pay mortgage insurance premiums.

What Are the Different Types of Mortgage Insurance?

Mortgage insurance can be privately-backed through insurance companies or government-backed through programs such as the increasingly popular Federal Housing Administration or FHA loans.

Private mortgage insurance (PMI), otherwise known as lenders mortgage insurance, is the most common type of mortgage insurance. If the down payment is less than 20 percent of the sales price or appraised value of a home, the buyer is usually responsible for paying mortgage insurance.

Factors Affecting Mortgage Insurance Rates

Mortgage insurance rates can vary widely. The main factors depend on the type of premium, how much of a down payment is made and, most recently, a borrower's credit score. Many insurers are now offering credit-tiered mortgage insurance, where a better credit score equals better rates, according to Anny Havland, co-owner and licensed mortgage advisor at Neighborhood Mortgage in Bellingham, Wash.

Different mortgage insurance payment types are another reason rates may vary. The most common are where the borrower makes monthly payments. Others can be paid up front or in full, and others are lender-paid. Lender-paid loans are funded through a higher interest rate, which the borrower then pays. These are typically advertised as "No MI Required" loans, according to Havland.

How Can I End My Mortgage Insurance Payments?

There are various ways a borrower can end mortgage insurance payments. Sometimes they will end automatically when the loan value reaches 78 percent. Other times it may require the borrower to pay for an appraisal or a Broker Price Opinion (BPO), which is typically a real estate comparison. In that case it depends on the housing market in the borrower's area. Other times, a borrower might choose to refinance, which would end mortgage insurance payments if the borrower refinances to less than 80 percent of the home's value, according to Havland.

Federal Housing Administration Loans

FHA loans were created during the Great Depression to help lower- to middle-income buyers afford homes. With these loans the minimum down payment is 3.5 percent. The loans are provided though private lenders but are federally insured. A percentage of the loan, called a mortgage insurance premium, must be paid at closing, and is usually financed by the lender. There may also be a mortgage insurance payment, depending on the loan-to-value ratio. FHA loans occupied only 2 percent of the mortgage market in 2006, and grew to occupy more than 30 percent as of July 2011, according to Forbes Magazine. The subprime mortgage crisis is hugely responsible for the growth, according to Kenneth Alexander, a mortgage underwriter for Wells Fargo.

"Government loans were much harder to obtain because of all the rules, guidelines and restrictions involved. Now that conventional lenders have tightened their guidelines, more people are going through FHA if they're eligible," said Alexander.

Are "Piggyback Loans" Still Around?

The subprime mortgage crisis also influenced the use of "piggyback loans," where a buyer could take out a second mortgage to avoid paying mortgage insurance. Although these once-common loans are still around, many lenders won't offer them. The second mortgages that were taken out were the first to default during the housing crisis and it became a risk for banks to offer them. Also, due to a 2007 tax provision making mortgage insurance premiums tax deductable for borrowers with an annual income of $100,000 or less, it became cheaper for many borrowers to keep the mortgage insurance rather than try to get a Piggyback Loan, according to Dustin Brumley, a licensed mortgage advisor for Neighborhood Mortgage in Bellingham, Wash.

### W hat Does Buying a House on Contingency Mean?

When it comes to real estate contracts for buying or selling a home, contingencies hold the key to either big savings or large potential loses. What do you need to know about them?

Gambling on Contingencies

As a homebuyer the main questions is how many contingencies can you get away with in your offer to purchase a home?

A contingency is a condition (or clause). In other words, you are making an offer to buy a home provided certain conditions are met. The more contingencies the better for buyers; they provide more opportunities to walk away, ensuring a refund of the deposit money if something turns up they don't like. However, demand too many contingencies and your offer could get shot down by sellers who are afraid you may walk away.

So are you feeling lucky?

What's more important to you? Making sure you land this home and make your partner happy or making sure you don't end up losing your precious capital?

What you can get away with often depends on current market conditions. At the end of 2011 the Chicago Tribune reported that multiple contingencies were becoming more acceptable as homeowners have become more desperate to make deals. However, just weeks into 2012, Florida real estate agents were reporting that banks were refusing even standard contingencies such as the right to inspect a home when taking offers on bank-owned properties.

What Contingencies Should I Include in My Purchase Offer?

There are many potential contingencies that you may want to include in your offer. In fact, buyers can dream up almost any contingency they feel like. Whether it gets accepted can be a completely different story, though.

The most common, and the answer you will most often receive when asking, "What does buying a house on contingency mean?" is an offer contingent on the buyer selling his or her current home. Few people want to take on a new mortgage until they have rid themselves of their old one. This makes sense, but in the past it has led to long chains of contingent contracts, which could easily crumble if one link is broken. This means it is highly unlikely you will get an offer like this accepted unless you can prove your home is already under contract and the buyer's financing is approved.

Five more common contingencies to contemplate:

1. Appraisal Contingency

Appraisal contingencies state that the buyer is entitled to cancel a contract and receive a refund of their deposit if the property does not appraise for a minimum amount (normally the purchase price).

2. Financing Contingency

This is perhaps one of the most useful for buyers and the easiest to manipulate. This makes the contract contingent on the buyer's ability to obtain financing at a certain loan-to-value, interest rate and term. If not, the buyer may cancel, and if the buyer can't provide proof of a mortgage commitment in a specified period of time, the seller can boot them too. However, making an offer contingent on 100 percent financing at a 4 percent rate is unlikely to get accepted. While an offer specifying a 70 percent LTV and a max rate of 7 percent is going to be much more attractive.

3. Repair Limits

This gives the buyer an out should the required repairs be found to exceed a specific dollar amount or percentage of the purchase price. However, most bank-owned properties are now sold almost exclusively on an "as-is" basis.

4. Zoning

Investors looking for bargains on properties that can hold big profits if the usage can be altered will want to use a zoning contingency. Getting your hands on a prime lot, which now holds a single family home but which could allow for a condo building or hotel, could produce massive potential.

5. Spousal or Partner Approval

Speed is essential today. Offers can stack up in hours and if yours isn't in, you could either be stuck in a bidding war or just flat out of luck. Making your offer contingent on your spouse's or partner's viewing of the property can make sure you are in the running without committing 100 percent. This allows investors to confirm hunches on the potential value and has probably saved many marriages as well.

The Secret Golden Clause

A "kick out" clause is used when a contract is contingent on selling the buyer's current home. It allows the seller to continue to market the home to other buyers. If a qualified buyer makes an offer on the home, the seller gives the previous buyer a time limit to either remove or exercise the contingency.

The kick-out clause must be carefully drafted to protect the seller. This is one of those situations where a real estate attorney should be consulted.

Making Backup Offers

What does buying a house on contingency mean for others who are interested? You shouldn't just pass over homes you like because they are already under contract. Deals fall apart all the time for all types of reasons, especially when they have many contingencies. If you like it, ask your real estate agent to submit a backup offer or perhaps you can even get the current offer kicked out!

### S coring the Best Loans for New Home Construction

It's an incredible time to get a sweet deal on a brand new house, but are there any good loans for new home construction left, and where will you find the best options?

Types of Loans for New Home Construction

Building a dream home on a dream lot overlooking the ocean or with a spectacular mountain view may be everyone's fantasy, but you had better check out your financing options before you break out the shovel.

You need to know where to score the best terms, how much you can expect to borrow, and the requirements for different types of new construction home loans, or you could be left with a very expensive hole in the ground and not much else.

Construction-Perm Loans

Designing and building a custom home from the ground up can be an exciting prospect, but finding construction loans for this type of project is far from easy today. Construction loans have always been one of the riskiest types of lending for banks, and the bust of the early 2000s saw lenders stuck with an incredible number of these loans, while construction loan programs evaporated.

Tip: With construction REOs making up the largest percentage of foreclosure properties on many banks' books, you may find amazing bargains on homes which were already started and never finished.

Still, if you really have your heart set on bringing your custom dream-home to life to your exact specifications, expect to put down more money and jump through a few extra hoops. These loans normally provide funds for acquiring your lot, building and then roll into a permanent loan once it is completed.

New Construction Loans

Many borrowers will find it extremely difficult to obtain construction-perm home loans today. However, this doesn't mean you can't find great new construction home loans all over the U.S. for financing brand new condos or homes in developments with custom finishes.

Also known as "end loans," this puts the financial responsibility of the construction on the builder, allows you to select from a variety of pre-designed models, and select certain upgrades or personalized finishes based on your own tastes. This gives you that new home smell and prestige while making getting a loan a lot easier.

You sign the contract, let the builder go to work, and once the C.O. (Certificate of Occupancy) is delivered, you take out an end loan. Fortunately, these are much easier to qualify for and borrowers can actually use almost any type of conventional loan for this purpose.

Lot Loans

For those who simply don't want to conform and must build their own unique living arrangements but just can't afford it today, perhaps simply taking advantage of today's low interest rates and land prices by buying a premium lot or acreage to build on later is the best way to go. Ask about better terms on shorter loans if you plan to build within the next few years.

Is 100% Financing Possible for New Construction Homes?

For those who only need an end loan, there are still numerous choices for finding financing. While conventional loans may be tough to qualify for today, there are a number of attractive options available to first-time homebuyers and move-up buyers alike.

Low or No Down Payment Loans for New Home Construction:

■ USDA home loans

■ VA home loans

■ FHA home mortgages

■ Transactional funding (for flipping houses)

Beware the In-House Lender!

Buyers spending their weekends browsing new communities and condo projects will often find they are offered financing by an in-house loan officer. Tread carefully here.

You may be offered certain "incentives" to utilize these on-site or recommended loan options for new home construction deals. However, this doesn't always mean they are anywhere near the best deal. They may pressure and try to scare you into using them as they may be illegally gaining kickbacks from these loan officers, but know that they cannot require you to use their preferred lender. You should always shop around and make sure that you are getting the best deal on rates, fees and terms for your personal situation.

4 More New Construction Loan Issues to Watch For

1. Purchasing the model or buying in later project phases can result in overpriced homes that won't appraise.

2. Builders are incredibly unforgiving if you run past your closing date and will try to keep your deposits. Apply for a loan as early as possible.

3. Some lenders and programs may have restrictions on the communities for which they will make loans.

4. Interest rates could change dramatically before your home is completed. Ask about extended locks and "float-downs" as rates drop.

### S hopping for a Lender

How to Go Mortgage Shopping

The decision to purchase a home is both exciting and nerve wracking. The major invasion of your financial privacy is something most homebuyers dread, though it's a necessary evil. Once you've resigned yourself to that fact and decide to apply for a mortgage loan, what's the next step?

Shop carefully for a home loan. Home financing is available from a variety of lenders, including banks, savings and loans, credit unions, private mortgage companies and others. When shopping for a mortgage loan, make a point of looking into mortgage shopping each of these entities for the best terms and rates.

If you're wondering which are the best and worst mortgage lenders, you're already on the right track to making an informed choice. Rates and terms can vary dramatically from lender to lender, so it pays to do your research. Choose several mortgage lenders with attractive terms and rates to speak with, and narrow down the choices until you find the lender with a product that fits your needs.

Finding a Mortgage Lender

If you need help knowing where to start the lender hunt, ask your real estate agent whom she suggests. Check online and the real estate section of your local newspaper for brokers advertising attractive rates. If you plan on applying for an FHA loan, choose from among their approved mortgage lenders.

If you have a good working relationship with a local bank or credit union, that may be the best place to start. Find out what they offer so you have something to compare other offers against.

A disadvantage of working with local mortgage lenders is that they may not have the leeway to give you the most favorable terms nor to adjust for special circumstances. Big mortgage lenders, especially those working with FHA-backed products, can offer a smorgasbord of options.

Consider working with a mortgage broker. These professionals are in the business of shopping around for loans that suit your circumstances. They can contact a number of lenders for mortgage loans that suit your finances, your down payment amount and your credit score.

First-time buyers, seniors, veterans and some union members may qualify for special loan packages, so look into those as well.

Compile Your Shopping List

Later on in the loan process, you'll be at the lender's mercy if your income and credit are less than stellar. Right now, though, you are in the driver's seat, so take full advantage of the situation. Get all the information you can to help you make an informed decision about who will be your lender.

Enter the process knowing exactly how much money you can allocate to the down payment. No ball park figures here – get clear on the exact number. Then, when you interview mortgage lenders, ask about:

Request Current Interest Rates

■ Find out whether their current rates are the lowest for just that day or for the week and if the rates quoted are for adjustable or fixed mortgages.

■ For adjustable rates, find out when the rates increase, how the rate and payments will vary, and whether or not payments will decrease with a reduction in rates.

■ Ask for the loan's APR. This figure, expressed as a yearly rate, represents not only the interest rate but includes fees, points and other charges.

Understand Points

The first-time homebuyer frequently misunderstands points. These are fees charged by the lender, and you can lower your rate by paying more points.

■ Ask the lender or broker to express the points as a dollar amount, rather than the number of points. This makes it easier for you to determine the exact amount you will be paying, as well as allowing you to more easily compare loans, according to the experts at the Federal Reserve Board.

Get a List of Fees

The list of fees involved in obtaining a mortgage loan is rather lengthy and varied. Loan origination fees, broker fees and closing costs name only a few. Ask the broker or lender for an itemization of estimated fees. While some of these fees are due upon application, others are paid at closing. Some are negotiable, according to the Federal Reserve Board.

■ Ask the lender to un-lump the fees. If a number of fees are included under one category, it will help you comparison shop if you know what each and every fee is.

■ Don't be afraid to ask for clarification on any fee you don't understand.

Don't Forget About Down Payment and Closing Costs

■ How much does the lender require as a down payment? If you are going for an FHA-backed mortgage, this amount is predetermined.

■ Ask if private mortgage insurance (PMI) is a requirement of the loan and, if so, how much the premium will increase your monthly payment.

Once approved for a loan, the lender is required to supply you with a Good Faith Estimate (GFE), itemizing the loan terms and fees. This form is now standardized across the country, making it easier for the consumer to comparison shop. Hang on to the GFE from each lender you speak with. This form, along with notes taken during the lender interviews, will allow you to intelligently shop for a mortgage loan.

### H ow to Pick a Champion Mortgage Broker

Today you don't need just another loan officer. Your quest to choose the right mortgage broker is about finding a bold champion who will go to battle for you.

Why No Ordinary Mortgage Broker Will Do

Contrary to the popular misconception that getting approved for a home loan is simply a matter of credit scores and figures, today it is often more like entering a gladiator's arena.

Besides battling against increasingly tougher lending and credit guidelines, knowing how to pick a great mortgage broker will protect you from bait and switch tactics, unscrupulous lenders who will demand a larger down payment at the last minute and will ensure you close on time, protecting your deposit money. We aren't just talking about the difference in being approved or denied, or a few extra dollars a month, but your ability to buy or retain your home and tens or even hundreds of thousands of dollars.

What to Look For In a Champion Mortgage Broker

Those who want to know how to really pick a mortgage broker who will blaze the way to a great home loan victory need to be on the look out for the following qualities.

■ Reputable and honorable

■ Skilled and experienced

■ Brave and courageous

How to Pick an Honorable Mortgage Broker

Signs of a Shady Lender: When to Run Away

A. You are quoted an interest rate without being asked detailed questions.

B. You are rushed into applying or having your credit pulled.

C. You are asked for any type of money upfront.

D. The broker tells you everything you want to hear.

Signs of Reputable Mortgage Brokers

A. They are members of professional associations like the Chamber of Commerce and local chapter of the National Association of Mortgage Brokers.

B. What are others saying about them? Check the Better Business Bureau, consumer comment sites like Yelp, and Google them. Remember that people will always complain; it is how these complaints are handled that really counts.

C. Check their mortgage broker license status with the state online.

D. They will sit down and try to understand your individual goals and situation to match you with the best possible loan for your personal needs as well as presenting a variety of options.

How to Pick a Skilled Mortgage Broker

Just having a mortgage broker's license or working for a big name bank doesn't automatically make someone a skilled mortgage broker. It can take years to learn the ins and outs of the business and how to get the best deals for consumers. No book knowledge accurately prepares a mortgage broker for what it takes to get loans closed. You want a battle-tested champ who has honed his or her skills on the front lines. Getting your loan approved means mastery of volumes of information as well as talented technical skills at bringing together appraisals, title searches, insurance and loan programs, and all of the many, many people involved at every level. The truth is that getting your loan approved is often about who your mortgage broker knows. It can take a while to build these relationships, but once they have been in the business for a few years they can get head underwriters on the phone and V.P.s who can override senseless underwriting conditions to get your loan request expedited.

Find out how long the broker has been in the business, and test him or her out with a few questions. Does she respond quickly? Can he give you answers on the spot? Is she proactive about helping you to avoid potential issues?

How to Pick a Champion Mortgage Broker

What really makes the difference between a champion mortgage broker and the rest is that he is motivated and willing to go to battle for you. She won't lay down and accept a denial and she won't accept delays from your appraiser, title company or insurance agent. He will fight to get you the best loan possible and ensure your closing happens on time. You want the Conan the Barbarian of mortgage brokers on your side.

How to identify them?

1. They won't be afraid to turn away your business if you insist on just getting quoted a rate instead of allowing them to find out what you really qualify for.

2. They won't just tell you what you want to hear to get your business.

3. They can be overheard hammering an underwriter on the phone and educating them about how the guidelines should be interpreted.

There are great home loans out there to be had, and interest rates have certainly never been better. So choose your champion mortgage broker, and have him or her help you purchase the home of your dreams or slash your housing payments.

### A re Credit Unions Good Sources for Home Loans?

With many banks losing their credibility by the day, and loans continuing to evaporate, could a local credit union be the answer for finding a great deal on your next home loan?

What is a Credit Union Anyway?

Credit unions are similar to banks in that they accept deposits, offer checking and savings accounts and provide credit for a wide range of needs including auto loans and home loans.

However, credit unions differ in that they are member-owned financial cooperatives. They promote themselves as "not-for-profit" organizations designed for building up the local community, which gives them tax and operating advantages over banks that are clearly not charitable institutions.

The American Bankers Association regularly lobbies against moves by credit unions to expand their lending capabilities as they feel that they have an unfair competitive advantage. Lower operating costs have often enabled these unique financial institutions to offer extremely low mortgage rates and low closing costs. However, due to their loyalty to their members, they could be more conservative in their lending in some circumstances.

While you may not have thought about approaching credit unions for a home loan before, they are certainly not new to the mortgage game. In fact, during the recent hard times other lenders have been through, credit unions increased their mortgage volume from $55 billion in 2006 to $96 billion in 2009.

Advantages of Choosing a Credit Union for Your Home Loan

While borrowers will essentially find that credit unions offer the same types of banking and lending services as actual banks, these institutions promote themselves as the best choice for various reasons, including:

■ Low mortgage interest rates

■ No fees

■ Personalized service

■ Speedier closings

■ Better rates on other credit products including auto loans

■ Higher returns on CDs to offset borrowing costs

Do Credit Unions Have the Home Loans I'm Looking for?

While different credit unions may offer slightly different loan programs and options, you can expect to find a full range of mortgage solutions for purchasing a home, refinancing and completing home improvements.

Borrowers will find a variety of conventional mortgage options available, including 30- and 15-year fixed-rate mortgages, ARMs (adjustable rate mortgages) of varying lengths, home equity loans as well as government backed home loan programs like FHA and VA home loans and HomePath Financing. Basically, anything you'll find offered at your local bank you'll find here.

Why doesn't everyone use Credit Unions for Home Loans?

Obviously, despite their growth, most people don't turn to credit unions for their loans. Why not?

For many it is because they simply don't understand how credit unions work or don't know that they offer home loans. Secondly, these loans are only available to members of credit unions. Membership for most types of credit unions is restricted to certain groups. The most popular are corporate credit unions and industry specific ones. However, with more than 7,000 state chartered or federally chartered credit unions across the U.S., and a growing number of location-based community unions, there are many options to explore no matter where you live or want to move.

Of course, home loans that are offered by credit unions aren't always a great fit for everyone. Even those who are credit union members may not be approved for the loan they want.

Borrowers also shouldn't blindly fall for the slick marketing and promises of better deals without shopping around. Always explore all of your options and make sure you are getting a fair deal. This is especially true of the "not-for-profit" aspect. Credit unions don't just give money away.

Those who don't fit the conventional loan mold and need more lenient underwriting guidelines, alternative lending options, and more flexibility – or real estate investors who have already maxed out the number of loans they can have with one institution – should look further afield before giving up.

Depending on the specifics of your situation, you may want to check out specialist construction or rehab lenders, hard money lenders, or talk to a mortgage broker or loan officer who is an expert in helping self-employed borrowers or those with credit or documentation challenges.

### H ow to Compare Lenders

Shopping for a home loan but not sure who to trust or how to make sure you are getting a good deal? Are there even any honest lenders left?

And why isn't the lowest interest rate always the best deal?

How Interest Rate Shoppers Sabotage Themselves

One of the biggest misconceptions borrowers have when it comes to how to compare lenders is that the one with the lowest advertised rate is always the best choice.

There are three major issues with this:

1. Advertised rates may not apply to your loan.

2. The true APR (and cost) could be a lot higher.

3. "Bait & switch" tactics are unfortunately still common, even among the biggest lenders.

Borrowers who simply call around and demand to know, "What is your rate?" are simply setting themselves up for failure. No lenders or banks just have one rate. Each lender has an almost identical range of rates on offer. What you receive depends on how much they think they can get away with and the specifics of your individual circumstances and transaction.

How to Accurately Compare Lenders and Loan Programs

What borrowers fail to realize is that they really ought to be focused on shopping by APR not advertised interest rates. This figure, by law, must be featured in advertisements

The APR reflects the real effective annual percentage rate when lender's points and fees are included. Often you'll find this number far higher. For example, a 3 percent rate with a 5 percent APR means that there are a lot of fees being charged by the lender and probably more money required at closing. In contrast, a 4 percent rate with a 4 percent APR means no fees and a loan that is actually cheaper.

Just to confuse things further, know that many loan officers sadly do not even understand this difference themselves, and you may actually be better off with the first example above if having the lowest possible payment is the most important thing to you.

Savvy Home Loan Shopping: It's the Person, Not the Institution

Experienced borrowers know that the individual loan officer or mortgage broker you are dealing with, rather than the brand, is often far more important to getting the best home loan.

It's no secret that some of the nation's largest lending institutions are also those that have committed the most fraud. Fortunately, their well-insulated CEOs have been able to afford to buy off accusations with a $26 billion settlement while the small brokers in the trenches were set up to do the hard time.

Many individuals believe they will get the best deal by walking into their local bank where they hold their checking accounts. Let's keep it real. It doesn't matter how long you have had an account there, unless you have $10 million in deposit, they don't care who you are. Note that they will normally simply sell your loan and they won't remain your lender after the first payment anyway.

Tip: If you are really in love with a certain bank, shop around through different mortgage brokers and you'll probably find they can get you a better rate than going direct because they have access to wholesale rates.

Your Background Check Checklist

Being uncertain about who to trust when shopping for a loan today is only smart. Regardless of how large and famous a bank is, you should always do your own background checks on both the lender and your individual loan officer. This can be done for free in about five minutes online and could save you many thousands.

What to look for:

■ The NMLS provides instant access to license status and complaint history.

■ State licensing agencies also provide online licensee lookup tools.

■ Google them.

■ Check consumer review sites like Yelp, and look them up on Facebook.

■ Check the Better Business Bureau.

What Makes a Great Loan Officer?

More than just a matter of honesty and integrity, how good your loan officer is at their job will make all the difference in your loan actually closing on time or even getting approved at all. Do not underestimate this. Your loan officer is like your personal champion who goes out to do battle for you every day to get your loan closed.

■ They are knowledgeable about loan products and options.

■ They have connections in underwriting the executive office and with other industry pros.

■ Experience. Lending is so complicated it can only be mastered by years of hands-on experience.

■ They take the time to match you to a loan program that best fits your personal goals.

■ They are happy to answer all your questions (for the tenth time).

■ They tell you what you need to know, not just what you want to hear.

The Bottom Line

When it comes to comparing lenders, remember that APR may be more important than rate, and size doesn't really matter, but experience does.

### W hat is a Good Faith Estimate and How Do I Use It?

A Good Faith Estimate (GFE) is one of the most important yet confusing mortgage documents buyers and those refinancing their homes will encounter.

A GFE may also be one of the most powerful negotiating tools you have on your side to hook the best deal on a home loan. But, is there any reason to have good faith that you will wind up with the same terms you are quoted at the closing table?

Good Faith Estimates 101

What is a Good Faith Estimate, how do I get one and how do I use it?

A Good Faith Estimate is your accounting of estimated closing costs associated with taking out a mortgage loan to buy or refinance real estate.

This includes a summary of your anticipated loan terms, an itemized list of all the various costs involved with financing, and – often most importantly – how much money you will need to bring with you to the closing table to seal the deal.

To say that a GFE is complicated for any first-time homebuyer is an understatement of huge proportions. If your head starts spinning, your eyes glaze over and your heart is pumping like crazy at the long list of numbers you don't understand, don't worry, it happens to everyone the first time around. However, it is a lot easier if you do a little homework first.

The Department of Housing and Urban Development (HUD) made major changes to the Good Faith Estimate format, which went into effect on January 1, 2010. While these changes were intended to make things easier for borrowers to understand, it actually stretched a relatively simple (in comparison) one-page document into three pages, with even more figures and fine print.

By law any bank, mortgage broker or lender you apply for a loan with must provide you with a Good Faith Estimate within three days. The best will provide one at the time of application, and some brokers may send you one upfront to give you an idea of the costs involved even before making an application.

Your GFE – A Negotiating Power Tool?

Your GFE is essentially your quote. You can use this document to shop around and compare quotes from different lenders and for different loan programs. This will enable you to more accurately compare rates, lender fees and terms side-by-side.

Three important caveats to consider:

1. Bait & Switch Scams

While shopping around and negotiating is smart, if you push too hard, some desperate lender may eventually tell you what you want to hear just to get your business. Do the background checks before committing to any lender.

2. Apples-to-Apples

Make sure you are truly comparing apples-to-apples. Some unscrupulous lenders may understate third party fees to make their overall quotes look smaller and then blame someone else when they come in higher. Make sure you understand which fees are being charged by the lender and get your own quotes for insurance and title work to make sure estimates are accurate.

3. A Lesson from "The Art of War"

Those who have read Sun Tzu's The Art of War, are aware of the concept that sometimes defeating your enemy actually does harm to yourself too. This is definitely true here. Get a fair deal, but if you hammer your loan officer so badly that he or she is making nothing from helping you, you can expect your loan to end up on the bottom of the pile and to be the first tossed when it gets difficult. Perhaps fairly compensating your loan officer for their hard work and motivating her to do her best is smarter when so much is on the line.

Making Sense of Your Good Faith Estimate

The mass of numbers and new terms can be confusing even for those who were great at math in school. Don't be afraid to ask questions. Make sure you understand what each charge is for, who it goes to and perhaps most important, whether that amount may change later.

A good loan officer and closing agent will be more than happy to answer your questions.

Don't Get Scammed

What happens if you arrive at the closing table only to find your final closing costs, interest rate and monthly mortgage payments much higher than those listed on your GFE?

This can happen for a number of reasons. If there are legitimate changes, your lender is required to send you a new disclosure in advance. However, some unscrupulous lenders will prey on the fact that you will be too afraid of losing more money by not signing. Don't sign!

Give the lender a chance to explain or correct mistakes. Otherwise, the threat of a complaint ought to motivate them to do the right thing, if they want to stay in business. No one wants the FBI going through their files.

### How to Choose a Buyer's Agent

Although Americans are smitten with the DIY craze, buying real estate is not a do-it-yourself project. Sure, it's fine to surf the Internet to search for your dream home, but when it comes time to actually view the homes, make sure you are fully represented by your own real estate agent.

Many new homebuyers don't understand that although it may be perfectly legal in your state for the seller's agent to also represent the buyer, it isn't wise. This situation is known as "dual agency," a type of transaction that at one time was outlawed in all 50 states, and here's why: The seller's real estate agent has a duty to his or her client to act in the client's best interests.

Now, how can this happen in a dual agency situation when the seller's interests and the buyer's interests are the exact opposite? Although agents feel they can offer the same ethical treatment to both parties, it doesn't always happen. To protect your interests during the purchase process, secure your own representation. It costs you, as the buyer, nothing. The seller pays the buyer's agent's commission out of the proceeds of the sale.

Do I need a "Buyer's" Agent?

If having an agent who deals only with buyers is important to you, choose one who is a member of the National Association of Exclusive Buyer Agents. These agents work solely for buyers, avoiding the conflicts of interest inherent in the traditional seller-oriented purchase transactions. You can search for these agents on the association's website.

There are several situations in which you absolutely must choose an agent who is a bona fide specialist:

■ The purchase of a luxury home

■ The mobile home purchase

■ Buying a short sale

■ The purchase of ranch property

Aside from these situations, pursue the best agent for your needs. Read on to find out how to go about finding this needle in a haystack.

Get Referrals

Whether you need a real estate agent to list your home for sale or to assist you with buying a home, a referral is the best way to find one. Ask everyone you know, including family members, co-workers, neighbors, friends and local business people. The checkout lady at the grocery store may have just purchased a home and adores her agent. So don't neglect to ask everyone you come into contact with and start compiling a list of names.

What if you're relocating to an area and don't have a network of contacts there? There are several other ways to find the perfect real estate agent for your needs:

■ Online: The larger real estate sites, such as RealEstate.com, offer the opportunity to search for real estate agents in your area. At RealEstate.com, scroll to the bottom of the home page and click on "Professionals."

■ Relocation Representative: If you work for a large company and find yourself relocating as a result of this employment, consult the employee relocation representative for a list of agents to interview.

■ Chamber of Commerce: Call the Chamber of Commerce located in the area where you are moving. The folks there typically have a directory of members and will be happy to refer you to several agents in the area.

Ask the Right Questions

Most guides to choosing the right real estate agent will counsel you to find out if the agent is full-time or part-time and suggest that you go with the full-time agent. The thinking behind this suggestion is that the full-time agent will have more time for you.

Not so fast. Ask a follow-up question: How big is your staff? The superstar agent with a staff of 15 is the agent you will probably never speak with or see until closing, if then. That's not to say this person isn't a good agent, but to remind you that if you're looking for personal, one-on-one interaction with the agent you hire, don't hire the superstar with a huge staff. If, on the other hand, you're looking for speed and efficiency, the agent with a large staff is typically better able to provide that.

Ask the agent how many other clients he or she is currently working with. The more clients the agent has, the thinner his or her attention is spread. If you find a house online that you absolutely love, time is of the essence in a fast-moving market. Will the agent have time to accommodate your last-minute showing needs?

If it's important to you that the agent has a certain amount of experience, by all means ask how long he has been in the business. Keep in mind, however, that new agents typically work securely under the wing of their brokers, so you are actually getting the wisdom and benefit of a highly experienced real estate pro, although second-hand.

As important as it is to ask the right questions, listening to the agent is equally as important. What types of questions does the agent ask? One of the most important is whether or not you have loan pre-approval. The savvy real estate agent understands that until you have seen a lender, looking at available homes is a waste of time, both yours and hers. Reject any agent who doesn't pose this question.

Should I Sign an Agreement?

Many agents who consider themselves buyer specialists will ask that you sign a broker's agreement.

This document commits you to working exclusively with the agent for a pre-determined amount of time. Broker's agreements typically state that the agent will be compensated in the event the buyer switches to another agent and ends up purchasing a home shown by the original agent.

If the agent insists that you sign an agreement, ask for a short-term commitment. This way, should you decide the relationship between the two of you isn't working out; you're only locked into working with her for a short time. Agents typically ask for a 90-day commitment but the terms are negotiable, so choose a time period that you are comfortable with.

You are also within your rights to ask for a guarantee. Request that a clause be inserted into the agreement stating that if either party decides the business relationship isn't a good fit, they will be released from the agreement.

Getting your finances in order and securing funding for the purchase of your home should always be the first steps in your home buying process. Finding the right real estate agent, while second on the to-do list is no less important.

### W hat to Expect from Your Buyer's Agent

If you're going into the home purchase process well armed with information, you already know how important it is to use your own real estate agent and not the seller's.

If this is news to you, read on.

Real estate agents owe their clients what is known as a "fiduciary duty." Although it sounds like legal jargon, it simply means that the agent is obligated to act in the best interests of his or her client.

What are these interests? At their most basic, the seller's interest is to sell the home for the most money possible while the buyer is interested in purchasing the home for the least amount of money possible.

Of course, both parties have ancillary interests such as the protection of their privacy. The fact is, a seller's interests and a buyer's interests are completely different and, in fact, conflict with one another.

Let's take a look at some of the specific interests that a real estate agent's fiduciary duty includes.

Full Disclosure

Above and beyond the homeowner's disclosures, the real estate agent must disclose all information he or she has that is relevant to the principal's interests. This includes any facts the agent may have about the value or desirability of the home and any knowledge about the other party that may affect negotiations.

An example of the duty to disclose is the seller's agent that finds out, somehow, that the buyer is willing to pay more than what he originally offers. Since the agent has a fiduciary duty to the seller, she must disclose this fact.

Suppose the buyer's agent knows that the seller is going through a divorce and is highly motivated to sell the home quickly. This is valuable information for his client and must be disclosed.

Confidentiality

Hand in hand with disclosing the opposing party's secrets comes a duty to protect those of the principal. If the seller's client is motivated to sell the home because of a job transfer, yet wants this information kept from the buyer, his agent has a duty to keep the information confidential.

Absolute Obedience

Real estate agents are obligated to obey all client instructions, as long as these instructions are legal. The seller's agent is obligated to follow the instructions of only the seller and the buyer's agent is obligated only to the buyer.

Loyalty

The duty of loyalty demands that the real estate agent act solely in the best interests of the principal to the exclusion of all other interests, including his or her own. In layperson's terms, loyalty means that the seller's agent must do everything he or she can to gain an advantage for the seller. The same applies to the buyer's agent and the buyer.

While the above doesn't include all fiduciary duties of a real estate agent, it includes those most important to the consumer.

As you can see, the seller and the buyer have competing interests, creating competing duties for their agents. This is why, even though in many states it is legal for an agent to represent both parties in the transaction (known as dual agency), it is not wise for the agent or the consumer.

There is no shortage of real estate agents in this country. Furthermore, the seller pays the buyer's agent's fees, so there is no reason not to have your own real estate agent.

What Else Should You Expect From Your Real Estate Agent?

■ Search for appropriate homes – If you've told your agent you want three bedrooms and two bathrooms and she keeps showing you homes with 1 bathroom, your agent isn't paying attention to your needs.

■ Help determine value – Your agent should compile a comparative market analysis for any home on which you would like to make an offer. This helps you determine if the list price is appropriate and how much money to offer for the home.

■ Disclosure – Aside from the agent's fiduciary duty to disclose what he knows about the other party, he also has a duty to disclose any property defects that he has observed.

■ Purchase agreement – Your agent should explain to you the entire purchase agreement before asking you to sign it. The agreement should be constructed in a manner that protects your interests and meets your needs.

■ Counter offer – Should the seller counter your offer or you need to amend the purchase agreement to request repairs, your agent should fully explain the process and advise you to seek legal counsel, if appropriate, to ensure your protection. Acceptance – Once your offer is accepted your agent should offer advice about obtaining a home inspection and other inspections that may be specific to the region, remain in contact with the title company and the lender to ensure that all time limits are met, and attend the closing with you.

Real estate agents who are members of the National Association of Realtors® (NAR) are the only agents allowed to call themselves Realtors®. NAR has its own set of ethics that Realtors® swear to uphold in addition to their statutory fiduciary duties.

H ouse Hunting:   
Decisions,  
Decisions,  
Decisions

Not everyone makes decisions the same way. Some use a pro and con technique, while others prioritize the items from which they're trying to choose. Then there are those hardy souls who flip a coin or go with their gut. The last two techniques aren't recommended when it comes to the biggest investment of your life - buying a home.

House hunting is either feast or famine: Sometimes there are no homes that you like, other times, there may be too many offering exactly what you want. So, how do you "say yes to one and let the other one ride," as the Lovin' Spoonful so aptly put it back in 1966? Here are some factors to consider when weighing one choice against the other.

Mortgage Costs and Financial Considerations

One of the biggest mistakes people make when buying a home is assuming your monthly mortgage payment is the only outlay required when owning a home. The cost of homeownership includes more than the payment - sometimes much more. Consider these additional costs:

■ Association, neighborhood or condo fees

■ Electricity, water and other utilities

■ Homeowner's insurance

■ Repair costs

■ Mortgage insurance

■ Mortgage payments

■ Property taxes

■ Maintenance, such as landscaping, pool service, etc.

Compare the real costs of owning the houses in question. One may just price itself out of the decision making process.

The Basics: Location, Structure and Design

Think back to when you first decided to purchase a home. Location was probably your biggest concern, aside from price. Over the course of house hunting, many folks compromise on items such as location, veering away from their original intent. Compare the locations of the houses in question. Which one fits your original intent? Are you compromising on location when you don't have to?

Go over this list and remind yourself of which aspects of location are most important to you:

■ Commuting distance

■ Future development projects

■ Local crime

■ Local economy

■ Neighborhood age and cleanliness

■ Neighborhood traffic noise

■ Property values

■ Proximity to shops, hospitals and schools

■ Nearby features that may drag down property values, such as a landfill

The structural integrity of the house is extremely important when you choose a home. A home may seem beautiful but if it isn't built well, home maintenance costs could cripple a new owner's finances. Here's another opportunity to compare houses. Which one is more structurally sound?

Something has equally attracted you to more than one home, and typically, that something is design. What design elements do the two homes have in common, and which house presents those elements better? Look at the floor plans and picture yourself using them. Is one more functional than the other? Are there odd shaped rooms that may end up driving you crazy?

Don't Go Changin'...

Still stuck? Ask yourself what you would change about each house, if finances were not a consideration. Allow your imagination free reign on this one and you may find that one house edges out the other.

While it's not advisable to go with your gut or flip a coin when deciding which house to buy, in the end, it may come down to emotion. On one level you're making an investment decision - but you're also deciding on a home. When all the priorities are examined, and all the pros and cons of each choice are considered, whether or not a house feels like home is an important consideration.

### F inding the Perfect Neighborhood

Have you ever played around with Google Earth? It's a fascinating tool – able to take you around the globe in a flash and get up close to cities you've only dreamed of visiting.

The search for the perfect neighborhood is very much like using Google Earth: You start at a great distance and slowly zoom in, according to your priorities. As you add and discard wants and needs, zooming in ever closer, you are finally at street level in the neighborhood of your dreams.

Before you can determine where you'll live, however, you need to know how much house you can afford. The only way to be sure of this is to see a lender and get pre-approved for a mortgage.

Once you know how much you can spend on a house, it's much easier to find your ideal neighborhood.

The Wish List

Making a wish list is one of the fun parts of house hunting, but it's a practical step as well, as it acts as a blueprint for your real estate agent. Once she knows exactly what you're looking for, she won't waste her time or yours showing you houses that don't fit your criteria.

So, your second step is to go wild imagining your ideal neighborhood. Just throw everything on the list, from an ocean view to the privacy of a wooded lot or the twinkling of city lights from your high-rise living room window.

Once you've got your dream neighborhood on paper, it's time to get brutally honest with yourself. Take a look at the monetary figure on your pre-approval letter. That maximum loan amount represents reality and will determine which of the items on your fantasy list are achievable.

It's time, then, to rearrange the wish list according to priorities. If a tennis court is a must have, and you are pre-approved for an entry-level home, all is not lost. You may want to consider a condo complex with tennis courts or a single-family home near community courts. If proximity to your job or good schools is a priority, move those items to the top of the list.

Give the final list, and your pre-approval letter, to your real estate agent. He or she will use it as a guide when searching for the ideal neighborhood.

Narrowing Down the Choice of Neighborhoods

If your agent finds a number of suitable neighborhoods, there are several ways to narrow them down. First, consider the fact that you will someday sell the home and that its location plays a large role in determining the home's value. Study the neighborhood for the following issues:

The future – What's in store for the neighborhood and nearby areas in the future? Zoning laws change and development may be in the works. Finding out what the future holds for a particular neighborhood, or areas around it, requires a trip to the city planner's office. Look at the public records carefully for such items as a landfill (which can reduce property values up to 12.9 percent, according to a study performed by the Northeast Center for Rural Development), and electric company substations, which can depress home values up to 7 percent, according to researchers at the University of California at Berkeley.

Check for criminals – Even if you don't have children, check the sex offender database for the neighborhood. Living as close as within one-tenth of a mile of a sex offender lowers the value of a house 9 percent, and it may take 10 percent more time to sell than homes that are not in close proximity to that of a sex offender, according to a study performed by Longwood University.

Foreclosures – When your neighbor suffers, so will you. According to a study published by the Massachusetts Institute of Technology, a home within 250 feet of a foreclosed home loses 1 percent of its value. There are a number of reasons for this, so it's a good idea to check the neighborhood carefully for foreclosures.

Another sleuthing technique to use when trying to determine if a neighborhood is right for you is driving through it at various times of the week, during the day and at night, observing the activity in the area. Weekends are an especially important time to check for activity as this is when most of the neighbors are home and you'll get a snapshot of how busy or noisy the area is.

While a satellite in outer space isn't a prerequisite to finding the best neighborhood for you and your family, using the Google Earth method to search gives you a systematic approach that will save time for both you and your real estate agent.

### W hat are the Benefits of a Condo vs. a House?

Apples and oranges - that's what condos and houses are. Sure, they both provide a roof over your head, and they're both financial investments, but that's where the similarities end. Just as when we compare apples and oranges, houses and condos differ by price, by taste and by how they will be used.

The biggest difference between a condo versus a house is ownership. When you buy a house you own the land. When you purchase a condo, on the other hand, you own only what lies between the walls of your unit. The rest of the condominium complex, what are known as the "common areas," are owned in common by a collective of all the unit owners. You have the right to use the common areas but not alter them in any way. Some items considered common areas for condo owners include:

■ Fitness center

■ Lobby

■ Pool

■ Mail room

■ Tennis courts

■ Elevators

■ Landscaping

The Advantages of Purchasing a Condo

The most obvious benefit of a condo vs. a house is price. Although luxury condominiums can be pricey, overall, condos are far less expensive than houses.

Other benefits include:

■ Less maintenance. The homeowners association (HOA) is responsible for maintenance decisions and all the owners share the cost of common area upkeep. This includes big-ticket items such as air-conditioning units, the roof and fencing.

■ On-site amenities. While pools and fitness centers are common, the sky is the limit when it comes to condo amenities. Some complexes offer dog parks, clubhouses, a concierge or rooftop gardens.

■ Lower cost of living. While you will most likely pay a maintenance fee each month, it typically includes the cost of water, trash and sewer. Sometimes utilities are included in the fee. The HOA pays for the insurance on the entire complex, so you may need only to cover what is inside your unit.

The Disadvantages of Buying a Condo

Judging by the sheer number of Americans who choose to purchase and live in condos, the disadvantages of condo living aren't insurmountable. Here are a few disadvantages to weigh against the advantages:

■ HOA. Some homeowners associations can be quite intrusive with restrictions that may border on the ridiculous. Some raise the maintenance fees annually while ignoring maintenance needs.

■ Space and privacy. There is a decided lack of both in most condo complexes.

■ Tenant neighbors. HOAs find it challenging to enforce the condominium rules and regulations on tenants and typically go after the absentee owner. Some owners are diligent about disciplining their tenants, others – not so much.

If you're leaning toward purchasing a condo instead of a house, be sure that you read every word on every page of the HOA documents that will be supplied to you. Pay close attention to the Covenants, Conditions & Restrictions (CC&Rs). These are the condominium rules and regulation you must live by when you purchase a condo in a particular complex. It's dry stuff, but contains all the information you need to determine if this is the right condo for you.

### I s a "Fixer-Upper" Home Right for You?

"Fixer-upper" is one real estate term that needs no explanation. While many homebuyers are in the market for a home in move-in condition, others are willing to take their chances on fixer-up homes that need some work. Fixer-uppers can range from homes requiring relatively small cosmetic updates (new paint and carpets, for example), to those requiring major repairs, such as a new roof or complete re-wiring.

The Advantages of Buying Fixer-Up Homes

Fixer-upper homes can be an excellent choice for some homebuyers, especially those purchasing a starter home. Some of the advantages of buying fixer-up homes include:

■ House prices: Houses that need significant repair work or require major renovation are often much cheaper than homes of a similar size or in a similar location. There may also be more room for price negotiation with these properties.

■ Location: Purchasing a home in less-than-perfect condition can be a great way to buy into a neighborhood that would otherwise be unaffordable.

■ Creativity: Everyone has her own idea of what makes the perfect house. A fixer-upper allows you to bring your vision for your home to life.

What to Look For in a Fixer-Upper Home

Before signing on the dotted line, you'll want to arrange for a home inspection, which can identify potentially serious problems that aren't readily apparent. Depending on the scope of the problem, anything found during the home inspection may help you negotiate a further reduction in price. When viewing the fixer-upper, keep your eye out for the following:

■ Rodent and insect infestation: Look for mice droppings, roaches, mud emerging from cracks (a sign of termites), and other signs of infestation. Firewood piles stacked against a house can also present a haven for termites.

■ Structural problems: Sloped floors, leaning walls, or cracks in a home's foundation can all be signs of serious structural problems that can be quite expensive to fix.

■ Wiring: Old wiring may need to be replaced, a potentially costly repair.

■ Drainage problems: Ideally, the ground on the property should slope away from the house. Poor drainage can cause dampness in basements, flooding and other issues.

After the house is professionally inspected, call a licensed contractor out to the house to get a realistic bid on how much the repairs will cost. Then, have your real estate agent perform a market analysis to determine how much the house will be worth after the repairs are made.

Crunch the Numbers Before Buying a Fixer-Upper

The experts at the National Association of Realtors® suggest you offer 20 to 30 percent below the home's fixed-up value. Others say you should do some serious number crunching.

With the home inspector's report and the contractor's bid in hand, sit down with your calculator and determine how much to offer on the fixer-upper. Subtract the repair/renovation costs from the house's future market value. Subtract an additional 10 percent to cover any unforeseen situations. The resulting figure is how much you should offer on the home.

Make sure your agent inserts an inspection contingency in the contract. You may want to have a pest inspection or roof inspection in addition to the home inspection. The contract contingency allows you to walk away from the deal should any problems pop up that you just don't want to deal with.

Wondering How to Finance a Fixer Upper Home?

So, after laying out the money for the down payment and then the closing costs, how to finance the repairs or renovation on a fixer-upper home? Fixer buyers use many creative ways to finance the work, from credit cards to borrowing against their 401k plans.

You may be able to get a home equity line of credit (HELOC) based on the future equity you'll have once the house is repaired. Talk you your accountant or attorney about the pros and cons of HELOCs.

The U.S. Department of Housing and Urban Development (HUD) offers a program for the purchase of fixer-uppers that includes the repair costs in the mortgage loan. Known as the FHA 203(k) program, it's only available from certain, HUD-approved lenders and to borrowers who intend to live in the home.

Buying a fixer-upper is not for everyone, but for those with the patience to deal with renovating, it can be an economical way to purchase a home.

### Q uick Guide to Buying a Condo

They're typically smaller than single-family homes and they require far less upkeep. Yet the process of purchasing a condo may be far more detailed than that of purchasing a house. You see, the more players there are in a real estate transaction, the trickier it becomes, and that is certainly true when buying a condo.

Some of the advantages to purchasing a condominium rather than a single-family home include the obvious facts that condos are typically less expensive and may offer more amenities. Let's take a look at some of the other advantages.

Advantages of Buying a Condo

■ Maintenance chores are greatly reduced for condo owners. Although there may be landscaping in front of your unit, it is typically (though not always) up to the homeowners association (HOA) to maintain it. The same holds true for the roof, fencing and other items.

■ The typical HOA maintenance fee imposed on owners includes paying for items such as water, trash collection and sewer fees. Insurance is also paid for by the HOA, bringing down the cost of living in a condo even more, although you will still need to insure the contents of your condo.

■ The appearance of the complex and issues such as noise and other types of disturbances are regulated by the HOA.

■ Condominiums may offer more security than a single-family home. Many have doormen, guards or gates at the entry. The proximity of neighbors also adds a certain level of security that may not be present in an area's single-family home selection.

Potential Drawbacks of Purchasing a Condo

The proximity of neighbors, while listed as an advantage, may be a disadvantage for those who crave privacy. The HOA, while advantageous for many reasons, may be intrusive and dictate unreasonable restrictions. Condos tend to have less storage space than single-family homes, a concern especially for families with lots of "stuff."

When you purchase a house, unless it sits on leasehold property, you are also buying the land beneath it. Not so with a condo. In most instances you will own only the space inside the unit and share ownership in the common areas of the complex. Your share of the common areas, however, does not grant you the right to alter them in any way. So, although you may despise the tree in front of your unit, you are not allowed to remove it unless the HOA approves.

The Condo Purchase Process

If you've purchased a house before, you'll notice that the condo purchase requires far more paperwork. This is because the seller must provide the buyer with certain HOA documents, which vary by state. These documents may include:

■ Covenants, Conditions & Restrictions (CC&Rs)

■ HOA budget

■ Bylaws

■ HOA meeting minutes

Each document in the HOA package provides valuable information. The meeting minutes let you know the type of issues that the board deals with frequently and whether there have been discussions regarding raising fees or if they are considering special assessments.

By far, the most important documents are the HOA's financials, especially the reserve balance, sometimes called "reserve funds," or "reserves." This is money set aside to cover major repairs or for replacement or maintenance of common area elements, such as a broken sewer line. A well-funded reserve account ensures you that there will most likely not be future special assessments imposed on the owners.

Another red flag to look for in the HOA documents is the number of non-owner occupied units. There are several reasons that a large number of tenants make the condo less attractive. First, many lenders won't finance a condo in a complex with a tenant ratio over 25 percent.

Next, tenants don't have the same incentive as owners to keep the property maintained so an overabundance of them may tend to bring down the value of the complex.

Lots of tenants also means a noisier environment and heavier usage of common area amenities such as the pool and exercise equipment, according to Robert Irwin, author of "Tips and Traps When Buying a Condo, Co-op, or Townhouse." Irwin suggests looking for a complex with 10 percent or fewer tenant-occupied units.

If you have any questions about anything in the HOA documents, consult an attorney before signing an agreement to purchase the condo. Since these documents govern how you can use your unit and the future costs of owning it, you owe it to yourself to understand every word.

### 5  Things You Should Know About Buying New and Pre-Construction Homes

That new car smell can't hold a candle to the smell of a brand new house. Nobody's nasty cooking odors, no doggy or baby smells and no third hand smoke odors. Instead, you're surrounded by the smell of new carpet and fresh paint. A new house is pristine, and that's what attracts many to new home developments – the ability to impose one's own style on a clean canvas.

Before you get into the car to visit your local model homes, take a minute to bone up on the differences between buying new and existing homes, and heed the following advice.

1. The Greeter

That nice person you meet when you walk into the builder's on-site office isn't an official greeter; he or she is the builder's real estate agent. Her job is to get you excited about the project, help you tour the model homes and sign you up to purchase one.

During the time you spend with the agent you may be pressured to use his services in the purchase of the home. A word of caution: don't do it. Sure, it seems more convenient. After all, this person is right in front of you and can help you purchase the home you just fell in love with and can do so now – as in no waiting.

Although it may be legal in your state for this agent to represent both the builder and you, it isn't wise, and here's why: Fiduciary duty.

A real estate agent has a legal obligation to perform certain tasks for his or her client. One of the agent's fiduciary duties is loyalty – the obligation to act solely in the best interests of his or her client. The agent must do everything he or she can do to gain her client an advantage.

How does this work when the agent represents both sides, a situation that is known as "dual agency?" Although agents in states where dual agency is legal claim that it works, the situation flies in the face of an agent's fiduciary duty.

In layperson's terms, imagine your divorce lawyer claiming that it's perfectly fine for her to represent both you and your soon-to-be-former spouse. Dual agency is dual agency, whether it's an attorney doing it (which is illegal) or a real estate agent.

So, above all else, remember that this agent's primary obligation is to the builder, not you. Take the time to secure the services of your own real estate agent before viewing homes in the new development. When you arrive at the builder's on-site office and sign in, there should be a space to list your agent's name, so don't neglect to do so. Once the on-site agent sees that you're working with another agent, the pressure will be off to sign with him.

2. The In-House Lender

Many new home developments are one-stop shops. It's like being in a casino in Las Vegas. The whole place is set up so that you don't have to leave for any reason – everything you need is right there.

The builder will most likely have an in-house or "preferred" lender and you may be pressured to use this lender. You may even be subtly given the impression that you must use this particular lender if you want to buy the home. Don't give into the pressure and don't be deceived. You have every right to secure your own lending, independent of the builder.

In fact, you owe it to yourself to shop a number of lenders, in addition to the builder's. Ask the builder's lender for a Good Faith Estimate (GFE). This form will list all the fees and costs of the loan being offered.

Since the GFE was standardized a few years ago, it's much easier to compare offers. If you have any questions when comparing the lenders' GFEs, ask your real estate agent or attorney for help. You can find a copy of the GFE, and an explanation on how to use it when shopping for a lender, on the U.S. Department of Housing and Urban Development (HUD) website.

3. The Builder

Homeowners who defer maintenance of their homes are more common than we like to think. Putting off repairs only allows problems to fester, and many of them do so in areas we can't see, such as behind walls or beneath foundations. It can be frightening to the novice homebuyer to think of all the things that may go wrong after the sale is final.

A new home, they surmise, won't have these problems. And, they are correct in this assumption – there are no deferred maintenance nightmares awaiting them. There may be other problems, though, that a homebuyer should consider and guard against.

Builders and subcontractors frequently take shortcuts, causing the very nightmare conditions the new homebuyer is hoping to avoid.

While your loan application is being processed, take some time to check the builder's reputation. It's a simple process but one that may save you from throwing your money away on a home with major problems.

■ Start your research by checking the builder's status with your local Better Business Bureau.

■ Check public records at your county courthouse. Look for lawsuits against the builder.

The experts at the National Association of Realtors® suggest that you walk around the development if there are homeowners living there. Knock on some doors and ask the occupants if they've experienced any problems with the new home.

4. The Bling

Model homes are alluring – it's easy to fall head over heels in love with them. The builder knows this and loads the models with her top-of-the-line options and upgrades. So, while you dream of having a replica of the model home, the builder dreams of giving it to you – at tens of thousands of dollars over the original price of the home.

New home specialists suggest that you choose options and upgrades that appeal to you and will make living in the home more pleasant, rather than trying to copy the model home's features.

Ask the builder's representative if you will be held financially responsible for installed upgrades should you need to cancel the sale.

Finally, if you absolutely must have an expensive upgrade, find out how much it would cost to have an outside contractor purchase and install it after the close of escrow. You may be surprised how much money you can save by going this route.

5. Inspect to Protect

Because of the very real chance that the builder or his subcontractors took shortcuts in the building of your home, and because building inspectors typically don't spend a lot of time inspecting each new home, it is critical to have the home professionally inspected by an independent, third party prior to closing escrow.

Experts with the California Real Estate Inspection Association take the inspection process one step further, suggesting that the home should be inspected during construction. This helps "ensure that the work completed is in compliance with plans, specifications, and the construction schedule."

Finally, real estate legal experts suggest that you purchase a new home warranty that takes up any slack in the builder's warranty.

### 4  Tips for Buying a Luxury Home

French provincial, Greek revival, Italianate and Neoclassical – if these terms are suddenly top-of-mind for you, then you must be considering the purchase of a luxury home.

If this is your first luxury home purchase, you'll quickly learn how the process differs from that of purchasing lower priced real estate. From determining how much to offer through the close of escrow, the luxury home purchase is more time consuming and requires much more due diligence than when purchasing in the lower price ranges.

Whether you dream of purchasing a Tuscan-style Italian villa, a French chateau or an English manor house, you'll find the devil is in far more of the details than just the home's architecture. Here are tips to keep in mind when purchasing luxury property.

Financing a Luxury Home Purchase

A common misconception is that most luxury homebuyers pay cash for their homes, when in reality only 31 percent pay cash, according to the Coldwell Banker study, "Who's Buying Luxury Property in America."

While this number may have changed in the 12 years since the study was published, it's safe to assume that most luxury homebuyers require a loan to purchase a home.

Another common misconception is that the buyer with financing can't compete against the cash buyer. As long as the terms you are offering are attractive and you come in with a large down payment, you are in equal position with a cash buyer offering less than market value for the home, according to Iyna Bort Caruso in The Wall Street Journal.

How much is a "large down payment"? Plan on paying as much as 30 percent of the purchase price. Aside from making your offer more attractive to the luxury homeowner, many lenders require higher down payment amounts on large loans.

The loan approval process may take longer for a luxury homebuyer – perhaps as long as 60 days. The extra documentation requires extended verification periods. As well, on particularly large loans, lenders sometimes require more than one appraisal. Gathering all required documents before visiting a lender will help speed the process. Although your lender will tell you what to bring, be prepared to show the following:

■ Asset statements

■ Tax returns

■ Employment verification

■ Proof of cash reserves

If you own more than 25 percent of a corporation, you will need to show additional documents, such as profit and loss statements, K-1s, 1120s and supporting schedules.

Use a Real Estate Agent

While using a good buyer's agent is a must in any type of a home purchase, it is imperative when purchasing luxury property. In fact, the ideal agent for you is one who specializes in luxury property.

One of the most important considerations in the home buying process is price: Am I paying too much for this home? Determining the market value of luxury property requires the ability to compare the incomparable, according to luxury real estate guru Jack Cotton.

This ability primarily comes from experience. An agent who spends his days selling moderately priced homes lacks this experience, so ensure that you work with a luxury home specialist.

Another bonus of using a luxury home specialist is that she typically has a network of contacts that allows her to hear about upcoming luxury listings before they hit the open market.

Don't Rush the Process

Estate homes are full of design details and amenities that are lacking in homes in the lower price ranges. These amenities, such as sophisticated security systems and multiple mechanical systems, may require the services of specialized home inspectors.

In larger homes, an inspection may take from six to 10 hours, or require a team of home inspectors. Then, factor in the additional time required for specialized inspections. It's important to not rush the process, but to take the time necessary to order all the inspections you feel you need to be comfortable with your purchase.

Tips for the Cash Buyer

If you are paying cash for your luxury home, even though there is no lender to require an appraisal, ask for an appraisal contingency anyway. This allows you to get another opinion as to the value of the property and to walk away from the purchase if the appraisal is far lower than what you agreed to pay.

Cash buyers should also guard against misjudging the competition, cautions Ashleigh Patterson with Reuters Money. Many times the cash buyer overestimates his negotiating power and comes in with a ridiculously low offer. As mentioned earlier, a loan-backed buyer may gain the upper hand if her offer is clean and she comes in with a large down payment.

Information is king in all real estate transactions but in those that are more complicated, such as the purchase of high-end property, it is critical. Learn as much as you can about the process, go into it well represented by a luxury home specialist, and take the time necessary to inspect the property thoroughly.

### T ips on Buying a FSBO Home

The real estate market is full of potential homebuyers and investors, hoping to grab the deal of a lifetime. While investors tend to mine foreclosure auctions for their next big deal, the average consumer looking for a bargain-priced home tends to labor under two misconceptions: Short sales and for-sale-by-owner (FSBO) homes offer the best bargains. In reality, however, neither of them necessarily does.

The National Association of Realtors® (NAR) claims that, in some cases, you'll pay less for a home listed by an agent-assisted home seller than you will for a FSBO going it alone.

If you have your heart set, however, on only shopping among an area's FSBOs, read on to learn how to protect yourself and ways to save some money.

Know Who You're Dealing With

The typical FSBO, an unmarried person, has a lower median income and is less likely to offer incentives (such as home buying a for-sale-by owner home warranties or assistance with closing costs) to the buyer than traditional home sellers, according to NAR.

If you know the seller, plan on paying more for the home than you would if you did not know the seller. The median sales price of a FSBO when the seller and buyer know one another is $167,100. The median price when sold to a stranger is $140,300.

Don't expect to get a rock-bottom bargain price from the FSBO right out of the gate. The main reason the seller isn't using a listing agent is to save the money he or she would pay in commissions. That's money she wants in her pocket and she most likely has no intention on sharing it with the buyer.

Tip: To gauge the seller's willingness to drop the price, ask if he or she is willing to pay a buyer's agent commission. If the answer is yes then it's a safe bet that the seller is most likely open to discounting the price at least 3 percent. If you feel confident enough to proceed with the purchase without a real estate agent, this will save you a significant amount of money.

Protect Yourself

If you aren't using an agent in the purchase of the FSBO, you need to know how to protect yourself during the process. The number one rule is to never rely on oral promises but get everything in writing. Here are some additional considerations:

Escrow

Never allow the seller to hold your earnest money deposit but instead ask that it be deposited into an escrow account. The ideal time to open one is with the deposit of your earnest money. Your lender can give you more information on how to open an escrow account.

Tip: These accounts typically have small setup fees, so request that the seller pay all escrow-related fees. Place this request in the purchase agreement.

Get a Clue

A Comprehensive Loss Underwriting Exchange (C.L.U.E.) report will allow you to check insurance claims data on the house. Covering the past five years, the report is inexpensive and can be ordered online.

Study the report, paying close attention to any type of claim for water damage as this could indicate a mold problem, according to Penny Doherty of the Wall Street Journal.

Tip: Since obtaining a C.L.U.E. report requires the homeowner's permission, ask the seller to order it and pay for it. Even if you decide not to go through with the purchase of the home, the seller can use a clean report as a selling tool with the next potential buyer.

What's it Worth?

A smart homeowner will obtain at least three comparative market analyses (CMA) from real estate agents prior to putting the FSBO home on the market. Real estate agents use the research included in the CMA to determine the current market value of homes. Without this information the seller is living in fantasyland and the asking price is merely a dream of what he hopes to receive.

Ask the seller how he came up with the price of the home and, if it was agent-generated, ask for copies of the CMAs. If the seller didn't obtain CMAs but used another method to determine value, ensure that the method relied only on the sales prices of recently sold homes in the area.

An accurate selling price is crucial, not only to ensure that you don't overpay for the house, but to ensure that the house will pass the lender's appraisal.

Tip: If you are still not satisfied with how the seller determined the price, ask for an independent appraisal of the home, paid for by the seller.

Structuring the Purchase Agreement for Maximum Protection

Contingencies are your friend. These are items placed in the purchase agreement that must be attended to before you will close on the sale. Time-limited, typical contingencies include:

■ Appraisal

■ Loan approval

■ Home and other inspections, such as a pest, well, septic system, roof, plumbing or electrical inspection

■ The sale of your current home

Real estate buyer's agents are worth every penny they make just for dealing with this section of the contract. This is where you, as the buyer, derive the most protection during the purchase process. Contingencies say to the seller "I want to purchase this home, and I will, provided the following occurs."

If any of the contingencies are unmet – perhaps the home fails to appraise for the amount of money the bank is willing to lend for it – you have the right to walk away from the deal with a full refund of your earnest money deposit. Which is in escrow, right?

Give yourself at least two weeks to complete the inspections. Once the contingency time limit expires, you are on the hook to proceed with the purchase if you haven't submitted an amended purchase agreement outlining what is required for you to continue with the purchase.

Additional Ways to Save Money

Who pays for what during a real estate transaction varies by local custom and laws, but many items are negotiable. Request, in the contract, that the seller pay for the following:

■ Owner's title insurance policy

■ Document preparation fee

■ Transfer taxes

■ Loan fees for FHA or VA loans

■ Pest inspection fee

■ Unpaid homeowners association dues

■ Bonds or assessments

■ Delinquent taxes

■ Notary fees

Buying a home without representation is risky. Without an agent or attorney not only will you have to do all the work by yourself, you lack that extra set of highly experienced eyes that may catch red flags that you fail to notice.

FSBO sellers name pricing the home correctly and understanding the paperwork among the top three most difficult tasks they faced when selling the home, according to research performed for the National Association of Realtors®.

Keep this in mind when deciding whether to enter into an agreement with a FSBO seller without agent or attorney representation. If you are equally as confused about these two critical elements of the home purchase, your best bet is to either pay for your own representation or find another FSBO home with a seller who is willing to pay for these services for you.

### C onsider Your Commute When Buying a House

If your commute to work takes 25 minutes, congratulations – you're average, according to the United States Census Bureau. Commuting to work is a very real part of American life for lots of people, so it's naturally a consideration when shopping for a home. Whether a commute is long because of the distance from home to office or because of rush hour traffic, moving to a new area may be the perfect opportunity to cut the time it takes you to get to work.

Commute Time in the United States

While many people love to drive, it's probably fair to say that not many people are looking to increase their commute time. While the average commute time is less than a half hour, most commuters surveyed spent 15 to 19 minutes getting to work.

The longer you spend on the road, the less time you have to enjoy your new home. Bear in mind, as well, that gasoline prices aren't likely to go down in the future, and the longer your commute, if you drive, the more you'll spend on gas. So, finding a house closer to work will save not only time, but money too.

One way to judge commute time is to drive from your potential home to your place of work during rush hour. This should give you an estimate of how long you'll be driving to and from work on any given day.

Proximity to Freeways and Road Conditions

A freeway through a region has a positive impact on home values in the area, according to a study commissioned by the Arizona Department of Transportation. The study also found that homes adjacent to freeways are worth less than those further away. This is good information to keep in mind if you're concerned about your new home's resale value as well as your commute time.

Weather and road conditions are another consideration, especially if you plan to buy in a rural area. How often are weather events such as heavy snowfalls likely to affect your commute time? Will weather make it impossible or extremely difficult to get to work on some days? The seller should be able to fill you in on these details.

Carpool or Public Transportation?

You may choose to get to work on public transportation. If this is the case, the availability of buses, subways and other transportation needs to be factored into your home-buying decisions; some neighborhoods receive better public transportation service than others. Living close to the bus stop is also desirable, especially when the weather is bad.

Another option is to carpool to work. Again, this may determine your neighborhood choices, especially if you intend to carpool with fellow employees. If you move into a neighborhood where you don't know anyone, you may be able to find carpool partners through an Internet carpool site.

Telecommuting Options

Telecommuting, or working from home, is sometimes an option for people seeking to escape the rush hour commute. To qualify for telecommuting, employees generally have to prove themselves as capable, independent workers, and of course need a home office space in which to work.

While some telecommuting jobs allow employees to work from their homes full-time, it's more common for the telecommuter to split her time between the office and working from home. Telecommuting isn't for everyone, but some people find it to be a productive solution to long commute times.

There's a lot to consider when hunting for a house. Location is one of the most important considerations and has a direct impact on your quality of life, so pay careful attention to this aspect of house hunting.

B uying a Home: The Dangers of Love at First Sight

Didn't your mama warn you about love at first sight? Didn't she tell you there's no such thing as a "soul mate?" So why are you falling in love with four walls and a roof? Houses, like men/women "are like streetcars (that should give you an indication of how old this saying is!); there will be another one along in a minute." They're also like one of the "other fish in the sea."

It's easy to fall in love with houses – it happens to seasoned real estate agents, so who can blame the average homebuyer for doing the same? Some houses just seem to beckon: "Look at my curves," "Hey, I have a super sexy basement," or, "Anything grows in this yard."

The come-on can be seductive, but what lies behind those sweet-talkin' ways?

What's Hiding Behind the Come-On?

Consider home staging. The proliferation of this business niche is pretty solid proof that homebuyers are entranced by first impressions. Home stagers come into a home and make it over with the sole aim of making a buyer want to live there.

A home stager knows that first impressions have a dramatic influence on homebuyers. In fact, the only thing more powerful than a staged home is a home with curb appeal.

Ah, you scoff. Curb appeal – isn't that old school? It's like "location, location, location" – more real estate lingo.

Ask any real estate agent who specializes in buyers, and she will tell you about how many buyers refuse to even get out of the car if they don't like the exterior of a house. Curb appeal, then, is everything.

While curb appeal and a staged interior are enticing to buyers, they are also distracting, taking attention away from the house's flaws.

Look Beyond the Sizzle to the Steak

There's an old advertising adage: "Don't sell the steak – sell the sizzle!" While this is good advice for the person trying to sell something, it should be turned around for the buyer. Look beyond the sizzle when looking at a house. Look beyond the pretty paint and perfectly manicured front yard to the house itself. While it's tempting to picture yourself moving right into the house without having to paint, replace carpet or any of the other duties new homeowners typically have, don't give in to the temptation.

Here are some questions to ask yourself while looking at a house that is brazenly tempting you to throw caution to the wind and fall head over heels for it:

■ Staged rooms look bigger than they really are. Picture the room with your furniture, not the designer's. Is there enough room for your stuff?

■ Falling in love with a particular design scheme is fine, but does it match your furniture or will you find yourself having to paint over the very thing that attracted you to the room in the first place?

■ Look beyond the staging to the flow of the house. Does it meet your needs?

The house may have curb appeal, but it also has neighbors. What does the rest of the neighborhood look like? Are the homes well cared for or is one neighbor's trashy exterior dragging down the values of all the other homes on the block? Is there anything else in the area that may impact value, such as a landfill?

There's nothing wrong with sellers trying to make their homes as attractive to buyers as possible. The danger for you, the buyer, is when you allow the sizzle to overwhelm you and keep you from looking at the steak.

### H ow to Predict the Resale Value of a House

People come in two flavors: those who live for today and those who consider tomorrow. Some folks see only what's right in front of them while others consider the big picture. We are either nearsighted or farsighted. Okay, some of us have 20/20 vision, but even that only means one has clear vision to a distance of 20 feet.

So, into which camp do you fall? If you're in the market to purchase a home, and you tend to be impulsive, you might want to take some lessons from the big picture folks. Spontaneously living in the moment is great, as long as you allow the future to intrude, even for just a moment.

Our biggest concern when faced with the home purchase contract is, naturally, price. Is this house priced correctly for the current market? Am I being overcharged? Can I get a deal? With your nose firmly placed in the home's current value, you may be neglecting something equally as important: its future value.

Now, until someone invents a foolproof, bona fide crystal ball, the true answer to anything that may happen in the future remains elusive. But even a modicum of research may give you some clues.

Factors that May Determine Future Value of a Home

Calculating resale value isn't an exact science. Multiple factors determine the value of houses on the market at any given time. Some of these you can't control, such as the national economy or supply and demand.

There are two main predictors of future value: location and land values.

"Location, location, location" isn't just a trite real estate-ism. The location of a house has a huge impact on its value. From its place within a city or town to what type of street it sits on, location is almost everything. As long as people have children, houses on cul-de-sacs will hold value better than those on busy thoroughfares. By the same token, homes near exceptional schools are more in demand than those in poor school districts.

Land will never be subjected to the supply side of the supply/demand formula simply because it's a finite resource: We can't manufacture more land. Demand for land may fluctuate, according to how usable the land remains. And while land value typically appreciates, the condition of what sits on it, the house, may either depreciate the land's value or make it more desirable.

What to Consider When House Hunting

Whether you're the type of person who is fueled by emotion or a more calculating soul, the most important thing to remember, if you're concerned about the future value of a house you're considering purchasing, is to remain emotionally detached and to do some sleuthing.

■ Look beyond the "oh-it's-so-cuteness" of the house and concentrate on its location.

■ Check with the city or county planning office to get an idea of any future land use plans. Will traffic be rerouted through your new neighborhood? Are there plans to develop a big-box retailer-anchored shopping center on that vacant parcel across the street?

■ Check out the neighbors. Neighborhoods with younger occupants tend to be more in demand than those primarily populated with retirees.

While there are certainly ways to improve the value of a house before placing it on the market, if you start thinking about selling the home even before you buy it, you'll end up ahead of the game before the game even starts.

W atch for Pleasant Surprises and Details When Buying a House

I don't know if there's an official survey out there, but I can tell you from experience that water heaters wait until the new homeowner moves in to fall apart. This is why home warranties are such a good idea.

What about pleasant surprises? We don't hear much about those. Jana M. moved into her Wisconsin home during a bleak late winter. When spring rolled around, her new yard came to life. The showstopper occurred in mid-summer when at least 30 Stargazer lilies burst into bloom along the back wall in the garden. She had no idea the bulbs were snug underground when she bought the house, and it was, most definitely, a pleasant surprise.

For some people, living in the home on a daily basis brings on little surprises, such as the extra storage space you missed while touring the house or the way the living area flows just right.

While you house hunt, think about some of the little things that would be pleasantly surprising after you move in and put some of them on your "must-have" list.

Interior Design and Home Buying

One of the biggest surprises when buying a house is walking into a home that looks drab and uninteresting on the outside, only to find that the inside is a wonderful example of tasteful interior design. While some elements of the interior - such as furniture and window treatments - may not be included in the sale, you may find structural design elements that you like.

Of course, what qualifies as good interior design depends largely on your personal needs, interests and taste.

The Importance of Closet Design and Extra Space

Storage space is a big consideration for many people. There's an old joke that people "expand to fit" their surroundings, gathering and storing possessions as the years pass. Sure, good closet design isn't as impressive as a whirlpool bath when you're viewing a home, but over the long run it's probably more essential. A walk-in closet or extra space for storage is almost always an advantage when buying a house.

Kitchens and Bathrooms

It's well known in real estate circles that kitchens and bathrooms sell homes. An outdated kitchen or a cramped, dingy bathroom can easily break a deal. Maybe you don't need a heated towel rack or a steam shower system, but if you're like most Americans, you don't want a dinky bathroom. Lots of space is the name of the game for today's homebuyers. So pay close attention to the bathroom in any home you're considering purchasing. Look for the details that will turn out to be pleasant surprises when you move in.

The kitchen, for many people, is much more than a place to prepare food – it's also a gathering place for family and friends, so an open, comfortable kitchen is a big plus in a home's favor. Americans have specific "wants" in their new kitchen and one of the most popular is a pantry, according to the Metropolitan Builders Association. Over 80 percent of people polled stated that a walk-in pantry is a must-have, with built-in microwaves and light-colored cabinetry coming in not far behind.

Keeping Home Buying Surprises in Context

Pleasant surprises can be the difference between buying a home and continuing to house hunt, but do remember to keep them in perspective. No matter how nice a home's interior design, how lush its garden or how much extra space it has for storage, if the house itself isn't structurally sound, it isn't worth buying. It's important to take care of the basics of home buying before looking at a home's little extras. On the other hand, a well built home with extra closet space? Now that's a nice surprise when buying a house!

### C hecklist for Home Buying: Evaluating the Interior of a Home

Shopping is shopping, whether it's for groceries, a new computer, a car or a house. Making a list of what you want and need – and the item's ideal features and benefits – helps make the process easier.

When looking at houses, with a checklist for home buying in hand, you avoid being distracted by the new surroundings and any staging the seller has done, and you can concentrate your attention where it should be: on the features you are looking for in your new home.

What to Include on Your Home Buying Checklist

To avoid forgetting anything important when you view a home, make a checklist of the items you want to pay close attention to. Some elements of this list will be subjective and based on your specific wants and needs. Here are some ideas to get you started on your list:

Which appliances are included in the sale? How old are they, and how well do they work? Don't be afraid to take a look at the inside of any stove or refrigerator included in the sale of the house to determine its condition.

■ Is there enough storage in the bathroom? Are there enough bathrooms for your family?

■ Are the closets large enough and designed for your needs?

■ How old is the house's electric wiring? Are there enough outlets?

■ What type of floor runs through the house? Will it need to be replaced? Does the home flooring need any special care or maintenance?

■ Will the kitchen be easy to work in? Is there sufficient storage?

■ How old is the water heater, furnace and air conditioning system?

■ Are the windows energy efficient? Is the glass warped or crazed? Are there holes in the screens?

■ Will you need to replace or update the lighting in the any of the rooms? Many buyers don't take the time to test a home's lighting. Check the lights in the bathrooms and kitchen to ensure they meet your needs.

■ If you work from home, make sure there is adequate space for you to work efficiently and comfortably. Check to make sure there are enough power outlets in the room that you'll be using as an office. If you work online, find out about Internet service in the area.

■ Double-check all of the homeowner's improvements. Ask if they were done professionally and ask to see receipts. Call the improvements to the attention of the home inspector so that he can check them as a professional.

The United States Department of Housing and Urban Development's (HUD) website has an in-depth home-viewing checklist that may give you more ideas on what to look for when shopping for a home. They suggest making copies of the checklist for each home that you tour to keep track of each home's details.

Viewing a home with an eye toward living in it takes a bit of imagination. Try to visualize the home with your furniture and decorative items. Use a measuring tape if you need to ensure spaces are the right size. Most of all don't be afraid to ask lots of questions.

### H ow'd they come Up With THAT Home Price?

Quick! What's the most valuable duty your buyer's agent can perform? Sure, showing you the house of your dreams is pretty valuable, but how do you know the house is worth the price the seller set? If your agent is really doing her job she'll give you a comparative market analysis, or CMA, so that you can determine how the seller came up with the price and whether it reflects current market conditions. A lot goes into analyzing the market to determine housing prices, so let's break the CMA down into its basic components.

How a Comparative Market Analysis Works

■ Your agent gathers a list of homes sold within the past six months, within a 1-mile or so radius of the home you wish to purchase.

■ She then puts these homes in order, from highest to lowest price.

■ Now comes the comparison – how does "your" house stack up to the sold houses? She'll take into consideration the size of each house, number of bedrooms and bathrooms, its age, its location and any improvements. Other factors may come into play, depending on whether the home is in a unique location, such as a beach community or rural area with large lots.

■ Extrapolation comes next. This is where she'll determine where, in this range of prices, the house you wish to purchase lies.

Now that you have a pretty good idea of what the house should sell for you are in a better position to know whether or not the seller may be amenable to price negotiations. To be really savvy, however, let's take a look at some of the more important factors when it comes to deciding the price of a house.

Impact of Location on Home Prices: More Than Just Crime Rates

There are general factors that influence the price of any particular house, such as the economy, the number of foreclosures in the area and current available housing inventory. Then there are more specific factors, such as environmental aspects and location, which may affect, positively or negatively, a home's value.

The location of a house, above all else, determines its value. "Location" refers not only to region, but also to the neighborhood, the street and even to the location of the lot within the neighborhood. Homes in regions with steady job growth and rising incomes tend to be worth more than those in areas with stagnant or negative growth. In beach communities, houses with ocean views are worth more than those without. Houses on cul-de-sacs are more in demand than those on busy streets. A house located near a landfill will depreciate in value much more quickly than one further away, according to Brian Johnson of the Pima County Assessor's Office. Location, therefore, encompasses many aspects. Additional location considerations impacting the value of a house include:

■ nearby restaurants and shopping centers

■ proximity to highways or freeways

■ size of the lot

■ traffic issues

■ transit systems

■ zoning issues

A neighborhood's crime rates do have a bearing on home values. With the advent of the National Sex Offender Registry, created by the U.S. Department of Justice in 2005, homebuyers have an easier time of determining the number of convicted sex offenders living near a home they may be interested in purchasing. Not only is this important information for your personal safety, but homes within one-tenth of a mile of a sexual predator's residence are worth 9 percent less than those further away, and take 10 percent longer to sell, according to researchers at Longwood University. While most residents are aware of the crime ridden areas of their city, newcomers are not, so databases such as this, and a phone call to the local police department, can provide the statistics needed to make a better informed purchasing decision.

Houses Need to Stay in Shape Too

While it goes without saying that a well-maintained home is worth more than a fixer-upper, appraisers take far more into consideration when checking a home's condition. A home that has been updated with energy-saving windows and appliances will be worth more than the house next door that hasn't been updated. Certain remodeling features add value as well, such as bathrooms and updated kitchens. In an area with older homes, those with updated wiring and plumbing have added value.

A neighbor's home also has an impact on the value of those around it. So a seller may sink thousands of dollars into home improvements, but if Jack next door has a rusting auto carcass and dying trees in his front yard, all houses on the block suffer, in terms of lower values.

Home Prices may Change With the Seasons

Real estate sales are seasonal, so when you shop for a home may have a bearing on its price. The hottest time of the year to sell a home is summer. Most families wait until after the school year ends to make a major move, so homes tend to sell much more quickly and for higher prices in the summer.

While spring is when neighborhoods tend to look their best, with everything in bloom, winter provides the best opportunity to get a bargain on your home purchase. If a seller is motivated enough to place his home on the market in the winter, especially around the holidays, he may just be motivated enough to negotiate on price. Granted, you will need to be able to look beyond bleak landscaping, but, aside from a good price, you'll face less competition.

Additional Considerations for Home Prices

When the housing industry tanked during the recession, Americans became more aware than ever of the mortgage industry and its bearing on housing prices. Short sales and foreclosures tend to depress a neighborhood's values. In fact, according to MIT Economist Parag Pathak, each property within 250 feet of a foreclosed home will experience at least a 1 percent reduction in value. Since markets take some time to correct, the recent rash of foreclosures in this country may drag down real estate values for some time in the future.

### S trategy for Making an Offer on a House

Someone purchasing a home may not have coined the term "emotional roller coaster," but it sure fits the process. It's one big up-and-down affair. Looking for a house is fun and exciting. Making the final decision to purchase a particular house may be fraught with doubt. Making an offer on a house may be downright terrifying.

While there are common elements in every home purchase, not all transactions are the same. Some are more complicated while others hum along smoothly. Carefully crafting your offer on a house is a big step toward humming down the purchase highway.

Evaluate Price before Making an Offer on a House

Deciding how much to offer the seller of a home is one of the most confusing parts of the home buying process. Many factors influence home values, and there's a fine line between getting a deal and lowballing to the point of insulting the seller and closing off the possibility of future negotiations. In a fast-moving market, price becomes even more important - there's always that chance that someone else has a more attractive offer. Here are some things to think about to help you determine a fair offering price:

Ask your real estate agent to compile a comparative market analysis (CMA). This is the same research the listing agent performed to help the seller determine her asking price. A CMA concentrates on recently sold homes in the area. With it, you can compare the house you want to buy to those sold and determine if the seller's price is in line with current market conditions.

Learn as much as possible about the seller's needs. This may be challenging, as you and your agent may not have direct access to the seller. Your agent can ask questions of the listing agent, but he is under no obligation, and may be in violation of his fiduciary duty to the seller, to divulge personal information. A pending divorce, job transfer or death of one of the owners are conditions under which the seller may be laboring and prompt her to sell the house quickly. The motivating factor for the seller determines how willing she is to negotiate price.

Understand the Terms of the Purchase Agreement

Real estate purchase agreement forms and processes vary throughout the country on a regional basis. All of these forms, however, are legally binding contracts. While your main concern may be the price you are offering, pay close attention to the terms of the contract. Have your real estate agent or attorney explain anything you don't understand. Never sign the papers unless they include your true intentions and you have a full understanding of every word. Some items to pay close attention to include:

■ financial concessions you would like the seller to make, such as paying closing costs, or cash back for required repairs

■ date on which you'd like to close and take possession

■ financing contingencies (such as being able to get a mortgage at an acceptable rate)

■ home inspection contingencies, pest report contingencies, etc.

■ personal property to be included in the purchase (such as appliances, window treatments or patio furniture)

■ your proposed selling price and earnest money deposit

Use the Counteroffer to Your Advantage

Ah, the negotiating process. While the absolute worst news your agent can give you is that the seller declined the offer, the second worst is the counteroffer. While you may have considered your offer to be reasonable, fair and in line with current real estate market conditions, the seller may think otherwise. Sometimes, however, counteroffers are used to change terms, not price. Perhaps the possession date needs to be changed, or maybe the seller has decided not to include some of the personal property you've requested.

So, the counteroffer isn't necessarily bad news. Think of it as yet another bargaining chip. Don't be surprised if your counter back to the seller results in a counter-to-the-counter-offer situation. This is, after all, what negotiating is all about.

### Driving a Hard Bargain: How to Negotiate with a Home Seller

When I mention "currency," what picture pops into your head? If you're like most of us, you'll envision a pile of gold coins or stacks of paper money.

We often forget that in the 21st century information has become a form of currency – often worth its weight in gold. Since the best information can actually help us save the physical currency we so readily envision, the savvy homebuyer gathers as much of the stuff as she can get her mind around before negotiating the price of a home.

Negotiating Requires Information

Go into the purchase negotiations locked and loaded with as much information as you can gather. First, have your agent prepare a market analysis.

Known as a comparative market analysis or CMA in real estate lingo, it is a compilation of homes similar to one another in size, age and location – adjusted for differences in amenities – that have sold over the past three to six months. The sales prices of these homes, when compared to the one you're interested in purchasing, will give you the home's market value.

Now, if the market is on the upswing and values are rising, you may be disappointed with the results of the CMA. But it's important information, either way. It gives you a basis from which to negotiate the price of a home.

Look carefully at the section of the CMA that mentions "days on the market," or DOM as it is called in real estate circles. This number is important because when a home has been sitting longer than the market average (ask your agent for this number), a lower offer is more likely to be accepted.

Negotiating Requires Answers

Buying a house is a huge purchase – one of the biggest you'll make in your lifetime. That said, you'd be surprised how many buyers go into the process without doing any research whatsoever. Many folks research new cars more thoroughly than they do houses.

Remember, information is your friend and you can never have too much of it.

You may not get answers to the questions you should ask, but ask them anyway. Here are a few things you should snoop around about:

■ Vacant? If the home is vacant, it's a safe bet that the sellers had to move on with their lives and most likely can't wait to get rid of a house payment on a house they don't even live in.

■ Motivation: Why is the seller moving? The answer to that question will tell you a lot about the home seller's motivation. A seller who has a job waiting for him a couple of states away is pretty heavily motivated to get his house sold.

■ Keep tabs on the local real estate market. Although it seems subtle, changes can happen quickly and we can go from a buyer's to a seller's market pretty quickly.

Know When to Stop Negotiating

Or, at least know when to consider it. Now that you're smartened up with market information, you should determine just how high in price you are willing to bid. In fast-moving markets with lots of buyers bidding on the same house, you may get caught up in the bidding frenzy. Having an exact figure in mind – your top bid – will allow you to walk away from negotiating with a home seller and avoid overspending.

Everyone's a Winner

Finally, if you really want the house and the seller won't budge on price, give in. That's right: capitulate on the price. Then, go deep on the terms.

Author Robert Irwin, in his book _Tips & Traps for Negotiating Real Estate_, tells the story of a gentleman who was about ready to give up on a bank-owned house he really wanted. The lender refused to negotiate on the price and the buyer didn't have the money to both pay for the house and the subsequent work required to make it livable.

At Irwin's suggestion, he agreed to the bank's price and countered the terms of the agreement instead. He ended up getting the house, with cash back from the lender to make the needed repairs.

Negotiating is an intimidating process for many people, and when the item you're negotiating for costs as much as a house, it can be truly frightening. Just remember to keep your emotions in check and arm yourself with the hottest currency in the 21st century, and you'll do fine.

U nderstanding Fair Housing Laws

It's painful to think that there was a time in American history when discrimination was the accepted practice and not the exception. It took the death of civil rights activist Martin Luther King, Jr. and the actions of President Lyndon Johnson to begin the end of housing discrimination.

The Fair Housing Act

Title VIII of the Civil Rights Act of 1968 is also known as the Fair Housing Act. It makes it illegal to discriminate against another on the basis of race, color, national origin, gender and familial status. The Fair Housing Act covers all housing-related transactions, including:

■ buying a home

■ renting an apartment

■ obtaining financing to buy a home

Lenders, mortgage companies, real estate agents and brokers, landlords, banks and municipalities are all forbidden from engaging in housing discrimination under fair housing laws.

If you feel you have been denied housing in violation of your rights, file a complaint with the United States Department of Housing and Urban Development (HUD). There are several ways in which to file the complaint:

■ File a complaint online at the HUD website.

■ Call HUD at 800-669-9777.

■ Print out and mail the complaint form, supplied on HUD's website.

■ Write a letter and mail it to HUD.

Other Fair Housing Laws and Exemptions

Some states or municipalities may have additional laws that prohibit discrimination based on other factors, such as sexual orientation or military service.

Retirement communities, those that only rent or sell to people over a certain age – typically 55 – are exceptions to fair housing laws. In addition, the Fair Housing Act may not apply to certain kinds of dwellings, such as an owner-occupied building that does not have more than four rental units, or housing for members of a religious community.

The Equal Credit Opportunity Act

The Equal Credit Opportunity Act (ECOA), enforced by the Federal Trade Commission (FTC), is another anti-discrimination law. The ECOA forbids creditors from discriminating based on race, color, religion, gender, national origin, marital status, age or source of income (such as Federal assistance). Sometimes called the "fair lending act," this law helps to ensure equal access to credit and may limit predatory lending.

However, it does not guarantee that you will be offered credit if you apply for it, or on what terms you will be offered credit. It also does not necessarily forbid creditors from asking questions related to gender or marital status on a credit application, though it does prohibit them in considering those factors when they make a determination about credit offerings. The law covers banks, mortgage brokers, credit card companies and other lenders.

If you believe your credit denial is in violation of the ECOA, you do have recourse.

■ Appeal to the creditor to reconsider the decision.

■ Take your case to the Attorney General's office to determine if there has been a violation of your rights under the law.

■ You have the right to sue the creditor in a court of law. Consult with an attorney on how to proceed.

■ Ask the creditor to supply you with the name, address and phone number of which agency to should contact to report the violation. Lenders are legally obligated to supply you with this information.

Additional Help is Available

Many states and cities have fair housing centers that will work with you to understand federal and state laws regarding housing. Check your state's official website for details.

### W hat Happens After My Offer is Accepted?

After all the back-and-forth on price, concessions and repairs, it's finally over and your offer to purchase the home was accepted. While you may think that your work is done at this point, think again.

Granted, you and the seller are no longer front and center on the home purchase stage; there are some details you'll need to attend to after the offer is accepted. For the most part, however, this is the point where real estate agents really earn their money and a good one proves that he or she is worth every penny.

Transaction Coordinator

Most large and many small real estate brokerages employ a transaction coordinator. This is the person who coordinates all of the details on the road to the close of escrow.

Once you sign the purchase agreement and hand it to your agent, she will return to her office, check it over for accuracy and ensure signatures and initials are in the proper places, and then either do all the rest of the work herself or hand the duties off to the transaction coordinator.

Escrow Opens

Quite simply, escrow describes a holding of funds or other items by a neutral third party to a transaction until they are distributed according to the principal parties' instructions. In the typical residential real estate transaction, the principals include the seller, buyer and lender.

To open escrow, the agent or the transaction coordinator calls the escrow officer, typically employed by an escrow or title company, to arrange delivery of the purchase agreement and your good faith deposit.

This is the point at which the clock begins ticking toward the closing date specified in the purchase agreement.

By the way, not all states use escrow. In non-escrow states, a real estate attorney handles these duties.

Title Company

The next step in the process is to order a title search on the property and the issuance of a Preliminary Title Report. This is delivered to the escrow holder who checks it over for any issues not addressed in the purchase agreement. A common item found in a preliminary title report is a lien or an additional loan on the property that wasn't previously reported to the buyer. This is brought to the attention of the buyer and the seller must clear the cloud on the title or the buyer can cancel the agreement.

Demands

The escrow officer then sends the lender a demand for the pay off of the seller's loan or a beneficiary statement if the buyer is assuming the loan or purchasing the home "subject to."

Contingency Removal

While all of the above is happening on your behalf, without your involvement (other than to review the Preliminary Title Report and sign off on it), the next step in the process requires your involvement.

It's time to remove the contingencies in the purchase agreement. Contingencies are events that must occur, according to the date listed in the contract, before the sale can close. Typical contingencies include:

■ Final loan approval: Failure to obtain a loan will kill the deal.

■ Inspections: Repair issues that arise from the home inspection are typically open to negotiation between the sellers. If the seller refuses to remedy any concerns, you have the right to cancel the contract with the full return of your earnest money deposit

■ Home sale: The successful sale of your current home.

■ Appraisal: If the home fails to appraise for the amount you are borrowing from the lender, you can negotiate with the seller for a lower price, pay a larger down payment or walk away from the sale.

Once the contract contingencies are removed you can still walk away from the deal but you will forfeit your earnest money deposit and be liable for liquidated damages if your contract includes such a clause.

Homeowner's Insurance

After contingency removal, act quickly to secure your homeowner's insurance if you haven't yet done so. Do some comparison shopping because the cost can vary widely among providers.

After contingency removal, act quickly to secure your homeowner's insurance if you haven't yet done so. Do some comparison shopping because the cost can vary widely among providers.

Final Walk-Through

The final walk-through is typically scheduled within the week leading up to the close of escrow and is your opportunity for one last look at the house. This is not the time to bring up new issues, but to ensure that the home is in the agreed-upon condition before you purchase it.

Take your time and do a thorough inspection of the home. Here are a few things to look for during the final walk-through:

**Repairs** – Did the seller perform all repair requests to the specifications outlined in the contract? If you require working utilities, such as water, gas or electricity to check the repairs, and those services have been disconnected, don't close escrow until the utilities are turned back on and you've inspected the repaired items.

**Condition** – Is the house in the same condition as when you signed the purchase agreement? Look for damage to walls, carpet, etc. that weren't there when you agreed to buy the home.

**Junk** – Inspect areas where the seller may have stashed unwanted items, such as the attic or basement. The seller or his agent, before the close of escrow, should remove all seller belongings from the house.

**Appliances** – Check that the refrigerator and freezer are cold and run the dishwasher through an entire cycle. Check the garbage disposer to ensure that it's in working order. Turn on the oven, broiler and stove burners. Check that the built-in microwave works.

**Major systems** – Flush toilets, turn on the hot water tap, and turn on the heater and then the air conditioner. Flip all the light switches to make sure they are in working order.

**Cleanliness** – If you requested that the house be professionally cleaned, check inside cabinets, cupboards and drawers and behind doors. If you did not make such a request, you are within your rights to request that the home be at least broom-swept before the close of escrow.

**Exterior** – Check the following systems to ensure they are in working order: irrigation, pool or spa pumps, heaters, timers and lights.

**Unfamiliar pool, spa and irrigation systems** – can be confusing to new homeowners. Ask that the sellers leave all the instruction manuals for you. If they neglect to do so, ask your agent to retrieve them from the seller.

**Miscellaneous** – Sometimes small but vital items are overlooked. Make sure that the automatic garage door openers were left on the property. If the mailbox requires a key, ask your agent to ensure that it will be available with the house keys when you close escrow. The seller should leave gate codes, security system codes and manuals and instructions for any custom features.

Settlement Statement

The Real Estate Settlement Procedures Act (RESPA) dictates that the parties to the transaction must receive the settlement statement (typically called the HUD-1) within 24 hours of closing. This statement is an itemized accounting of all charges imposed on both parties. These charges include the real estate broker's fees, your earnest money deposit, appraisal fee, transfer taxes, loan payoff and more. The statement clearly outlines from whom the money is taken and to whom it is credited.

Go over the HUD-1 with your attorney or real estate agent, checking it carefully for errors.

Closing

Who appears at the closing varies by region. Typically, the buyer and seller and their agents or attorneys attend the closing as well as the escrow agent and a notary public. Sometimes the lender will send a representative.

What to Bring to the Closing

The escrow officer can answer any questions you may have about what documents to bring to closing. The following list does not cover everything, but here are the basics of what you will need to bring with you:

■ Photo identification for each party to the purchase

■ Homeowner's insurance policy and proof of payment for it

■ Certified check for all monies you are required to pay at the closing

Be prepared to sign more papers than you ever imagined it was possible to sign. When all is said and signed, however, you will be handed the keys to your new house. Welcome home!

### L ittle Governments: The Homeowner's Association

The phrase "homeowners association" may sound innocuous enough to some, but it sends shivers down the spines of many. In books and movies this group of homeowners is typically portrayed as power hungry, meddling and suspicious with a special knack for invasion of privacy. Think Big Brother meets Mussolini and you'll have an idea of this group's image.

Is this reputation deserved? It's hard not to believe the rumors while being bombarded with news stories about homeowners associations (HOAs) that force residents to take down American flags, or those that seize homes when residents are late paying their dues.

Homeowners associations are like "little governments," according to Jackie Faye of NBC News. Like all governments, they exercise the power granted to them in one of two ways: with benevolence or dictatorially. Perhaps Abraham Lincoln foresaw the rise of homeowner associations when he claimed that "... if you want to test a man's character, give him power."

So, Who are These HOA People?

A homeowners association is actually a legal entity whose purpose is to manage a group of housing units, or a common interest development, as they are known in some regions of the country. These developments may be single-family dwellings or condominiums. The decision-making body of this entity is typically known as "the board," and there may be committees as well. The HOA board is composed of homeowners who act as volunteers, and are generally chosen in annual elections open to all homeowners within the community.

The reasons for volunteering to sit on a homeowners association board are varied. Some homeowners want more of a say in how the HOA money is spent, others are concerned with maintaining home values.

Homeowners Association Duties and Responsibilities

Although it seems as if homeowners association boards have unlimited power to do as the members wish, most states have laws that govern what they can and cannot do. Yes, they sometimes overstep these laws. While duties and responsibilities vary across the country, here are some that are common to most homeowners associations:

■ Paying taxes on the common areas

■ The enforcement of the HOA rules, such as the bylaws and the Covenants, Conditions and Restrictions (CC&Rs)

■ Creating the association's budget

■ Creating rules for the use of the common areas

■ Disciplining homeowners for violations of HOA rules

Buying a Home in a HOA-Governed Community

The homeowners association must supply the homeowner with certain documents when there is an offer to purchase the property. The seller then gives these documents to the buyer. There is usually a charge for the copies and the seller typically pays this fee.

HOA doc packages are usually quite thick and may be extremely complex and boring. It is essential, though, that you read and understand everything in them. If you need help, contact an attorney. Once you own the home, you are obliged to follow the homeowners association rules.

Some items to pay close attention to in the CC&Rs include:

■ Pet policies, if you have pets

■ Parking rules, for yourself and guests

■ The rules and restrictions for the use of on-site amenities

■ Landscaping rules

■ House color and exterior decorations allowed

■ Restrictions on the construction of outbuildings, such as sheds and gazebos

■ The rules regarding leasing your home

Look at the homeowner association's budget:

■ Does the income cover the costs? If not, why?

■ How is the money spent?

■ Does the reserve account hold enough money for emergencies?

Check out the board's meeting minutes:

■ What type of issues does the board typically face?

■ What type of actions have they taken against homeowners?

■ Have they talked about increasing fees or any upcoming special assessments?

Read over the governing documents, or bylaws, to determine how and when elections are held, how to sit on the board and the length of board members' terms.

One of the most important aspects of purchasing a home governed by a homeowners association involves determining if there is pending litigation. Sometimes the HOA is suing the developer or a homeowner or the HOA is being sued. If there is litigation pending, you may not be able to get a loan, so make sure you get all the information you need about this.

Buying a home regulated by a homeowners association has advantages, such as security and the regulation of the area's appearance and noise levels. The drawbacks, on the other hand, are numerous and include the additional monthly outlay for homeowners association fees and the sometimes-meddlesome members of the HOA. Do your homework when considering purchasing into a common interest development governed by a homeowners association. Investigate it thoroughly to make sure you don't end up in a HOA horror story.

### S hould I Buy a Home With Mold, Foundation Issues or Other Problems?

In the wake of the foreclosure crisis the real estate market is flooded with handyman specials, fixer uppers and REOs offering big profits for investors and huge discounts for first-time homebuyers. However, there is a huge difference between houses needing a new coat of paint and those with scary structural issues.

Will you find gold buried among the feast of foreclosures on the market, or will you be needing a hand to help dig you out of the money pit you invested in?

Hidden Costs or Buried Treasure?

There is a big difference between buying a home with cosmetic repair issues and buying a house with problems that threaten the integrity of the structure. Cosmetic issues can mean landscaping, painting, upgrading appliances or replacing flooring. These homes can often be easily turned around with a little sweat or gradual improvements over time. Structural problems on the other hand can often turn into far more expensive projects than planned. Plus, while there may be big profits to be had from these types of homes, most lenders will not consider loaning on them until problems are resolved.

In some cases sellers will remedy these problems before selling in order to enable buyers to get a home loan. However, if a home inspection isn't done and they creep up on you after closing, you may be unable to sell the home. So make sure you know what you are getting into.

Let's take a look at some of the most common structural problems and what you need to know about them.

Should You Buy a House With Foundation Repairs?

Surprisingly, foundation issues aren't always as scary as they sound. In many areas of the country foundation problems are commonly found in many homes. This is especially true of Texas where some real estate investment companies have made millions buying up homes with foundation problems they know can easily be fixed.

Cracked walls, sagging roofs, and dips in the flooring can all suggest the foundation needs to be looked at. The great news is that in many cases professionals can remedy the problem in as little as one day.

The cost of rectifying this can vary greatly and depends on how many "piers" are required.

So, should you buy a house with foundation repairs? Be careful, don't write it off, but always get multiple quotes and compare the number of piers, prices and length of warranties.

Buying a Home with Mold in it

Mold can be extremely common in some areas, especially those which have been affected by flooding and hurricanes as well as in tightly built new homes.

Mold is no joke. Toxic mold cannot just cause skin rashes and congestion but serious breathing difficulties, especially in children and those with weaker immune systems. Mold can often be detected visibly and by smell, though not always. Despite the fact that home sellers are required by law to disclose such issues, considering the damage it can do, you shouldn't buy a home without conducting a mold inspection. These inspections and any required remediation should be done to EPA (Environmental Protection Agency) standards and specifications.

Should I Buy a House with Powder Post Beetles?

Powder post beetles, like termites, destroy wood in homes, and over time can do significant damage to the structure. They get their name from the fine powder that they leave when boring into wood. As with termites, there can be a big difference between buying a home where there is a live infestation versus old damage that has already been treated. Your pest inspector should be able to recommend the appropriate solution.

Treatment for powder post beetles is relatively simple and can be handled by a local pest control company. Treatment protocols range from spot treatments with liquid insecticide to tenting and fogging the entire home. However, wood may still need to be replaced.

Homebuyers shouldn't be too concerned about buying a house with these types of issues because, if you are buying in areas like South Florida, you may have an incredibly hard time finding a home that hasn't ever had termites at some point or other. Normally the seller will agree to tenting the property before buying in order to satisfy lender requirements.

What Else Should I Be Looking Out for When Buying a Home?

There are two other serious issues homebuyers should be on the lookout for to avoid making painfully expensive mistakes. The first is Chinese drywall. This toxic drywall has been found to cause severe health issues in short periods of time and goes on to infect many other materials in the home. Remediation is incredibly difficult, and it is likely that – in addition to replacing drywall, wiring, pipes and anything else in contact with it – it will need to be ripped out. Real estate companies like Carney Properties in Cape Coral, Florida recommend avoiding these homes altogether and refuse to associate themselves with them, even if they have been remodeled.

Roofs can be incredibly expensive to repair. A home needing a few shingles replaced is one thing, but brand new roofs easily run into the tens of thousands of dollars with waiting lists that can be years long. Plus, there may be hidden water damage within the home. If you are buying a home that may need a new roof in the next five years, make sure to get multiple quotes, and find out how long those quotes are good for and how fast the work can be done.

Remember, a few bug bites can be easily treated, and foundations may not be as scary as you expect, but you don't want anything falling in on your head or invisible toxins killing you in your sleep.

### H ome Inspections 101

Shopping for a new home is both fun and frustrating. When you finally settle on your dream home and the seller accepts your bid, the rest of the purchase process brings yet more frustration and stress - especially when it comes time to have the home inspected.

A quick word here about your purchase agreement. Most savvy agents will place a contingency in the agreement that the sale is predicated on an acceptable home inspection report. Never take for granted, however, that your agent has done so. Make sure the contingency exists in the contract.

The home inspection is one of the most important aspects of the home buying process. A variety of very costly problems may not be apparent to you but will be to the inspector's trained eye. The home inspection is your protection against these flaws. Whether the news from the inspector is good or bad, its value is incalculable.

What Exactly Is a Home Inspection?

While it's important to understand what is covered in a home inspection, it is equally as important to be clear on what is not covered. The home inspection doesn't offer insurance against future failures, it merely points out apparent problems at the time of the inspection. A home inspection is not an appraisal of the home's value nor will the inspector offer an opinion of such. The home inspector does not verify whether the home or improvements are up to code.

A home inspection is a visual investigation of a house's physical structure and systems with a keen eye on safety. Note a key concept here: "visual." The home inspector can't tell you what lies behind the walls or under the floorboards - she only inspects what she can see.

These inspections may turn up problems that require immediate attention, such as faulty heater venting. Keep in mind that all homes have problems, so expect a few to pop up on the inspection report. A typical home inspection covers the following:

■ Central air conditioning and heating system

■ Doors and windows

■ Electrical system

■ Heating systems

■ Interior plumbing

■ The basement

■ The foundation

■ The roof, attic and any insulation visible

■ Visible structure of the home

■ Walls, ceilings and floors

Any problems found during home inspections are detailed in the home inspection report. Inspectors may recommend further evaluation of problems.

What Happens if The Home Has Problems?

First, don't panic. Identifying the trouble spots in the house is a good thing. Obtain a bid from a licensed tradesperson to determine the cost of fixing any problems. With this information your real estate agent can reopen negotiations with the seller, requesting that either the problems be rectified before the close of escrow or that the seller pay for the repairs at closing. Not all sellers are willing to negotiate on repairs. In this case, you need to make a decision: Either pay for the repairs yourself or walk away from the deal.

### H ome Inspections save Buyers Money

When you see that dream home with the unbeatable price tag, you may already be more than sold on investing your life's earnings on it.

But don't rush into it.

At least not until you can have an objective pair of eyes scan the property so your dream doesn't turn into a nightmare.

Buyers' home inspections ensure that a professional inspector has offered you an objective visual survey of your new home from the roof to the foundation.

Getting a home inspection also means having that peace of mind that you won't have to fork out thousands of dollars on repairs after you move in. According to the United States Department of Housing and Urban Development (HUD), home inspections offer buyers an unbiased evaluation of the physical condition of the home, such as the property's structure, construction and mechanical systems. They also identify items that need to be repaired or replaced and estimate the remaining life of major systems, equipment, structure and finishes.

"It is really important for buyers to be informed about the condition of the property and any potential unforeseen concerns," said Peter Muehlbronner, president and owner of Allstate Home Inspections in Philadelphia. The inspection is not an appraisal or geared toward cosmetic issues, but structural and mechanical concerns.

Last year, nearly three in four American homeowners said that having their new home inspected helped them avoid potential problems, according to a poll by the American Society of Home Inspections. Among those surveyed, 64 percent said they saved a lot of money in the long run because of the inspections.

House Inspection Checklist:

■ Before hiring a professional, examine the property yourself for any visible potential disasters such as drainage issues, leaky roofs or signs of water entry into the foundation or basement, Muehlbronner said.

■ Check the age of appliances, the heat, ventilation and air-conditioning systems and the water heater.

■ Examine the age and condition of the electrical system, and check for water pressure and drainage speed.

■ Ensure that the seller's disclosure is complete and accurate.

■ Hire a professional, Muehlbronner said. Otherwise, you may not have any standing in your requests for repairs.

How to Choose a Home Inspector

■ Hire an inspector who's affiliated with the American Society of Home Inspectors.

■ Consult family, friends, co-workers, real estate agents and neighbors for their recommendations on an inspector they trust.

■ Interview a few inspectors before deciding to hire someone. Check their credentials and offer them information on the property.

■ Ask the inspector about his or her professional history. Ask, as well, for the names and phone numbers of former clients. Inquire if the inspector specializes in residential real estate. Background in construction and engineering is a bonus, but doesn't replace experience in home inspections.

■ Ask for samples of other reports he or she has compiled.

■ Choose an inspector who's committed to continued education, training and certification in his or her area of expertise. This is important if you are buying a historic home or a much older house.

■ Ask for a firm price upfront. You should not be charged additional fees on site.

■ Plan to attend the home inspection. It typically lasts anywhere from 2.5 to 4 hours, Muehlbronner said.

Cost of Home Inspection

Depending on the geographical location, age and size of the home, buyers' home inspections can cost you anywhere from $300 to $500. The cost doesn't necessarily reflect quality, according to HUD. The agency doesn't regulate home inspection fees, so don't be surprised if the quoted fees vary dramatically for different inspectors you interview.

### T he Nuts and Bolts of the Home Inspection Report

A good home inspection report is a valuable resource – not only during the home buying process, but also as a guide to maintenance when you own the home. Home inspection reports can be difficult to decipher, but it is vital that you thoroughly understand everything in the report and the inspector's recommendations.

Types of Home Inspection Reports

Home inspectors produce different types of reports. Some home inspection reports are checklists pertaining to specific areas of the house. Some are narratives, detailing what the home inspector found as he or she went through the house. Some are written in plain English, while others use symbols and icons that the reader has to decipher.

No matter the format, a home inspection should provide a detailed description of the home's features. "Damage to door lintel" isn't as descriptive (or as useful) as "some scuff marks on door lintel with splintering on left side," for example.

Some home inspectors tend to give a home's negative features more attention than its positives. Make it clear you want the home inspection report to list the good along with the bad. You'll be better able to judge the state of the home if the report includes the positives as well as the problem areas.

Who Reads Home Inspection Reports?

Homebuyers aren't the only people who read home inspection reports. Lenders may require a home inspection report in addition to the appraisal. If you decide to exercise your right to walk away from the deal due to the findings of the inspection, you'll need to share the report to get your earnest money deposit back.

Depending on state law, real estate agents representing both buyers and sellers sometimes receive a copy of the report. Depending on negotiations, buyers may allow the seller to also see the report.

Evaluating Home Inspection Reports

If at all possible, accompany the home inspector during the inspection: This allows you to ask questions and get a better sense of the condition of the house than if you rely on the written report alone.

Questions to consider as you look over the home inspection report include:

■ Are the problems with the house reflected in the asking price?

■ Are the problems significant enough to rule out buying the home?

■ Does a problem require immediate attention or can it be fixed in the future?

■ Do you need more information on a problem?

■ Is a problem minor or major?

Often, reading a home inspection report generates more questions than you had to begin with. Your home inspector should be willing to provide you with more information on the nature of specific issues.

Home Inspection Reports After a Sale

Hold on to your home inspection report after you purchase a house. A thorough report may contain up to 20 or more pages, detailing items that need adjustment, service or cleaning. The summary punch list, detailing the inspector's concerns, is a valuable reference for future home maintenance needs.

### E verything You've Always Wanted to Know about Home Appraisals

The seller of that home you are about to purchase no doubt thought long and hard about how much to ask for it. She consulted with her real estate agent who spent some time poring over statistics and the prices of recently sold homes in the area to come to a rough estimate of the home's value.

You made your offer based on what you felt the home was worth. The truth is, neither yours nor the seller's opinion matters. The home is worth what the appraiser says it's worth, at least as far as your lender is concerned.

Who is the Appraiser?

The real estate appraiser is a specialist in estimating the current market value of real estate. Appraisers typically specialize in commercial property, land, natural resources or residents.

Residential appraisers usually need a bachelor's degree, although some states will accept an associate degree. State licensing requirements vary, according to the Bureau of Labor Statistics.

Furthermore, loans sold to Fannie Mae and Freddie Mac are required to rely on appraisals performed by individuals who are not only knowledgeable about the area in which the house is located but who have access to local records regarding recent sales in the area.

The Appraisal Process

After you have signed the purchase agreement, but before your lender will agree to give you the money to purchase the home, it will order an appraisal.

The appraiser will visit the home and take measurements of the exterior. Later, she will use these measurements to make an estimate of the square footage of the interior of the home.

The appraiser also checks the home for obvious major concerns – although he does not examine the home as the home inspector does – and makes note of any unique characteristics.

To determine the current market value of the home the appraiser may also:

■ Use public records to verify the legal description of the property

■ Photograph the home

■ Study comparable homes in the area which have recently sold

■ Prepare a written report on the value of the home

Appraisers have a variety of resources from which to pull information. These include:

■ The local Multiple Listing Service (MLS) database

■ Tax assessor records

■ Courthouse records

■ Local real estate agents

■ Appraisal data aggregators

Other factors play into the appraisal process and may be considered by the appraiser. In fact, new laws require that, if an appraiser includes a foreclosed home among the comps, he must consider the home's condition and make adjustments to the subject property's value accordingly. Here are a few other factors that may influence the appraisal:

■ How the local economy is impacting the market

■ The location of the house

■ Problems with the house

■ How the home's appearance stacks up to that of comparable homes

■ The home's upgrades

■ Foreclosures in the neighborhood

■ New developments in the area, such as a landfill, electric company substation or park, and their impact on value

A Low Appraisal Doesn't Have to be a Deal Breaker

While most experienced real estate agents come close to the appraiser's figure, there are times when the appraisal is lower than what the buyer has agreed to pay.

At this point, the buyer must choose from one of three options:

■ Request that the seller lower the price

■ Request that the seller challenge the appraiser's price determination

■ Come up with a larger down payment

■ Walk away from the deal

The first step to take when faced with a low appraisal is to check the appraiser's work for errors or omissions. Make sure that the square footage is correct, that the number of bedrooms and bathrooms is accurate. Ensure credit was given for any improvement that adds significant value.

Then check the comparables the appraiser used. Your agent can supply you with the MLS printouts for these homes so that you can check the appraisal for accuracy of square footage, bedrooms and bathrooms, age and other items.

If both real estate agents agree that the appraiser used faulty or insufficient information to arrive at the value, then the seller should dispute the appraisal by contacting the lender.

If you are selling your home, it's important to heed your real estate agent's advice on price. If you overprice the home it may not appraise and you may lose valuable time as well as a good buyer.

### A lternatives to the "F" Word – How to Avoid Foreclosure

Delinquent: No longer just a word to describe unruly adolescents. Full-grown responsible adults now bear the scarlet letter because, for one reason or another, they can't make their mortgage payments.

Since the events of 2008, it doesn't take a genius to figure out why someone may not be able to make his house payments, especially if that person lives in one of the cities hardest hit during the recession. The foreclosure poster-child states of Nevada, Illinois and Michigan were in the news daily, with tales of residents losing their jobs, construction industries stalling and factories closing.

Although the recession is considered officially over, unemployment numbers are still high, and, without a job to help pay the mortgage, homeowners are still losing their homes to foreclosure.

If you are among those Americans facing the prospect of foreclosure, don't panic. There are alternatives to consider and there is help out there.

Forbearance

Forbearance is an agreement with your lender that you will catch up with all of the payments, late fees and interest that you owe by making larger payments for a period of time. As you can see, this method of foreclosure avoidance won't work for the unemployed unless he or she has significant cash reserves or can borrow the money.

Some lenders offer a special forbearance for homeowners who can prove that the situation that is causing them to fall behind on mortgage payments is temporary. These special forbearance agreements may suspend your payments for a period of time and then require you to begin making payments that include missed payments, late fees and interest.

While lenders would like you to believe otherwise, a forbearance agreement does not remove your home from the foreclosure process, but suspends the foreclosure until you are current on your loan payments. One late payment or one reduced payment amount could not only cause the foreclosure process to resume, it may even accelerate, according to real estate lawyers with McFarlin, LLP.

Deed in Lieu of Foreclosure

Many real estate experts suggest that if you are unable to cure the mortgage default and you owe more on your home than what you can realize from the sale of it, a short sale is the next best alternative.

Not so fast. When two methods will get you results, many folks will choose the easier one. A deed-in-lieu of foreclosure agreement is far easier than a short sale and has an identical outcome. In fact, a savvy attorney may even be able to help you get more than just a free ticket out of your home.

A deed-in-lieu of foreclosure agreement is one in which the lien holder agrees to take the deed back in satisfaction or partial satisfaction of your obligation, in lieu of foreclosure.

Government entities, such as the FHA and the Veteran's Administration, have their own deed-in-lieu programs with various requirements. Typically, these programs and lenders in general require that the property be lien-free before they'll accept it back.

Why would a lender agree to enter into this type of an agreement? Since this arrangement is quicker and less expensive than foreclosure, according to Gary Neustadter, Santa Clara Law professor, a lender is more likely to be amenable to the deed-in-lieu agreement if it believes that the home is worth close to market value or to the amount of your debt.

Short Sale

If what you owe on the house exceeds what you can sell it for, you may qualify for a short sale. The lender must agree to a short sale and has certain qualifying criteria.

Although the short sale process is known for being protracted, new rules set forth by the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac's regulators, should shorten the process significantly. These new rules require that the lender review and respond to a short sale request within 30 days. Furthermore, the lender must reach a final decision on whether to allow a short sale within 60 days, supplying the borrower with a weekly update on the status of the deliberations.

As the borrower, you will be responsible for marketing and selling the home for your lender. While it seems like a great way to avoid foreclosure, keep in mind that you will receive none of the proceeds from the sale and are basically doing all the work to sell someone else's home. In the end, your FICO® score takes the same hit as if you had gone through a foreclosure.

Loan Modification

A loan modification is a means to refinance your mortgage or extend its terms. One of the most popular modification programs is the Making Home Affordable (MHA) program, offered by the U.S. Departments of the Treasury and Housing and Urban Development (HUD). A HUD-approved foreclosure avoidance counselor can provide you with information and program requirements.

Bankruptcy

If you have exhausted all of the aforementioned foreclosure alternatives, you may want to consider declaring bankruptcy. While a bankruptcy may not stop the foreclosure process, it will stall it for some time.

Upon filing a Chapter 7 or Chapter 13 bankruptcy the court issues an order called a "stay." This stay prohibits your creditors from continuing to pursue you for payment of your debts. Creditors include your lender who must postpone a pending foreclosure sale while the bankruptcy is pending. This time period varies, but it usually averages between 90 and 120 days.

Your lender may request what is known as a "motion to lift the stay." If granted, the lender may then proceed with the foreclosure.

There are numerous nuances and pitfalls as well as benefits in filing for bankruptcy. Your attorney is your best source of information and assistance.

Jingle Mail

Jingle mail is a term that lenders use to describe all the house keys they receive in the mail from borrowers who decide to simply walk away from their homes.

While this isn't a way to avoid foreclosure, it is a way to get out from under the burden that the alternatives pose. Of course, if you live in a state that allows it, a deficiency judgment may rear its ugly head as far as five to seven years down the road.

There is plenty of help out there for Americans facing foreclosure, and there are plenty of scams as well. The U.S. Department of Housing and Urban Development offers a wealth of information and free counseling to help you decide just which alternative is right for you. Contacting them is a wise first step

### T he Basics of Mortgage Loan Modification

Some swear that loan modifications are the best thing since the invention of the Starbucks Frappuccino. For many others, they have turned out to be more like those cancer-causing artificial sweeteners, which have actually done a lot more harm than good. So what's the deal?

What Is A Home Loan Modification?

Mortgage modifications are actually not a new invention. In fact they were used to control foreclosures back in the Great Depression. Loan modifications are used to alter the terms of a home loan in order to make them more affordable for borrowers. This can be done by lowering the interest rate or principal balance, extending the term of the loan or a combination of the three.

For mortgage lenders, modifying home loans to a level where borrowers can keep current and will choose to remain in their homes instead of defaulting and just walking away is a common sense move. Unfortunately, in many cases greed has clouded their judgment and caused them to pursue foreclosures instead. Now it seems that many lenders are recognizing the folly of their ways and are approving more loan modifications. However, borrowers must be cautious and should remember that in many cases these lenders are partly responsible for the situation they are in. In other words, it isn't much different than buying a car that is a total lemon and then going back to the same dealer to get another one or trusting them to fix it.

However, the bottom line is that for homeowners in trouble and who want to stay in their homes, loan modifications may be the only option.

Benefits of Loan Modifications for Borrowers

■ Get out of default and be able to stay in your home.

■ Current late fees may be waived.

■ Loan interest rate may be reduced as low as 2 percent.

■ New housing payments will be less than 31 percent of gross monthly income.

■ Helps to avoid the serious financial impact of an actual foreclosure.

Who Is Eligible For A Loan Modification?

While the following basic criteria remain true pretty much across the board, it is important for homeowners to realize that there are differences between the governments' programs and those of individual lenders who have created their own loan modification programs.

In order to qualify for a home loan modification you must:

1. Be able to prove financial hardship which has limited your ability to keep up payments.

2. Have some form of income to pay the new, modified mortgage payments.

3. Currently have a monthly housing payment greater than 31 percent of your gross monthly income.

Loan Modification Issues

While loan modifications certainly promise to be of huge help to homeowners who can get them, the process has certainly often been like navigating a mine field for those who have sought them out. Despite the fact that some sources point out that 60 percent of successful loan modifications have been facilitated by independent third parties, the government's crackdown on loan modification firms has virtually regulated them out of business.

Yes, homeowners need to be cautious about anyone who asks for upfront fees without guarantees and even some law firms which are operating with questionable ethics. However, the very lenders which the government is urging homeowners to contact and deal with directly do not have a great track record either. In fact many homeowners have found that, after months of negotiations and holding on the phone, they are either offered inferior modifications, which put them in a worse position, or are foreclosed on anyway. Of course this was probably just an oversight due to head bankers being off on vacation to play golf and to help committees dream up other programs that sound great, but it doesn't result in them losing any money.

Your Loan Modification Options

1. Call your lender directly and try to negotiate.

2. Call the government backed Hope for Homeowners Hotline at 888-995-HOPE for free help.

3. Retain an experienced real estate attorney to fight on your behalf.

According to the Wall Street Journal's Market Watch, the Hope Now alliance has actually succeeded in securing over 5 million loan modifications nationwide. However, having expert legal representation of your own seems like common sense, especially given that fact that you only have one shot to get this right and save your home. Unless, of course, you really fancy your odds against your lender's million dollar legal department.

If you do not qualify for a home loan modification, then there may be other options available to you, including bankruptcy or a short sale. The most important thing is deciding to be proactive and take positive action now.

### W here to Get Loan Modification Help

Struggling to keep up with home loan payments? Wondering where to get real help with a loan modification without being taken advantage of, and what you should really expect from the process?

Working with Lenders to Get a Loan Modification

If you are struggling financially and are afraid that you may fall behind on payments, or you have just fallen behind, then it is a good idea to try and stay in contact with your mortgage lender to see what options they can offer you. It may not always be a pleasant experience, but you may be surprised at how lenient they can be depending on your circumstances. If they try to play hardball and make threats, you can always hang up. Try it, it feels great.

Don't just jump on the first solution you are offered, unless it means a nice payment vacation. There may be more appealing options out there for you, and you should never agree to new terms that you know you will end up defaulting on again in a few months.

If you have set your heart on a loan modification, and you believe you qualify, be ready for a testing experience. It won't be easy, but saving tens of thousands of dollars on your home loan and saving your home could make it the highest paying hours you will ever see in your lifetime. Just be prepared for hours of being on hold and being transferred to one imbecile who can't help you after the other. Try to remember it's not their fault, they are just trying to pay their own mortgages. However, if you are strapped for cash and planned on staying in this Friday night anyway, then it could be more entertaining than watching yet another round of reruns on TV. Well, at least more productive... eventually.

Be prepared – in case you do actually make it through to someone who can help you – by having all of your financial information on hand. But know that whatever details you do provide could well be used against you too.

Quick Tip: Request the Loss Mitigation department, and try to get through to the "Executive Offices" or "Offices of the President" for someone who can actually think for themselves and make decisions.

For those who just don't trust their mortgage lenders, or whose lenders refuse to help, it is time to seek out loan modification help from a third party.

Counseling, Dodging Scams & Third Party Loan Modification Companies

There are three choices for those who are determined to keep their homes and who desperately need a home loan modification in order to make that happen.

Hope Now Counseling

No this isn't therapy, though you may well need it by the time you are done with the loan modification process. The Hope Now Alliance was put together by the government, investors, lenders and counselors to help struggling homeowners navigate the loan modification process and avoid foreclosure. You can find a list of Hope Now approved counselors who offer free help and guidance on the official website. The first downside here is that these counselors really do not represent you, and will not go to bat for you as other third parties may. The second downside is that some of the options being promoted may be even more risky. In particular, avoid being pressured into taking out a second loan to cover your delinquent payments, which will just put you under more financial stress and increase your monthly obligations.

Third Party Loan Modification Companies

The government has repeatedly warned about the dangers of working with loan modification companies and has done its best to regulate them into extinction. Independent loan modification companies are highly motivated to help you obtain a mortgage modification, but unfortunately it has become incredibly difficult to distinguish the good from the bad. Avoid those requiring large upfront fees, and never sign the title to your home over to anyone under any circumstances, no matter what they promise. You are probably better off taking that money to Las Vegas and trying your luck on the slots or simply using it to rent a new home.

Foreclosure Defense Attorneys

While you may certainly not enjoy dealing with attorneys under any other circumstances this is one of those times you may be really glad to have one on your side. Your lender has a whole army of attorneys to send after you so it only makes sense to come prepared. An experienced real estate attorney knows the law and can proactively go to battle on your behalf and fight for the best possible loan modification terms. It may not be free, but being able to save your home is priceless, and the difference in savings between what your lender is likely to voluntarily offer and what an attorney can achieve should mean it pays for itself. The other advantage here is that if all else fails, your attorney will be well positioned to help you stall foreclosure proceedings while you explore other options.

Tempted to Just Curl Back Up in Bed?

Acting to avoid foreclosure is absolutely essential for anyone who values their future, even if the situation feels hopeless right now. There is a brighter future ahead, but you need to be willing to fight for it.

### W hat are the Disadvantages of a Home Loan Modification?

Home loan modifications are perhaps one of the most controversial topics of the last five years. So, could a home loan modification be just what you need to save your home and help you to sleep at night – or is there any real upside at all?

We have all heard about the plethora of loan modification scam companies out to strip homeowners of their last dollar and steal the deeds to their homes. The question is, even if you can dodge these scam artists, what are the disadvantages that no one is talking about?

Time is Not on Your Side

One of the biggest frustrations borrowers have faced when it comes to home loan modifications is the endless delays and months that it can take to get any solid answers from their mortgage lenders and servicers.

Banks and lenders have often notoriously taken months on end to process loan modification applications, leaving homeowners in limbo, continuing to suffer sleepless nights and making the biggest winners out of the foreclosure mess those selling hair dye and anti-aging products.

As reported in the Palm Beach Post, laws were changed last year to force lenders to respond to homeowners within 10 days of a modification request and to deliver an answer within 30 days. Only the loophole remains that instead of approving or denying your request, they can rule your application incomplete, enabling them to stretch out the process just as long as before.

Will Applying for a Home Loan Modification Stop Foreclosure?

Sorry, but the real truth is that despite what some loan modification companies may pitch, applying for a loan modification does not stop foreclosure. In fact many homeowners have found themselves being evicted while still waiting for their lenders to deliver a decision.

Note that in order for you to be able to explore your other options of filing for bankruptcy or selling as a short sale, you will still need to apply for a home loan modification, even if you don't want one. Just don't stop pursuing these other options in the hope of getting a modification before you get kicked out.

Loan Modifications Always Offer Better Terms, Right?

Wrong. The government wants you to only deal directly with your lender or one of their preferred counselors for your home loan modification. However, loan modification companies will tell you that they are inundated with calls from borrowers who are being offered inferior modifications, which actually put them in a worse position.

While modifications are designed to lower a homeowner's payments, what many don't realize is that all of those months of back interest can be added back onto the loan. Plus, those who have enjoyed lower monthly payments because they have been paying their taxes and insurance separately may end up with a higher payment than they expect when they are required to be paid monthly to their lenders. These items may be balanced out by lenders extending loans for up to 40 years, which can feel great now but can mean paying thousands of dollars more over the life of the loan.

Loan Modification is a One Shot Deal

You only have one shot at applying for a home loan modification. Get it wrong and you may not like the choices left on the table. Get one approved that isn't exactly what you hoped for, and you could be stuck with a worse deal in a home, still owing more on it than it is worth, for another five to 10 years.

This is why it is crucial to seek expert help and to educate yourself about the process as much as possible before applying.

The home loan modification process may not be all smooth sailing, but they are well worth pursuing. If you can dramatically lower your interest rate, stay in your dream home, and perhaps most importantly, continue to provide stability and peace of mind for your family, that is truly priceless.

### W hat Do Loan Modification Scams Look Like?

Crackdowns on loan modification scams have been in the news almost as much as the foreclosures they are meant to prevent over the last few years. Are they really going on, and how can you prevent becoming a victim? Or is this all a distraction designed to profit those in power?

Do Loan Modification Scams Really Exist?

The current administration has lead a massive attack on loan modification companies, going far beyond any other witch hunts carried out in decades. Certainly if the government had made half this amount of effort to regulate the mortgage, real estate and securities industries earlier, we wouldn't be in the economic and housing turmoil we are now.

This medieval-style crusade has resulted in unprecedented measures, including a widespread blackout of online advertising by suspected loan modification scams and companies. This, on top of massive regulation, which has virtually outlawed third party loan modification assistance as a business, and has some questioning whether it is really a matter of politics rather than combating a real threat to consumers.

There is no question that loan modification scams do exist out there somewhere even though you have probably met more people who have been victims of other types of mortgage banking and real estate fraud. So, while homeowners should absolutely seek out financial help in the form of loan modifications, it still pays to be vigilant to avoid becoming the victim of scam artists.

How to Dodge the Loan Modification Scam Bullet

While most foreclosure prevention advice focuses on telling homeowners to work directly with their lenders, the reality is this just doesn't always work. Mortgage lenders and servicers are still playing hard ball a little too often and think they can scare homeowners into paying versus working with them. However, for those who don't have the money, it really doesn't matter what the threats are – if there isn't any money to pay, they simply can't.

The Hope Now government-backed alliance is one option which can put homeowners in touch with counselors, though having your own attorney battle for a loan modification for you can work too.

Of course there are no guarantees you won't be taken advantage of by your lender again, but the biggest concern about loan modification scams comes from third party loan modification companies and foreclosure prevention companies who are taking people's money or the deeds to their homes and not providing any help. This doesn't mean that there aren't any honest foreclosure relief or loan modification experts out there. It just means you need to be careful about who you deal with.

When to Run Away:

■ You are asked to sign over the deed to your home.

■ You are instructed to skip mortgage payments in order to qualify even if you can afford them.

■ You are told to make mortgage payments to someone other than your lender.

■ You are asked for large upfront fees without any guarantees of success.

■ You are pressured into signing documents immediately.

■ You are being cold called by hard-selling boiler room types.

What You Should Be Looking For

If you are considering enrolling the help of anyone except for your mortgage lender, it is essential that you take a few moments to do a little research on them. With a wealth of information at your fingertips on the Internet, there is really no excuse not to.

Forget testimonials and the Better Business Bureau, these are too easily tainted. Instead, check out consumer review sites like Yelp, look up licenses with state agencies, and ask for copies of real loan modifications that they have successfully negotiated for others.

How to Sound the Alarm

What if you are contacted by someone who you fear is in the business of loan modification scams, or worse – you believe you are already the victim of one?

There are a number of ways to sound the alarm bells to warn other homeowners and try to force the party in question to rectify the situation. Just make sure that you are above reproach yourself and that you give the opportunity for them to explain. You don't want to ruin someone's life because of a misunderstanding, and you don't want the FBI's spotlight on you if you did anything questionable when you applied for your original loan, whether you realized it was wrong or not.

If you do need to raise the alarm, consider:

■ Filing a complaint with the Better Business Bureau.

■ Reporting the issue to state licensing agencies.

■ Reporting it to your state's Attorney General's Office.

■ Making a complaint with the Federal Trade Commission.

■ Contacting the Federal Bureau of Investigation.

### S hort Payoffs and Other Solutions for Underwater Mortgages

While we all want to think of our homes as sound investments, the changing real estate climate sometimes works to bring a home's value down. If your home loan is now substantially higher than the value of your home, you may wish to refinance or negotiate a short payoff. If you can't qualify for either of those financing solutions, you may need to short-sell your home to avoid foreclosure.

A short payoff, like a short sale, is a process by which the lender agrees to accept less than the amount of the principal value owed on a home loan. But there are some important differences between the two options. A third option – refinancing – might be preferable, depending on your financial position.

What is a Short Payoff?

A short payoff allows you to sell your home for less than you owe the bank. Not everyone can qualify for a short payoff because it requires very good credit. If you can stay in your home for awhile, you might find it easier to refinance with a lower interest rate or a longer term for repayment. For those who must sell and whose property values have fallen, short payoffs are an increasingly common solution. Freddie Mac reports that their volume of short payoffs grew more than 1,000 percent from 2007 through 2009.

If you need to move and the selling price of your home won't pay your full balance due, you can approach the bank to negotiate a compromise. In a short payoff, your credit won't suffer because you'll end up paying what's owed on the home even after it's sold.

Here is how a short payoff on an existing home loan works:

■ Your lender will settle the loan for less than the current amount owed and release the lien on your property.

■ The lender doesn't just forgive the difference; you'll be required to sign an unsecured loan for some or all of the difference owed.

■ Since the lender eventually gets most or all of what was owed, a short payoff option will not harm your credit rating.

■ Because you retain your good credit, you can qualify to purchase another home right away.

Freddie Mac warns against fraudulent short-payoff opportunities. They caution consumers to read the fine print when doing short-payoff paperwork. Additional tips can be found at

Are You a Good Candidate for a Short Payoff?

A short payoff option is not for everyone. A good candidate for a short payoff must have:

■ The ability to pay off the remaining debt

■ Current mortgage payments up-to-date

■ Excellent credit

A short payoff is appropriate when your home has depreciated enough to make it impossible to sell and you don't have the cash in hand to pay off the difference. You'll probably have to show the bank that you've experienced some financial hardship. While some lenders won't accept a short payoff, many will. Home values have dropped nationwide in recent years, so more and more lenders are trying to accommodate homeowners with financial hardship.

Understanding Short Sales

Short sales are another option when your mortgage is substantially higher than the value of your home, you are having trouble making your payments and you want to avoid foreclosure. In a short sale, like in a short payoff, the lender releases the lien in exchange for a payment that's less than the principal balance owed to settle the loan. The Fair Isaacs Corporation, or FICO®, will see this option as a default on your loan and your credit score will drop accordingly.

■ With a short sale, after the loan is paid off and the home is sold, the transaction is complete. The original homeowner does not owe the lender anything more.

■ The price for forgiving part of your debt is that your credit rating will suffer. Expect your FICO® score to drop by at least a hundred points after a short sale.

■ Because it will take time to repair your credit score, you will not qualify for a mortgage for the next few years and will have to rent during this time period.

If you are facing a hardship situation and can't make the payments for a mortgage with an amount much higher than the current value of your home, you may be a good candidate for a short sale. If you don't want your credit rating to suffer and can't commit to paying off the balance owed in a short payoff, you may wish to refinance instead.

FHA Short Refinance Program

When homeowners are underwater on a non-FHA mortgage, they have another option through the Federal Housing Administration (FHA). Since September of 2010, the FHA has offered a refinance program that allows homeowners to get a new loan. Here's their explanation of how a homeowner can qualify:

■ "The homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage."

■ "The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500."

■ "The property must be the homeowner's primary residence."

■ "The borrower's existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower's combined loan-to-value ratio to no greater than 115%."

A few additional restrictions apply, so check with your lender if you think an FHA-insured refinance loan is for you.

### W hat to Do if You Can't Make the Payments On Your VA Loan

Should you fight to stay in your home or throw in the towel and give it up? This is just one of the many questions faced by millions of homeowners who, for a number of reasons, find themselves with not enough money at the end of the month to pay the mortgage.

If you have a mortgage backed by the U.S. Department of Veterans Affairs (VA), and you can no longer make your payments, you have several options.

Your lender should notify you as soon as you go into default. This is the time to work with the lender to bring your loan up to date. Once you've missed two payments, the lender is required to notify the VA. Before that occurs, call a VA Loan service representative for assistance.

Be prepared to tell the representative why you are in default, your current financial situation, who occupies the property and whether or not you wish to keep it.

The VA offers several suggestions on ways to avoid foreclosure:

■ **Sell the home.**

■ **Pay the delinquency.**

■ **Deed-in-lieu of foreclosure** – If you have exhausted all other possibilities, the VA may consider taking back the deed to your house instead of pursuing foreclosure. You may be released completely from future liability, or you may have to agree to repay the government in the future.

■ **Forbearance** – A plan that allows you to repay a portion of the delinquency every month, on top of your mortgage payment. If your financial problems are temporary and you expect them to end sometime in the near future, the lender may suspend these additional payments for a time.

One of the more common ways veterans avoid foreclosure is through a refinance. This is the ideal situation for those who can hang on to the home if the payment is lower.

The VA has a program known as the IRRRL, the Interest Rate Reduction Refinancing Loan. To qualify, the mortgage must be a VA-backed loan and you are not allowed to receive any cash out from the refinance. Fixed-rate mortgage refinances must lead to a lower interest rate, and the VA cautions that an adjustable rate refinance may result in a higher mortgage rate.

Benefits of the IRRRL include:

■ No appraisal is required by the VA.

■ No credit check is required by the VA.

■ You won't need a certificate of eligibility.

■ The refinance can be performed with no cash out of your pocket, rolling the cost into the new loan.

The above are VA-supplied benefits only. Since a lender performs the refinance, you will most likely still be required, per lender standards, to submit credit information and have the home appraised.

The loan amount cannot exceed the outstanding balance of your existing mortgage, plus fees and closing costs. The VA cautions that, depending on your current loan balance, these fees may raise your balance to more than what the home is worth.

For more information on the IRRRL, see the Department of Veterans Affairs website.

Servicemembers' Civil Relief Act

If you are on active-duty and being threatened with foreclosure, the Servicemember's Civil Relief Act (SCRA) may protect you.

Enacted in late 2003, the SCRA mandates that lenders acquire a court order to proceed with a foreclosure on property purchased by military personnel prior to entering the service if it is secured by a deed of trust or mortgage. This protection extends throughout the time of service or up to nine months after completion.

SCRA's provisions apply to both conventional and government-backed mortgage loans. A lender's failure to comply with the act voids the foreclosure or sale. To find out more about the SCRA, visit the Service Members Law Center website.

### W hat Happens After Foreclosure?

A foreclosure is generally about as pleasant as a root canal. For both parties. Don't think your lender wants to foreclose. Lenders almost never want to go through the expense and hassle of going through the entire foreclosure process. But the lender also has a responsibility to its investors to protect their position as best it can, and so foreclosures happen.

So what's going to happen once you receive notice of a foreclosure? It varies. Here are the possible outcomes:

1. You pay the mortgage and keep the house.

This is the happiest of all possible outcomes. The lender is satisfied, and you get to keep your home. Once you pay the note, the foreclosure becomes null and void. Occasionally, people can raise enough cash to pay off the note. But in most cases, people pay off the note by refinancing, one way or another.

Hopefully, if you refinance, you will be able to do it via another bank loan or mortgage company loan at a reasonable interest rate. In some cases, people have paid off their notes with personal loans or high-interest credit card debt, by hocking their cars, or any combination of the above.

Be cautious about replacing a mortgage debt you can't pay with even higher interest debt you can't pay: You could wind up in bankruptcy, despite your best efforts.

2. You pay the mortgage by selling your house.

If you can't refinance, and you can't pay off the loan with other assets, the next best thing may be to sell the house yourself. If you can satisfy the loan with the proceeds from selling the home, all is well. For the moment, anyway. If you don't buy another house soon, and you actually profited from the transaction, you could be hit with a capital gains tax liability. True, if you lived in the house for three of the previous five years (special rules may apply for active duty military), you get a $250,000 capital gains tax exclusion on the sale of a personal residence. Twice that for married couples.

If it's an investment property, on the other hand, you're under the gun, and the clock is ticking.

You have until the moment the lender auctions off the home to sell it yourself. However, if you owe more on the mortgage than the home is worth, you will either need to make up the difference in cash, or get the bank to agree to take a lower amount in a short sale.

3. The bank auctions the home.

Different states have different specific procedures. But generally, whoever made the highest bid and comes up with the cash will get the deed to the property – and all the rights and privileges attaching thereto. You may be able to make a deal with the buyer to stay on as a renter or work out a rent-to-own arrangement.

If you were on the cusp of being able to arrange financing to pay off the loan and just didn't quite manage it in time, you may even be able to purchase the home from the new owner outright – though the new owner will likely expect a tidy profit for his or her trouble!

Tip: Some states provide for a redemption period. This is a period of time, ranging from a few days to as long as a month, in which you can still get your home back, if you can come up with the necessary cash. Speak with your own foreclosure law attorney to find the applicable laws in your state.

4. The bank takes over the property.

Sometimes a lender will go ahead and take over the property outright, choosing to manage the property itself. This happens if there are no reasonable bidders for the property, or if the lender is confident that they can eventually get a better recovery by biding their time and waiting.

Meanwhile, unless the home was a residential property, or the loan was a non-recourse loan (meaning the loan is secured only by the underlying property itself, and the lender has no right to file suit to recover any unsatisfied balance), the borrower remains on the hook for the difference between the loan balance and the fair market value of the property.

If the lender actually seizes the property, you can eventually expect the sheriff to come and evict you and your belongings and the locks to get changed. In some cases, though, you may be able to stay on as a renter, as described above. (This is one advantage to using a small, locally owned and operated bank as your lender: You can sometimes strike a better deal with a senior loan officer, or even a bank president, with the authority to approve your proposal, than you can with a low-ranking drone in your bank's foreclosure department.

5. Bankruptcy.

By filing bankruptcy, you can legally bring all foreclosure proceedings to a halt. In some areas, this can take months or years. Meanwhile, you can save as much as you can, and perhaps free up enough cash flow during the process to pay off your mortgage, or at least get current on it. State laws vary a great deal. Chapter 7 bankruptcy – the full discharge of debt – typically requires you to sell off almost everything you have, frequently including your home, as part of the bankruptcy process. Generally, you won't be able to qualify for Chapter 7 anyway, unless you meet the income requirements for your area. Typically, to stave off bankruptcy, at least temporarily, you will file under Chapter 13.

Bankruptcy doesn't eliminate a foreclosure all by itself. But it can buy time to help you bring things to a more favorable conclusion for you, or at least give you some breathing space while the long bankruptcy process plays itself out.

Can I Throw Away My Foreclosure Paperwork?

It's going to be awhile before you want to throw that stuff away, tempting though it may be. Especially if you don't live in a non-recourse state. You can look up your state's specific laws on the HUD website. If your state allows mortgage lenders to pursue you even after the foreclosure for the unpaid amount on your mortgage, they may get a judgment for the difference – and you could be on the hook, subject to collection actions, for as long as 20 years, depending on the law in your state.

If you filed a bankruptcy, keep your papers around for at least 10 years after a Chapter 7, or seven years after a Chapter 13.

If you had debt forgiven on an investment property, there will be tax consequences to that as well. You'll get a 1099 for any debt the lender has to write off, which is generally taxable as income to you. Keep your documents for at least six years after you file your taxes for that year.

So Now What?

So let's say you can already read the tea leaves, and you know you aren't going to be able to keep your home. It's time to batten down the hatches, say experts.

First, you will need to solve the immediate problem of finding a new place to live. With a recent foreclosure on your record, many landlords will shy away, or require a higher security deposit from you to compensate them for their risk.

If you're sending every spare penny into the bank in a hopeless attempt to stave off the inevitable, you may want to rethink that strategy. Keep enough in hand in cash to pay all your move-in costs for the new place.

Tip: Consider the "cash for keys" program. If you have an FHA loan, there are programs available that will give you cash – up to $20,000 in some limited circumstances – to move out and leave the property in good condition. Everyone wins: You have something in "starting-over money," and the lender gets prompt access to a property they can quickly sell or rent.

Cash & Carry

Once a foreclosure goes on your credit record, it could cause an unpleasant chain reaction. For example, you could see banks close your credit card accounts to new charges, or jack up your rate. Why? Once you have gone through a foreclosure, lenders put you in a different risk category. They see a high correlation between people who go through foreclosure and who default on other debts.

What's more, that foreclosure is going to hang around on your credit report like a backache: It will take seven years for it to scroll off your credit report, according to the Fair Isaac Corporation, the company behind your credit score. If you declared bankruptcy to delay foreclosure, you could have that bankruptcy on your record for up to 10 years. However, the good news is that the effects of a foreclosure on your credit score gradually fade with time, and it will gradually get easier for you to get credit, including car loans, credit cards, and even a new mortgage.

**Note:** Not all foreclosures are equal. You can buy again in a few years if you default because of a layoff. But if you do a "strategic default" and simply walk away from your mortgage, don't expect anyone to give you a mortgage again with that on your record. At least, not without a substantial down payment of up to 30 percent, according to Jay Brinkman, the chief economist for the Mortgage Bankers Association.

Professional Consequences After Foreclosure or Bankruptcy

If your job requires you to hold a top secret security clearance, get out in front of it. Promptly notify your supervisor of your foreclosure situation. In some cases, bankruptcy and foreclosure can contribute to a decision by federal officials to revoke your clearance – which can jeopardize your career. But being up front about it will look much better to adjudicating officials than trying to conceal your financial issues. There is less stigma to foreclosure and bankruptcy than there used to be, and so foreclosure is less of a factor in security clearance revocations than it was a few years ago. However, it can still be a problem. If your career depends on your security clearance, be very conservative with your finances, and do what you can to avoid foreclosure or bankruptcy in the first place.

### W hat are the Tax Consequences after Foreclosure?

As if you didn't have enough problems with managing or avoiding a foreclosure itself, you also need to consider tax consequences. The good news is, though, that the tax consequences after a foreclosure aren't as severe now as they have been in the past – especially for those involved in foreclosures on their personal residences as opposed to investment properties.

Are You In a Recourse or Non-Recourse State?

State laws vary. The first thing you want to determine is whether you live in a recourse or non-recourse state, says Rosemarie Vincent, a Certified Public Accountant in Delray Beach, Florida. In some states, the lender can continue to go after you to collect on the unpaid balance of your home, even if you go through the whole foreclosure process. This can create a perverse incentive for the lender to sell the foreclosed home at a ridiculously low auction price – and then go after you for the difference. Potentially, your lender could get a judgment and even get a court order to garnish wages if you aren't proactive in paying the debt.

In a non-recourse state, on the other hand, the lender can only recover the unpaid balance by selling the foreclosed property. They can't go after you beyond that. If they can't recover their investment when they sell the foreclosed property, they must write off the loan as uncollectable.

When a lender writes off a loan, however, it takes a tax deduction for it. This can potentially create a tax issue for you, the borrower. Why? Because debt forgiven by the lender, except if the debt is attached to a mortgage on a qualified personal residence, gets taxed as income.

Here's how it works:

Suppose you owe $150,000 on a house, but you lost your job and fell behind on the mortgage payments. Suppose also that the house was only worth $120,000 when the bank foreclosed. That's all the bank could get on the house at auction. In a recourse state, you could be liable for the $30,000 difference. In a non-recourse state, it's the bank that has to eat the difference.

The Mortgage Forgiveness Debt Relief Act of 2007

A more recent law, the Mortgage Forgiveness Debt Relief Act of 2007, however, allows you to exclude up to $1 million cancelled or forgiven debt from your income – but only on mortgages secured by personal residences. Married couples filing jointly can exclude up to $2 million. Further, the law only applies on debt forgiven between 2007 and 2012. So if you're coming down to the wire, you may want to get the bank to pull the trigger before the end of 2012. Otherwise, unless Congress changes the law, you could be on the hook for a large tax bill.

There are exceptions for those who are legally insolvent. If your forgiven debt exceeds your total net worth, you generally won't get hit with a tax bill on forgiven mortgage debt.

Tax Consequences for VA Mortgage Foreclosures

You military veterans already know... the government never forgets a debt. The reason you don't need a down payment on a Veterans Administration mortgage is because Uncle Sam guarantees the loan. If you default, the taxpayer picks up the tab – and you're liable.

Balances you owe on a VA mortgage loan that goes into default are not typically dischargeable in bankruptcy. That is, you can't make them go away, in most cases, simply by filing under Chapter 7. In fact, if you don't pay the balance of the loan back, it could have indirect tax consequences for you: The IRS may attach future tax refunds until the loan is paid off.

This isn't a huge deal if you never get a refund anyway. But for those of you working W-2 jobs and who have a deduction or two, you may not be able to count on that sweet refund cash every spring!

How To Report Forgiven or Cancelled Debt

If your lender forgives or cancels a balance on your mortgage, they will send you and the IRS a 1099-C form, entitled "Cancellation of Debt," or a 1099-A, Acquisition of Abandoned or Secured Property. When you file your own personal income taxes, you must ordinarily declare the forgiven or cancelled debt on your individual tax return, using Form 1040, and attach IRS Form 982 to your return. Normally, you don't need to fill out the whole form – just lines 1.e. and 2, and in some circumstances, line 10.e.

Tips for Minimizing Your Tax Bill

If you should receive a Form 1099-C or 1099-A, here are some tips directly from Nina Olson, head of the IRS's Taxpayer Advocate Service:

1. Don't ignore the form.

2. Check to see if the amount reported on the forms is correct.

3. Take a close look at the amount shown in box seven for the fair market value of the home that was repossessed. If it's wrong, you will need to contact the lender and have them reissue a corrected form.

4. Try to pull together proof that supports your belief about what the fair market value of your home was at the time it was foreclosed.

5. Third, figure out how much of your home loan was used to buy or fix up your home. This information will help you figure out how much of the forgiven loan is not taxable under the new law.

6. If you were insolvent right before the debt was forgiven, your cancellation of debt is not taxable up to the amount of your insolvency.

7. Finally, don't ignore the problem, warns Olson. If you don't respond with a Form 982, the IRS will assume that you owe taxes on the entire amount forgiven – even though you may not.

For more tax information, see IRS Publication 4681, available on the IRS website.

### C aution: Foreclosure Scams May be Hard to Spot

Like vultures to carrion, scam artists choose people at their weakest point in life to swoop in and try to make the kill. Over the past five years, these fraudsters have turned their attention to distressed homeowners and have come up with a number of ways to separate them from their houses, all under the guise of "foreclosure avoidance."

The scam artists employ a variety of tactics to locate and defraud distressed homeowners, from poring over public foreclosure notices in the newspaper to checking files at county courthouses. Many take the process a step further and advertise their services with seductive headlines screaming that they can stop your foreclosure or modify your loan.

If you're facing foreclosure, the last thing you need is one more stressful event. Let's take a look at some common scams, how to identify if you're being scammed, and how to protect yourself.

The Mediator

This guy, posing as a lawyer or as a representative of a group of lawyers, asks for a fee to negotiate with your lender on your behalf. He promises to get you lower payments or that he'll save your home, in some mysterious way, from foreclosure.

Part of the scam is that, while he will tell you not to contact your lender directly during the negotiation process, you should continue making your loan payments to him and he will handle getting them to the lender.

After paying the up-front fee and several months of mortgage payments, you will never hear from him again.

Forensic Loan Auditors

This is another up-front fee scam (are you noticing a pattern yet?). This scammer promises that the fee covers the cost of a forensic loan audit – the review of your mortgage documents by an attorney – to find loopholes that can be exploited to avoid foreclosure.

According to the Federal Trade Commission (FTC), forensic loan audits do nothing to help you get mortgage relief.

Fractional Interest Transfer

A popular scam on the West Coast, according to the Department of Justice, these scammers promise that for the transfer of a fractional interest in your home they will pursue an automatic stay of the foreclosure.

How they do this is by transferring this interest to another perpetrator that is already in a bankruptcy proceeding. The lender can't foreclose on the home until the stay is lifted. Sometimes, according to the DOJ, each time the stay is lifted, the perpetrator's interest is transferred to another bankruptcy case.

The DOJ warns homeowners that this type of scam constitutes bankruptcy fraud and carries heavy penalties.

How to Know When You're Being Scammed

The United States Department of Housing and Urban Development (HUD) offers the following tips to avoid becoming the victim of a foreclosure scam:

■ Never pay anyone an up-front fee for loan modification or counseling services.

■ Never sign papers unless they come from your lender.

■ Never sign papers or sign over your deed without speaking with an attorney.

■ Never make a mortgage payment to anyone but your lender of record.

Know Your Rights

The FTC has created rules that protect homeowners from foreclosure scams. One of these is known as MARS, or Mortgage Assistance Relief Services, a program that makes it illegal for any company to collect up-front fees. Consumers no longer have to pay these companies until the lender accepts whatever offers the company presents.

Mortgage relief companies, organizations and individuals must also clearly state the following:

■ They must explain their association with the government, if any.

■ They must disclose that their services are not approved by the government.

■ They must tell you that your lender may not approve the changes to your loan that the company promises.

■ It is against the law for them to tell you to cease communications with your lender.

If you're facing foreclosure, both the Department of Veterans Affairs and HUD offer free assistance to help you determine your best course of action.

If you've been scammed, file a complaint with the FTC by calling 877-FTC-HELP or by visiting the FTC's Complaint Assistant website.

### T ips on How to Buy a Foreclosed Home

If you're a fan of late-night television, you've seen the guys hawking their latest get-rich-quick-with-foreclosures program. These infomercials typically feature folks, "just like you," who got stinking rich simply by buying foreclosed or bank-owned properties. It's so easy!

What about the average consumer in the market for a home to live in who just wants a deal? Many of these non-investor type buyers hear the wild tales of deeply discounted foreclosed homes and want in on the action. Discounts make us salivate. After all, this is America; why pay full price when you can get a bargain?

Sometimes, though, bargains aren't all they're cracked up to be. The inexpensive sweater that unravels after the first washing, the generic tomato paste that tastes like aluminum, and the car that smokes and sputters when driven off the discount dealership's lot are all indications that we get what we pay for.

Buying a foreclosed home requires either lots of experience, lots of research or the assistance of someone who has acquired both. This is not a transaction for the novice homebuyer to tackle alone. With that in mind, here is a quick foreclosure home buying guide to help you get started.

### The 3 Ways to Buy a Foreclosed Home

1. Pre-foreclosure Homes

When a homeowner is delinquent on her mortgage payments – typically three to six months – the lender sends her a Notice of Default (NOD). This begins a period of reinstatement wherein she is provided the opportunity to bring her loan current. This is the pre-foreclosure stage and a point when many homeowners attempt to sell the house to avoid a foreclosure on their records. It's also the point at which the late night TV guys swoop in, offering cash to take over the house.

Pre-foreclosure sales are popular with professional real estate investors, as they offer huge discounts off the home's market value. The risks, however, run high, especially for the novice. Research becomes crucial to your success in this type of purchase. Some of the many things you will need to determine include:

■ Are there liens on the property that the seller didn't disclose?

■ How delinquent is the seller on his property taxes?

■ How many individuals are on title and are they all signing off on the deed?

■ Has the seller filed for bankruptcy?

Each one of these considerations carries the risk of either the deal falling apart or putting you at financial risk. A real estate agent who is knowledgeable about the foreclosure process can provide valuable tips and may be your best advocate during a pre-foreclosure purchase.

2. Buying a Home at Auction

After the reinstatement period, if the homeowner fails to bring the loan current, the lender will sell the house at auction. The lender's trustee, typically an attorney, represents the lender at the auction and receives the cash from the winning bidder. The opening bid is usually equal to the outstanding loan balance, plus accrued interest, trustee's fees and other costs of the foreclosure process. If no bids match or exceed the opening bid, the trustee purchases the property, in the lender's name, and it becomes what is known as Real Estate Owned, or REO.

This auction is another situation where the average homebuyer will be competing against seasoned real estate investors with deep pockets. Not only is the competition fierce, but also you are buying a property sight unseen, for the most part. While it's possible to view the home from the outside before the auction, what lurks within typically remains a mystery. The home's history – whether it's been remodeled, the condition of the major systems and whether it's been trashed – generally remain unknown until you take possession.

Which brings up another possible problem. There may be people living in the home and you will have to take over the process of getting rid of them.

3. Buying Bank-Owned Property

Buying directly from the lender is the safest way for the average homebuyer to purchase a foreclosure. While the process is lengthier than the traditional real estate purchase transaction, and fraught with delays and problems, you may still get a decent discount on price. Don't expect huge savings off the list price, though, as bank-owned properties in most regions tend to sell close to asking price, according to the California Association of Realtors®.

Offers to purchase foreclosed homes are generally countered by the lender and usually for price, but there may be other terms of the purchase agreement that the lender takes issue with. While this part of a traditional real estate transaction is usually completed within a week, with the lender as the seller it has the potential to drag on for a lengthy period. After all, there are a lot of people involved in the process on the lender's side, so it plods along at an excruciatingly slow pace.

The Fine Print – Considerations When Buying a Foreclosed Home

While foreclosed homes may seem like bargains, the average homebuyer needs to consider the trade-off for saving money. Some of the problems you may want to consider include:

■ Information about a particular foreclosed home may be at a premium. The folks who knew the house best – the previous occupants – are long gone. The lender most likely knows nothing of the home's current condition nor is it under any obligation to determine flaws and disclose them to potential buyers. "As-is" was never a more frightening phrase than when purchasing the biggest investment of your life.

■ Buying bank-owned property may be a very lengthy process. Dealing with an emotional homeowner in a traditional real estate transaction is a snap compared with the dispassionate lender that owns the foreclosed home.

■ How do you determine how much to bid at an auction when you have no knowledge of the house being sold? Do you have the cash if you're the winning bidder?

While buying a foreclosed home may seem like the best way to get a real deal on your new home, "Foreclosures are more of an investment vehicle than a way to get the home of your dreams," according to Ryan Slack, CEO of Property Research Partners.

### W here Can I Find Pre-Foreclosure Listings?

One man's misery is another's opportunity. That, in a nutshell, sums up the foreclosure process. While the homeowner is typically labeled as "distressed," the buyer, whether at auction, short sale or in a pre-foreclosure sale, is a "savvy investor." There's only one winner here, and it isn't the homeowner.

When a homeowner stops making mortgage payments, the lender sends a Notice of Default (NOD), informing her that the house will go to auction if payments aren't brought current. The day she receives the NOD begins the pre-foreclosure period, which, if the homeowner can't come up with the money to cure the default, typically ends when one of three events occurs:

■ The homeowner sells the house to a third party.

■ The house is successfully auctioned to a third party.

■ The house doesn't bring any buyers and the bank retains ownership. This type of house is commonly known as REO, or "real estate owned" by the bank.

Advantages of Purchasing a Home in Pre-Foreclosure

Pre-foreclosures generally offer the buyer less competition and lower prices than when purchasing at auction or a short sale. Additional advantages of pursuing pre-foreclosure properties include:

■ **Fewer Mysteries:** When you purchase a home at auction you generally have no idea about its condition and typically haven't viewed the interior. When a house is purchased during the pre-foreclosure period, you have the opportunity to view it and perform inspections.

■ **Flexibility:** Dealing with a homeowner is always easier than dealing with a homeowner and a lender. Buying a pre-foreclosure also does away with the need to pay huge chunks of cash upfront or pay cash for the purchase.

■ **Bargain Prices:** Distressed homeowners willing to sell the home during the pre-foreclosure process typically just want out from under the mortgage payment, to avoid foreclosure and to move on with their lives. Houses sold during this time period usually go for what the homeowner owes on the loan, not current market value.

The challenge for the buyer lies in locating these properties. Pre-foreclosure buying opportunities aren't "listed" in the traditional manner, such as in the Multiple Listing Service (MLS). To find these homes requires a search, and there are a number of places to look.

Public Records of Pre-Foreclosure Listings

Foreclosure communications from the lender are considered public information and you can find the documents on file at the county recorder's or clerk's office. Although poring over county records is time-consuming, it is one way to find free real estate pre-foreclosure listings, sometimes before anyone else knows about them. Types of records to search for include:

■ **Notice of Default:** the NOD discussed earlier.

■ **Lis Pendens:** If you live in a state that requires judicial foreclosures, the lender files a lis pendens instead of a NOD.

■ **Notice of Sale:** This is the final notice to the homeowner. It includes the date and time that the house will go on the auction block and provides the homeowner with one last chance to bring the loan current.

Check the Newspaper for Listings

Lenders must publish the NOD in the local newspaper. Many investors use this method to locate distressed homeowners, so you'll have more competition than you will if you research county records. Many larger cities have business journals, so check those as well.

Search Pre-Foreclosure Listings on the Internet

You'll find many companies selling pre-foreclosure lists on the Web. If you're looking for free, comprehensive information, RealEstate.com offers some of the best pre-foreclosure listings available. You can also search for foreclosures, short sales and traditional home listings. Just go to the Find Homes tab, enter the city where you want to search, and select the type of home you are looking for from the drop-down menu.

If you have your heart set on pre-foreclosure investing, set yourself up to succeed. The most important step in the process occurs before looking for pre-foreclosure listings: getting your financing in order. Not only does this allow you to shop only those listings that you can afford, it also gives you leverage with the seller.

### T he Basics of Bank Foreclosure Auctions

One thing you may notice when you attend your first foreclosure auction is just how many professional investors show up. You'll know them by the cell phones stuck to their ears and the laptops spread before them. This is serious business for them. They have deep pockets and the knowledge of when to, as Kenny Rogers once said, "hold 'em, and when to fold 'em." Do you have that knowledge?

For the average guy or gal out there just trying to find a home, attending a bank foreclosure auction is like swimming in shark infested water right before the chum's thrown in. If you don't know what you're doing, you'll be gobbled up real quick.

Yes, buying a foreclosure house at auction can lead to bargains. Not always, but enough of the time that professional investors make a lot of money selling homes that they bought on the cheap, for bigger money.

If you're new to the process and wondering how to buy a house at a foreclosure auction, consider first attending as an observer. In fact, make it a point to do so.

Buying Foreclosures at Auction: Do You Have Nerves of Steel?

You'll pretty much have to if you're planning this foreclosure purchase as a home to live in. While you may have inspected the outside of the house and the property, you have no way of knowing what lies within. Sure, sometimes, just prior to an auction, there may be an open house, but those situations are rare. The chances are good that you'll be bidding on a home whose interior remains sight-unseen.

If the owner is still in the home, or there are tenants, you run into another set of problems. Foreclosed homeowners and soon-to-be-evicted tenants have a tendency to not want anyone – especially appraisers – in the home. Few lenders will loan on a house that isn't appraised.

Then you need to take into account that if you are the winning bidder, you are responsible for evicting the current residents. This may be time consuming, expensive and an emotionally draining task.

Oh, did we mention you'll need lots of money? Typically, you'll need a big chunk of cash when buying a house at auction.

How to Swim With the Auction Sharks

To be successful at a bank foreclosure auction, there are rules you need to follow. Here are four basic to-dos before attending a real estate auction:

■ Know which house you want and when it will be sold.

■ Research liens on the house.

■ Check the condition of the house.

■ Are there tenants?

■ Find out market value for recently sold homes in the area.

Hopefully, you've attended an auction or two as a sort of dress rehearsal. On the big day, know exactly how much you can spend. It's easy to get caught up in the momentum and overbid. Bring a certified check, drawn to the amount specified in the bidding instructions.

One of three things will happen at the foreclosure auction:

■ The auction will be postponed or canceled. This happens frequently and for a number of reasons. Sometimes the homeowner comes up with the money and is able to save his home. If the auction is postponed and you're interested in the house, find out the date of the next auction

■ The property is sold to the trustee. This is the lender's representative, usually an attorney. If the property doesn't sell for at least the opening bid amount, it is purchased by the trustee and becomes an REO (real estate owned) property of the bank and will eventually be put on the market.

■ The property is awarded at auction. Hopefully, you are the winning bidder. If not, another third party bidder wins the auction and the house is sold.

Most real estate experts advise the non-investor, in the market for a home, to avoid foreclosure auctions and to go after the bank-owned properties if you truly feel you need to buy a foreclosed home. Your real estate agent is your best compass when navigating these waters.

### 6  Tips for Getting the Best Deal on a Foreclosure

Not every foreclosure may be a bargain today, but there are amazing deals to be found on distressed properties all over the country.

Still, if you want to make big money by buying foreclosures, or at least be able to brag to your friends about just how great of a deal you got on your new home, you'll want to check out the following 6 pro tips for getting the biggest discounts.

1. Cash is King

Cash buyers definitely have the upper hand in the current market. Cash offers give the REO lender confidence, and it may accept less than if the offer is contingent on obtaining a mortgage. If you don't have the free liquid funds, can you use monies from a poorly performing retirement account, partner up with someone else, or find another way to borrow cash early?

2. Close Fast

The faster and sooner you offer to close the more likely your bid is to be accepted.

3. Track Property Listings

You may not always get your first offer accepted, but that doesn't mean you can't make a deal happen. Keep tabs on REO opportunities when lenders may become more motivated or have more negotiating room.

4. Follow the Path of Least Resistance

If you have the stomach for it, go after properties that others are afraid to take on and that are receiving very few inquiries. Ugly houses and those with structural repairs often offer the biggest discounts and most flexible lenders. Do your homework, get quotes for repairs, and you may find huge profits to be had, while being able to demand your own terms.

5. Negotiate Your Real Estate Agent's Commission

If you are working with a real estate agent, you may be able to negotiate their commission. Even though the REO lender pays their commission, higher fees mean less net profit. If your real estate agent is willing to only give a discount on commission, your bid may beat one where the lender must pay a full commission.

6. Timing Your Offers

Banks have monthly and quarterly figures to report, and making an offer just in time to help pump up those numbers could enable you to get away with more than normal.

### T he Truth about Foreclosures

Whether you own a home and think you can just stop paying your mortgage and escape foreclosure for the next three years without consequences or are hoping to buy a foreclosed home and make off like a bandit with thousands in profits like you see on reality TV shows, you could be in for a rather unpleasant wake-up call!

There are so many misconceptions and so much misinformation out there it is no wonder homeowners are paralyzed with fear, and newbie investors are finding profits more elusive than imagined.

So, if you are facing foreclosure or want to buy one, what do you need to know?

### 5 Common Misconceptions about Foreclosure

1. You Have Plenty of Time

Yes, there have been sensational stories in the news about some borrowers getting away without paying their mortgage for years, but others haven't been so lucky. Remember, these stories make the news headlines because they are sensational and abnormal. In some states foreclosures have been held up to due to scandals and backlogs, but that may now be a thing of the past. Thanks to the recent $26 billion settlement, banks and courts are now once again blazing through foreclosures at record rates. According to a new report by data compiler RealtyTrac, foreclosure filings are soaring as are evictions and bank possessions. The first quarter of 2012 saw foreclosures jumping in almost every city in Florida, ranging from a 37 percent year-over-year increase in Miami to 148 percent leap in Palm Bay. How long it will be before the sheriff comes to drag you out depends on your lender, your state laws and how attractive your individual property is.

2. Your Problems Will end Once the Bank Takes Away Your Home

You can just ride out the next few months without payments and when your home is taken away you'll finally be out of debt right? Wrong!

In many states deficiency judgments are still allowed. This means if you owed $300,000 on your home and your bank takes your home for non-payment and can only sell it on for $150,000, you still owe the difference and they will hunt you down for it for years. So you won't own the home but still owe on it and your credit will take a huge hit.

3. Filing for Bankruptcy is the Fast & Easy Way Out

Bankruptcy may the best option for a select few homeowners, but it is not the answer for everyone. Bankruptcy can have major consequences for decades. Plus, it costs money, and you'll probably have some catching up on your taxes before you can file.

4. Loan Modifications are Always Great

Homeowners should certainly inquire about a loan modification, but go into the process with their eyes wide open. A loan modification could limit your future options, most don't end in principal reductions, and some may even result in owing more on your underwater home or even higher payments. The bad news is you may have to apply for one anyway if you want to sell as a short sale or file bankruptcy.

5. You Can't Sell Your Home Because You Don't Have Equity

This is definitely not true. No matter how much more you owe on your home than it is worth right now, you can still sell, get out of debt and perhaps even receive a huge payout to go buy or rent a new home and furnish it. Banks have been offering borrowers $20,000 or more to complete short sales, while allowing them to sell their homes for hundreds of thousands less than they owe and forgiving the debt.

### 5 Common Misconceptions about Buying Foreclosures

1. All Foreclosure Properties are Bargains

There are incredible deals to be had on foreclosure homes – just make sure you are paying attention to how much the home is really worth today, not what it was worth seven years ago. Just because a property is cheap doesn't mean it is a good deal either. As an investor you still need to sell or rent it out to make a profit. A $1,000 home may sound cool, but a burnout or condemned home may end up being a $30,000 tear down before you can even start rebuilding.

2. All Foreclosures are in Bad Shape

Not at all – many are run-down, neglected or vandalized, but others are in great shape. HUD sometimes begins renovating their REOs (real estate owned or bank-owned properties) before they are auctioned off.

3. Banks are Giving These Properties Away

Banks do need to get rid of these properties but that doesn't mean they make it easy. They still want to make as much as they can on their REO properties. Sometimes this means having to accept terms that you would never consider otherwise.

4. Foreclosure Auctions Always Offer the Biggest Discounts

Auctions have been a great way for real estate investors to buy homes. However, their tremendous popularity has also meant increasing competition. Too many people bidding means shrinking profits, but they are still well worth checking out.

5. It's Too Tough to Get a Mortgage Today

Lenders are a lot tougher about whom they make loans to today, but lower interest rates and cheap homes mean many more individuals qualify than before. For those purchasing homes to fix or flip, Fannie Mae HomePath financing, FHA 203(k) rehab loans and transactional funding all offer attractive options.

While there are many misconceptions about buying foreclosures if you go into the process armed with information and facts, you may find the home of your dreams, or an attractive investment property, at a bargain price.

### D o I Need to Short Sell My Home?

Las Vegans John and Lenore were in trouble. They received a notice from their mortgage lender that their house payments were doubling – from $1,500 to over $3,000 a month. Lenore had just been laid off from her job and John, a professional fighter, worked sporadically. They'd planned on living off their meager savings until John's next bout or until Lenore found other work. With the change in their mortgage, however, they'd be wiped out within just a few months.

To add insult to injury, their real estate agent told them the house was worth $71,000 less than what they owed the lender. The clincher? The bank refused to work with them on restructuring the loan.

John and Lenore were on the leading edge of the mortgage crisis – among the first victims – long before the creation of fancy loan modifications and other bailouts. It came down to where they had three choices:

■ Sell the house via a short sale.

■ Let the house go into foreclosure.

■ File for bankruptcy.

Today there are additional options for distressed homeowners, with many finding help in a variety of places.

If you've run out of options, though, and the reality is that you can no longer afford to remain in the home, the decision of what to do next is gut wrenching. Make sure you qualify for a short sale, if that's the option you are considering. You must meet all of the following basic criteria in order to short sell your home:

■ You must have a hardship, such as job loss, major illness or divorce. Lenders won't consider a short sale unless you can prove to them that you have a hardship that prevents you from meeting your monthly mortgage obligation.

■ You must owe more on the house than its current market value. This situation defines the short sale.

■ You must be insolvent. The lender will want proof that you have insufficient resources, such as savings, to pay down the loan.

Things to Consider Before a Short Sale

When attempting to decide if a short sale is your best option, consider the following:

Credit Ramifications

Don't make your decision on whether or not to short sell your home based on the misinformation in the marketplace about short sales. They are no better on your credit record than foreclosures and deeds-in-lieu of foreclosure. The Fair Isaac Corporation, the folks that compile your FICO score, treat all three as accounts "not paid as agreed."

Can the Lender Sue You for the Deficiency?

If the lender obtains a deficiency judgment, you may be chased down, sometimes many years after the short sale, for the amount owed after the sale of the home – the deficiency between what you owed on the loan and the proceeds of the sale.

Some states, such as Florida, allow deficiency judgments. Others, such as California, have enacted laws to protect distressed homeowners from future liability. The details may be confusing to some, but it's important to know if you live in a state that allows deficiency judgments. This is a good question for your attorney, who can also fill you in on the specifics of your state's statutes.

Regardless of future ramifications, you may still want to short sale your home. Just be extra careful in the choice of your real estate agent. A highly experienced short sale expert knows what to look for in the lender's fine print. Words such as "collectable balance," will set off alarms for this agent, alerting her that she needs to do some serious surgery on the paperwork and reopen negotiations with the lender.

Buying Another Home After a Short Sale

If you hope to purchase another home within two to four years, a short sale may be your best option. Depending on the loan-to-value ratio, Fannie Mae will consider lending to you within that time period, whereas the wait is seven years after a foreclosure. FHA treats the short sale and foreclosure the same, however, and won't insure a new mortgage for three years.

Bottom Line

The home sale process is lengthy and typically quite stressful, and the short sale is no different. It may, in fact, take longer and involve a much higher level of stress. As the seller, you'll need to keep the home in top condition during the marketing period. You'll be asked to leave the home during showings. You'll entertain offers, sign mountains of paperwork, deal with the snail-pace processes of the lender and hope that the buyer remains motivated during the process.

Look carefully at the literature urging distressed homeowners to choose a short sale over a foreclosure. Who stands to gain the most from this type of transaction? The real estate agent will get a commission. Generally, the lender realizes a larger profit in a short sale than in a foreclosure sale.

What does the homeowner get? Some larger banks are now offering selected homeowners cash to remain in the home and care for it during the short sale transaction. How they choose which homeowners to offer this incentive is a mystery, so it may or may not come your way.

Keep in mind that, during the short sale process, you are, in essence, selling someone else's home for them. Consider what's in it for you before putting yourself, and your family, through the process.

### A  Short Sale Real Estate Primer

Back in real estate's dinosaur days, the short sale specialist was a rarity. I worked with a total of one of these specialists in the entire decade and a half that I sold real estate. I, like many of his other colleagues, didn't quite understand his specialty – how the process worked. Lucky for the area's underwater homeowners, he knew exactly what he was doing and is still helping homeowners today.

We've all been baptized by fire when it comes to the short sale process. What is a short sale in real estate? Consumers know the rudimentary details: A short sale occurs when the lender agrees to take less than what is owed on the home, and short sales wreck your credit. But there is a lot of misinformation out there and a lot more to know about the short sale process.

First, let's take a look at some history.

The Housing Mess

Call it a housing bubble or call it a housing market crash, what occurred in 2006, 2007 and 2008 was devastating to millions of American homeowners. Although home prices began a downward spiral in 2006, by the end of 2008 the Standard & Poor's Case-Shiller home price index experienced its largest drop ever.

Lenders were foreclosing on American homeowners at an alarming rate, refusing to negotiate foreclosure alternatives. Rather than refinance a $350,000 loan for a struggling homeowner, the lender would foreclose and end up with an REO on its books that would eventually sell for less than half of what the original homeowner was willing to pay.

Banks Wise Up

The situation today is far different. Somewhere along the line lenders realized that they get far more money from short sales than foreclosures.

Not only do the homes sell for more money, the bank doesn't have to sit on the real estate, the homes are in better condition, and the homeowner does all the work of unloading the bank's assets. What a deal!

Short sale requirements relaxed as lenders became more willing to work with underwater homeowners. At one point, in 2011 and early 2012, lenders were actually paying some homeowners to short sale their homes.

The process, once protracted and cumbersome, became more homeowner friendly. Recently, the Federal Housing Finance Agency (FHFA) imposed new rules on Fannie Mae and Freddie Mac that promise to speed up the short sale process even more.

The Short Sale Process in a Nutshell

■ The homeowner, for some reason, is no longer able to make her mortgage payments.

■ The homeowner hires a real estate agent and puts the home on the market.

■ A buyer makes an offer on the home, which is then sent to the lender, with other documents (the "short sale package"), for approval.

■ The lender evaluates the short sale package and the offer and makes a determination whether it will accept the offer or not.

In an ideal world, this is how a short sale proceeds. In the real world, any number of variations of the process, and the outcome, occur.

Qualifying for a Short Sale

While diminished home value is the most obvious qualification required by the lender for a short sale, there are others:

**Financial hardship** — Lenders will only consider certain hardships when granting permission for a short sale. These include:

■ Job loss

■ Death of one of the borrowers

■ Chronic Illness

■ Divorce

■ Involuntary job relocation

■ Military deployment

■ Incarceration

Although you must prove a hardship, short sale requirements are fluid and vary by lender. Some will consider a new addition to the family, such as a baby or taking in an elderly relative, a hardship, others won't.

**Assets** — All assets must be liquidated to pay down the mortgage before the lender will consider a short sale.

Considerations

If you think that you may want to buy another home in the near future, it's important to keep your mortgage payments current during the short sale process. This one act alone may help you qualify for a mortgage backed by the Federal Housing Administration (FHA). If you are delinquent when the short sale closes, you'll have to wait three years to get an FHA-backed loan.

One of the most important steps to take, whether you are the buyer or seller, is to enlist the services of a qualified real estate agent. The short sale is not your typical real estate transaction, and, although Uncle Joe may be a great agent, if he lacks extensive short sale experience, look elsewhere for an agent.

### W hat is a HAFA Short Sale?

Although its nickname begs to differ, the federal government's Home Foreclosure Affordable Alternatives (HAFA) program is actually a full short sale, one of the latest additions to what's becoming quite a menu of short sales

The flavor du jour, HAFA was created to streamline the approval process and help the homeowner move on in life by providing financial assistance. Like all government programs, there are rules and qualification requirements. Let's take a look at some of them.

Advantages of a HAFA Short Sale

The advantages of the HAFA short sale far outweigh those few that exist in the traditional short sale:

■ A complete release of the mortgage – there will be nobody chasing after you years down the road for the amount of the mortgage that you still owe.

■ You will receive $3,000 to assist in your relocation.

■ Department of Housing and Urban Development (HUD)-approved counselors walk you through the process.

■ You and your lender work as a team to determine a suitable list price for the home.

■ A HAFA short sale doesn't impact your credit as much as the conventional short sale.

HAFA Eligibility Requirements

If you're sold on pursuing a HAFA short sale, here's what you'll need to verify to be eligible:

■ You have lived in the home for the past year.

■ You have not purchased another residence in the past 12 months.

■ The balance of your first mortgage is equal to or less than $729,750.

■ The house is worth less than what you owe on it.

■ You obtained your current mortgage prior to January 1, 2009.

■ You are experiencing a financial hardship that prohibits you from paying your mortgage payments.

■ You have had no convictions, for the past 10 years, for felony theft, larceny, forgery, fraud, tax evasion or money laundering in connection with a real estate or mortgage transaction.

■ The home is not condemned.

■ Fannie Mae, Freddie Mac or a HAMP (Home Affordable Modification Program)-participating mortgage broker must own your mortgage. To find out if Fannie or Freddie owns your loan, check the Making Home Affordable (MHA) website database. To determine if your mortgage servicer is among those that are HAMP-certified, check the list at this MHA website.

Next Steps

If you feel you are eligible for a HAFA short sale and have decided to pursue one, you will find an application for assistance at the MHA website. The application includes a Hardship Affidavit, an area to list household income and expenses (you will be asked for documentation), and a Dodd-Frank Certification. Completing the certification is a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It assures the government that you have not been convicted of certain felonies, in connection with a mortgage or real estate transaction, in the past 10 years.

In addition to certifying your lack of a criminal background, the U.S. Department of the Treasury reserves the right to investigate a borrower's criminal background to confirm the certification.

For assistance with any aspect of the process, HUD provides housing counselors, free of charge, who can help. They can be reached by calling 888-995-HOPE.

### U nderstanding the HUD/FHA Short Sale Process

Distressed homeowners who have exhausted most other methods to avoid foreclosure on their homes typically decide to perform a short sale.

If you have an FHA-backed loan, you'll be happy to learn that the United States Department of Housing and Urban Development (HUD) offers a program, known as the Pre-Foreclosure Sales Program, which allows the seller in default to satisfy his or her mortgage debt despite the fact that the home is worth less than what is owed.

The sale must be what is known as "arm's length," meaning that the parties to the sale, including the real estate agent, must have no relationship to each other. Furthermore, HUD has a tiered net proceeds requirement that states:

■ During the first 30 days on the market, the homeowner can only accept offers to purchase that result in at least 88 percent of the appraised value of the home.

■ During the next 30 days, the offer must be for at least 86 percent of the appraised value.

■ For the remaining time the home is on the market, the seller can only accept offers that are for a minimum of 84 percent of the home's appraised value.

The seller may not make the following concessions to the buyer:

■ Repair allowances

■ The cost of a home warranty

■ Discount points on loans other than FHA-backed loans

■ Payment of the lender's title insurance fee

Eligibility requirements for the HUD Pre-Foreclosure Home Sale program include:

■ The home must be owner-occupied. Exceptions to this requirement include homeowners who were forced to move due to involuntary job transfer, death of the homeowner, job loss and divorce, provided the home was not rented out for more than 18 months.

■ The homeowners must provide proof of their inability to pay the mortgage and their need to vacate the home.

■ The homeowner must be at least 31 days delinquent on mortgage payments at the time the sale closes.

Advantages of the HUD Short Sale Program

While a homeowner underwater on a mortgage has little to be optimistic about, the HUD Pre-Foreclosure Sales Program offers a glimmer of a silver lining in the situation.

The sale's proceeds, even though less than what is owed on the mortgage, completely satisfy the debt. This should provide some peace of mind to homeowners in states that allow deficiency judgments, as they are assured that they won't be liable for the deficiency amount in the future.

If the short sale closes within 90 days of the date of application, HUD pays the seller a $1,000 incentive. If the home takes longer to sell, the incentive is reduced to $750.

HUD allows for a real estate commission, up to 6 percent, so you won't have to proceed without agent representation. It also allows various customary closing costs.

If the buyer is using a FHA-backed mortgage, HUD allows the seller to pay 1 percent of the buyer's closing costs out of the proceeds.

If you feel that you qualify for the HUD Pre-Foreclosure Sales Program, get in touch with a HUD-approved foreclosure avoidance counselor via HUD's website.

### H ow are Short Sales on a VA Loan Different?

Today's veterans have President Roosevelt to thank for their housing benefits. Signing the GI Bill of Rights into law provided our service members – who fight so hard to maintain the American dream – the chance to actually achieve it themselves: a federally guaranteed home loan with no down payment.

Like the Federal Housing Administration's (FHA) guarantee, the U.S. Department of Veteran's Affairs (VA) doesn't make loans, but provides a guarantee that protects the lender if the veteran defaults on his or her mortgage. This guarantee allows the lender to do away with down payment requirements and to offer more favorable interest rates and terms.

The short sale process for a home with a mortgage backed by a VA loan is similar to that of a traditional short sale but does contain several important distinctions.

The VA calls its short sale program a "compromise sale." If a veteran owes more on the home than what it's worth and sells the home, the VA will pay the remaining balance of the mortgage and closing costs. This is the most significant difference between the traditional short sale and the compromise sale: the lender receives the full balance owed by the veteran.

Additionally, as of January 2011, the veteran is entitled to $1,500 for relocation assistance.

Short Sale Program Requirements

■ The main requirement to undertake a compromise sale is that the veteran is experiencing severe financial hardship that prohibits her from meeting her mortgage obligation. Suitable hardships include:

■ Major medical expenses

■ A decrease in income

■ Death of one of the principle wage earners in the household

■ Involuntary relocation

If the veteran has any significant assets, the VA may require that they be sold or cashed in to help offset the mortgage deficiency.

The VA will review the veteran's situation, looking for the following criteria:

■ The home must be sold for current market value.

■ Closing costs must be "reasonable and customary."

■ The compromise sale will be less costly for the VA than foreclosure.

■ The veteran's financial situation.

■ The date of mortgage origination – if the loan was taken out on or before December 31, 1989, the lender must agree to write off the portion of the debt above the maximum guarantee.

■ The home has no other liens.

How to Get Started

If you feel you meet the criteria and need to undertake a compromise sale, there are certain steps to take:

■ Contact your lender's loss mitigation department and let the representative know that you can no longer make your loan payments and will be selling the home via a compromise sale.

■ Secure the services of an experienced short sale real estate agent and list the home for sale. Ensure that the agent includes a contingency that the sale is subject to VA approval and that the home is listed at current market value. Ask the real estate agent to waive his or her commission should the VA not approve the sale and get the agreement in writing.

■ Create a compromise sale package with the assistance of your real estate agent that includes a request for a compromise sale, the offer to purchase, a Good Faith Estimate (GFE) a financial statement with supporting documentation, a hardship letter, a Compromise Sale Agreement (available from the lender) and a payoff statement from the lender. Your real estate agent will take it from here, sending the package to your lender.

The lender will have the property appraised by a VA-approved appraiser, and check the title for additional liens or other clouds. The time it takes until you hear if your compromise sale is accepted varies according to the lender's current workload.

The VA warns veterans to beware of the various scams perpetrated against distressed homeowners. These include offers by someone other than your lender or the VA to pay your deficiency if you'll sign certain paperwork. The VA cautions veterans to contact their lender before signing anything presented by a stranger.

A veteran can purchase another home within two years of completing a compromise sale, according to Brian Skaar, a California lender.

### T ax and Credit Implications of the Short Sale

Is this really the ultra-savvy financial move it is made out to be, or are real estate agents and foreclosure rescue firms glossing over the ugly tax and credit implications of a short sale?

Why Care About My Credit if I Already Have Late Payments?

If you have already taken some hits to your credit score from late mortgage or credit card payments in the last couple of years, all is not lost. It is still wise to do everything in your power to minimize further damage.

Whether you like using it or not your credit is one of your most valuable assets. You won't just pay more on car loans and future home loans if you have a poor credit score, you may not even be able to rent an apartment or finance a washing machine when yours breaks down. Human resources managers now also openly admit that unless you have good credit, your job application is going straight to the shredder. Already have a job? You may not once reviews come around and the boss finds out you just went through a foreclosure.

Fair Isaac spokesman Craig Watts recently pointed out that, "The lending industry tends to regard an account differently when it has become 90 or more days late," and "a single one-time black mark results in steep drops, but it is when they fall further behind that things get really harsh."

So is a short sale the best route for minimizing the credit implications of a default?

Credit Implications of a Short Sale: The Real Deal

Real estate agents, investors and foreclosure rescue websites are hounding underwater homeowners with the message that electing to do a short sale does far less damage than going through a real foreclosure and that even those not at risk of becoming delinquent are smart to use short sales as part of a "strategic default."

Some say that credit reporting agencies treat foreclosures, a deed-in-lieu of foreclosure or a short sale equally when modeling credit scores; others claim there is a big difference.

So what's the real deal?

The credit bureaus have recently begun to break the silence and provide more insight into their modeling systems to make it easier for homeowners to analyze their options.

However, the main problem and reason for all the confusion is that credit scores are the result or incredibly complicated mathematical equations and depend on a huge number of variables. Even Maxine Sweet, Experian's VP of public education, states that, "Some borrowers will fall much more steeply than others for the same payment problem." It has a lot to do with where you are starting from and how much credit history you have. Clearly, if you have a ton of good credit, one late payment won't hold you back forever versus those who only have a mortgage in foreclosure on their reports.

FICO®'s cheat sheet for the average hit your credit score will take for mortgage issues:

■ 30 days delinquent, 40 to 110 points

■ 90 days delinquent, 60 to 135 points

■ Short sales, foreclosure or deed-in-lieu, 85 to 160 points

■ Bankruptcy, 130 to 240 points

However, Fair Isaac's principal scientist, Frederic Huynh, also disclosed that the amount of damage done to credit scores from foreclosures has a lot to do with whether there is a deficiency balance left over. In other words, if the outstanding debt is forgiven in a short sale, an individual starting with a 680 credit score may see a drop as small as 50 points. In contrast those allowing their homes to be foreclosed on and sold off by the bank, resulting in some of the debt remaining outstanding, will find themselves taking the biggest hits.

This is another critical factor for homeowners to keep in mind. Many states still allow lenders to obtain and pursue borrowers with deficiency judgments even after taking possession of the property. This means borrowers who do not choose short sales could both lose their homes and still owe on the mortgage! Not a position you want to be in.

So the credit implications of a short sale can potentially be less harmful than other options or doing nothing.

Tax Implications of a Short Sale: Ready for a Giant Tax Bill?

Will selecting a short sale as a way of avoiding foreclosure land you with a killer tax bill?

The only reason you weren't held liable for taxes on the money you received from your lender to buy your home was because the IRS believed you were going to pay it back. If a lender forgives any debt you owe, it instantly becomes income. What would an extra $100,000, $250,000 or $1 million do to your tax return without any additional write-offs to balance it out?

If you are in the 35 percent tax bracket for 2012, just $100,000 more in income means an extra $35,000 you'll owe the IRS!

That's just federal income tax; if you'll owe state income tax too, you may just want to hole yourself up in your bunker and prepare for a stand-off.

Fortunately, thanks to the passing of the Mortgage Forgiveness Debt Relief Act of 2007, those choosing short sales can get a tax break if they complete the transaction by the end of 2012. This act gives those completing short sales on their primary residence exclusion on any taxes due on up to the first $2 million of forgiven debt. Note that this does not apply to other properties owned.

Borrowers who are struggling with their mortgage payments or who are choosing to default or complete short sales for other reasons also need to be aware of the coming tax tsunami at the end of this year dubbed "Taxmageddon" when billions in tax credit programs expire, making it essential to get on that short sale immediately.

The Bottom Line

Borrowers weighing the tax and credit implications of the short sale do have some tough decision making to do. However, it is clear that – for those who act quickly – a short sale can easily be the best option.

This is on top of the fact that many lenders are dishing out up to $20,000 or even more to help homeowners relocate if they are willing to do a short sale. This could be your only chance to walk away, owe nothing and actually get money in your pocket.

You'll also be happy to know that short sales also normally enable borrowers to qualify to get a new home loan much faster, ranging from immediately to three years down the road depending on the details.

What is critical is to have a plan for getting your finances and credit back on track. Make a plan to re-establish good credit and you could see your credit score return to its glory day in as little as three years, though blemishes can remain for up to seven, and some will find it takes longer to mend.

### H ow to Buy a Short Sale Home

Whatever happened to the days when a homeowner who just wanted to sell his home found a willing buyer and, after several negotiations, the home sold? The economy, silly. The real estate market's tumble into the ashes flooded the market with "distressed properties" – a sweet euphemism for homes that the owners could no longer afford.

While the short sale transaction has been around as long as mortgages have, the sheer volume of them during the most recent recession familiarized the average American with the concept. Caught unaware, both lenders and real estate professionals scrambled to find their places in the process, with many becoming overnight experts. Several myths became firmly rooted in our consciousness and scams and cons abounded.

Sellers typically agree to short sell a house as a way to avoid foreclosure. This is because they've bought into the myth that a foreclosure is worse on their credit than a short sale. In reality, the Fair Isaac Corporation treats a short sale and a foreclosure the same when determining your FICO score.

Buyers, on the other hand, have been inundated with news stories about deeply discounted prices for short sale properties – so much so that some buyers insist on being shown short sales instead of traditionally listed properties.

Lenders love short sales. The homes tend to sell for more than foreclosed homes, and the borrower remains in the home, caring for it, showing it to potential buyers, hiring the real estate agent and, basically, doing the lender's job.

Real estate agents love short sales because they have a better shot at getting the listing than they do if a house is bank-owned. Is it any wonder then, that the myth of a short sale being better for both buyer and seller is so pervasive?

If you've decided you absolutely must pursue a short sale home, let's take a look at the basics of buying a short sale.

### Buying a Short Sale: Take it One Step at a Time

Step One – The Short Sale Real Estate Agent

The first step to take is to find a knowledgeable real estate agent. Yes, it may be a bit of a challenge, but short sales are quite different than standard purchases, and you need someone experienced and well-versed in the short sale process. Let the newbie agent find someone else to practice on. To find this super agent, ask friends, colleagues and neighbors who they recommend. Look at short sale homes currently on the market and pay close attention to any agent names that pop up repeatedly.

Step Two – Financing

Next, put the agent to work finding you a short sale property according to the criteria you have determined works best for you. While he's doing that, concentrate on getting a loan. Visit lenders to find the best rates and terms. Although short sales are notoriously slow, once your offer is approved by the seller's lender the pace may pick up, and you want to be ready to close when it does.

Step Three – Determine Market Value

Never assume that just because a house is listed as a short sale, it's bargain-priced. When you find a house that you are interested in, have your agent compile a comparative market analysis (CMA) to determine its market value. Often, its value doesn't match the asking price, so a CMA gives you a basis from which to determine how much to offer on the house.

Step Four – The Safety Net

Ensure that your agent includes language in the offer that allows you an out under certain circumstances. Some of these include finding another home or a home inspection that turns up needed and costly repairs. Lenders typically won't negotiate the price because of considerable problems with the house. It's imperative you are able to walk away from the deal when faced with huge problems with the home.

Step Five – Continue Your Short Sale Search

Keep looking at houses. There is absolutely no guarantee that the lender will accept your offer or that the sale will conclude successfully. If you find another home that you like, that is easier to purchase, you may want to walk away from the short sale.

It seems as if everyone involved with the short sale, from the homeowner to the listing broker to the lender, wants you to believe that the short sale is the very best bargain opportunity of a homebuyer's lifetime. The reality may be quite different, depending on region. In Las Vegas, for instance, the prices of short sale houses average $2,500 more than the median price of other homes on the market. Foreclosures are the bargain in Sin City. The lesson here? Don't buy into the media's hype. Do your homework and pay close attention to research pertinent to your specific region.

Short sales do offer the chance to purchase a home at a discount, but buyers should proceed with caution. It's a long process, full of pitfalls. Going into it with a savvy agent, and your eyes wide open, puts you a step ahead of the game.

R eal Estate Glossary for the First-Time Homebuyer

Every industry has its "inside" jargon, and the real estate industry is no exception. Some of the lingo, such as "location, location, location," is a snap to decipher, while other real estate terminology can be downright incomprehensible.

Real estate agents sometimes have a tendency to roll this stuff off their tongues, assuming their clients understand every real estate term. In reality, they may as well be speaking a different language.

Here is a glossary of some of the most common real estate terminology you will hear during the process of buying or selling real estate:

**Adjustable Rate Mortgage (ARM)** \- A mortgage with a fluctuating interest rate. ARMs tend to have lower initial interest rates for a set period of time, and then begin adjusting according to an index. They may adjust monthly, quarterly, annually or longer.

**Addendum** \- A form describing a change or addition to the purchase agreement. Anything added in addendum should be looked at very carefully. Addendums are used for many changes, such as the extension of the closing date.

**Appraisal** \- In a real estate transaction, the appraisal is a determination of the value of a house. The evaluation is required by the lender and prepared by the lender's choice of an objective and impartial professional appraiser. The appraisal may not be the same amount as whatever selling price a real estate agent may have calculated. If the appraisal is lower, the buyer and seller have several options, including lowering the asking price.

**Certificate of Title** \- The title certificate is a document that ensures the property being conveyed is legally owned by the seller(s) and that no other party owns any part of it or has any claims, such as liens, against it.

**Closing** \- This is where the term "closing table" comes into play, and the process is also known as "settlement." You, your agent or attorney and the escrow agent, along with the seller and her agent or attorney, sit at a table and finalize the purchase. Sometimes a lender's representative is present as well.

**Closing Costs** \- All the additional expenses incurred in financing and purchasing the home. These expenses typically include attorney's fees, a loan origination fee, escrow impounds, and other miscellaneous charges. Typically, closing costs run 6 percent of the sale price of the house.

**CMA (Comparative Market Analysis)** \- A determination of a home's market value for the purpose of determining a fair asking price. Real estate brokers compile the CMA by comparing the subject house to those that have recently sold within close proximity. Many times a buyer will request a CMA to ensure she is not overpaying for a house. Although the CMA is similar to an appraisal, it will not replace a lender-required appraisal.

**Comps** \- Properties that are comparable to the property being analyzed.

**Contingency** \- A section of the purchase agreement that specifies certain conditions that must be met in order for the sale to proceed. Common contingencies in purchase agreements include those for inspections and loan approval.

**Counter Offer** \- A form that requests the addition or elimination of parts of the original purchase agreement.

**CC &Rs** \- Covenants, conditions and restrictions. This is where you find out that, no, you can't paint your front door blue. These documents set out the rules that homeowners must obey.

**Disclosures** \- Information about the home that a seller must provide, by law, to a buyer. The number and types of disclosures provided to the buyer depend on region. In California, for instance, the lengthy Transfer Disclosure Statement (TDS) provides the buyer with information from the seller regarding the condition of the property and any repairs or modifications performed.

**Deed** \- The deed is the legal document that provides proof of the transfer of ownership as real property.

**Down Payment** \- The down payment is the percentage of the purchase price that the buyer pays in cash. Depending upon lender, this percentage generally ranges from 3 to 20 percent.

**Due Diligence** \- The responsibility of the buyer to exercise the appropriate care before closing on the purchase. Due diligence includes verifying all of the seller's representations and uncovering any other pertinent facts that have not been disclosed but have a bearing on whether or not you want to purchase the property.

**Earnest Money Deposit** \- The earnest money deposit is money provided by the homebuyer to the seller to prove her earnest intent to purchase the property. The amount varies, and the check is typically submitted with the purchase agreement. If the sale goes through, the earnest money deposit is applied to the down payment. If the buyer walks away from the sale, through no fault of the seller, he may forfeit his earnest money deposit.

**Escrow** \- The escrow process assures that the purchase funds are released and that the transfer of the house is completed. The escrow company is a neutral third party to the process and uses the purchase agreement and other associated documents as instructions.

**Escrow Impounds** \- The lender requires a deposit, as prepayment of taxes and insurance, at the close of escrow. This deposit goes into an escrow account and protects the lender in the event that you allow your insurance to lapse or don't pay your property taxes. By law, the lender can only request an amount that is equal to no more than two months' payments.

**FHA Loan** \- This is a loan tendered by a traditional lender but insured by the Department of Housing and Urban Development and administered by the Federal Housing Administration. FHA offers several home loan programs, some offering low down payments, others to assist buyers of fixer-upper properties. FHA does not provide loans — it provides insurance for loans.

**FICO® Score** \- Your FICO® score is a compilation of information from the three major credit reporting agencies and calculated by the Fair Isaac Corporation. Your FICO® score reflects your debt payment history, amounts owed, length of credit history, new credit and the types of credit you use. The FICO® score range is between 300 and 850. The higher your FICO® score, the less of a credit risk you present to lenders.

**Fiduciary Duty** \- The broker under which your real estate agent works is your fiduciary. She is held to specific duties, outlined by state law, to her principal (you). Some of these duties include disclosure, confidentiality, reasonable care and diligence and loyalty.

**Final Walk-Through** \- The buyer is allowed one last chance to walk through the home prior to the close of escrow. This inspection is not to turn up newly-discovered defects, but to ensure that the home is in the same condition as when the offer was tendered.

**Fixed-Rate Mortgage** \- A type of mortgage in which the interest rate does not fluctuate over the life of the loan.

**GFE** \- The Good Faith Estimate is a form provided to borrowers by lenders. It is required by law and allows borrowers to compare the rates and terms of multiple lenders when shopping for a home loan. The GFE must include a list of all fees associated with the mortgage loan and it must be provided to the borrower within three days of loan application.

**HOA Docs** \- Homeowner's Association Documents. When purchasing a condo or a home in a managed community, you have a right to view recent HOA meeting minutes, a copy of their current budget, CC&Rs and other equally fascinating documents. Think boring, and you've got an idea of what's included in the HOA docs. They're important, though, so set aside an hour or two to go over them.

**HUD 1** – This is the settlement statement provided to the homebuyer. The HUD 1 details all fees charged by the lender.

**Loan-To-Value (LTV) Ratio** \- The LTV is a ratio that lenders use to assess risk when providing a mortgage loan. The LTV represents the amount of the mortgage divided by the appraised value of the property. Lenders consider higher LTV ratios as high risk loans.

**Mortgage** \- A legal document that pledges the house to the lender as security for the loan to purchase the house.

**Mortgage Insurance** \- An insurance policy that compensates the lender in the event a borrower defaults on his loan.

**Offer** \- A presentation of a bid on a home for sale.

**PITI (Principal, Interest, Taxes and Insurance)** \- Your monthly mortgage payment. Principal is the part of the payment that pays down the loan, the interest is the part of the payment that pays the lender for loaning you the money to buy the home, taxes and insurance are the necessary evils that must be paid for, typically into an escrow account each month.

**PMI (Private Mortgage Insurance)** \- Like mortgage insurance, this policy protects the lender against a buyer's loan default. Lenders on high-risk loans – typically when the LTV exceeds 80 percent – require PMI. When the homeowner's LTV falls below the specified rate, PMI may be discontinued.

**Point** \- A one-time charge by the lender for originating a loan. A point is 1 percent of the amount of the loan.

**Pre-Qualification** \- The process of determining if a borrower qualifies for a loan and the approximate amount of money she may qualify to receive.

**Title Insurance** \- An insurance policy that protects against damages due to defects in the chain of title.

**VA Loans** \- These loans are offered by the Department of Veterans Affairs exclusively to members of the military. Veterans, those on active-duty and reservists are all considered as eligible to apply for VA loans, which typically require no down payment.

### M aking Sense of Homeowner Insurance Policy Definitions

If you feel like you're reading a foreign language when you look over your homeowner's insurance policy, you aren't alone. Where simple language that's easy for the layperson to understand will suffice, the typical homeowner's insurance policy is loaded with industry jargon. Grab a cup of coffee to keep yourself awake while we pick that policy apart and see if we can come to grips with some of the terms.

Keep in mind that although not all homeowner insurance policies are the same, and they vary in their coverage, a policy typically covers the house and other structures on the property. Personal possessions inside the home are covered (although pricier items may require additional coverage), as is your liability in the event someone is injured on your property. Earthquake and flood damage is usually not covered and you will need to buy separate coverage for these events.

Deciphering Insurance-ese

Pay very close attention to the conditions clause of your policy. This sets forth your obligations and duties. This may be the most important clause in the entire contract, for if these conditions are not met, your claim may be denied.

One of the common terms found in most homeowner insurance policies is "actual cash value." This number reflects the amount the company will pay in the event of a disaster. It is typically equal to what it would cost to replace the house, minus depreciation. Many homeowners confuse actual cash value with replacement value, which is the amount the insurance company will pay without the depreciation deduction, yet still subject to policy limits. You will find a description of how the company arrived at this figure under the Claim Settlement Provision portion of the policy. The Functional Replacement Cost section of the policy describes the determination of replacement value.

We'll Pay, but So Will You

Coinsurance is a term that confuses not only those in the market for a homeowner's policy but health insurance as well. You may find this concept listed as "insurance to value" on a homeowner's policy. The first thing to understand about coinsurance is that it only comes into play in the event of a partial loss. Described as a percentage, this provision defines the amount of the total damage that the company will cover. For instance, many insurers recommend that, if you don't want to insure at full value, you should obtain a policy with at least 80 percent coverage. In this case, the insurance company will pay up to 80 percent of the loss while you are responsible for the remaining 20 percent. Now, to add even more confusion to the mix, this clause only comes into play when the loss and the policy limit fall below the coinsurance percentage.

Your policy's deductible is the amount you pay in the event of a disaster. This amount may be listed as a specific dollar amount or a percentage of the home's insured value. The choice of the deductible amount determines the premium (amount you pay for insurance), with the premium going down as the deductible goes up.

What happens if the home is so damaged that you can't live in it until it is replaced or repaired? The Loss of Use portion of the policy spells this out, explaining how much you will be reimbursed for expenses incurred to find additional shelter during this time.

Endorsements are Only Good in Politics

Attached to your policy are the endorsements. These forms modify the terms of the policy in some manner. This is the toughest part of the insurance policy to understand for most homeowners. Some of these endorsements may negate policy clauses, or place conditions on them. It's a bit like reading the Internal Revenue Service tax instructions. If you have any questions on this part of your homeowner's policy, consult with your attorney.

The Perils of Your Insurance Policy

In going over your insurance policy you may notice references to "perils." These perils are then classified as either "open" or "named." And this is where jargon takes a turn toward the ridiculous. The peril is the event that caused the loss, such as theft or fire. If your policy provides for open perils, it will name which ones are excluded from coverage. If you own a named perils policy, on the other hand, the policy will list every one of the perils that's covered. If you have concern about replacement of your personal possessions in the home, pay close attention to this part of the policy. You may have an open perils clause for the home and a named perils clause for its contents. This is why updating your coverage as you acquire new possessions is so important.

If you live in earthquake country or in a flood zone you will need to purchase an additional policy. You may not be able to purchase this policy on the open market if you live in a high-risk area, but there may be government-mandated insurance plans available. Check with your state's insurance commissioner for details on these plans.

If you live in an area at high risk for hurricane activity, your insurance choices become even more confusing. While most policies cover damage or loss from the hurricane, they won't cover any damage from the ensuing flood. The policies offered in hurricane-prone regions are definitely a mixed bag, though, with some offering limited coverage and some requiring a higher deductible. As with homeowners in regions prone to earthquakes, check with your state's insurance commissioner about government-mandated insurance plans that provide coverage that can't be obtained on the open market.

Due Diligence: It's Not Just What's For Breakfast

It's important to take your time when purchasing a homeowner's policy and to never make assumptions based on the word of the insurance agent. Learn how to read your policy and change it immediately if it doesn't meet your needs. According to the insurance experts at United Policyholders, when shopping for insurance, make sure that you have enough coverage to replace your home (not the land) at full value, that you are protected against regional risks — such as earthquakes or floods — and that you have shopped around for the best price and have received all the discounts to which you are entitled.

