Remember the reason why we celebrate Memorial Day.
Traditionally, when you buy a home, you apply for a mortgage through a lender, find a home for sale, and use a combination of your down payment and the loan amount to purchase the home. It is a tried and true method, but what if you want to skip the buying and selling process and simply take over another homeowner’s loan?
With certain loans you may be able to do that, but there is a lot to consider before assuming a loan.
“In days long past, some mortgages were fully assumable with no qualifying required by the new borrowers at all,” said Ron Bork, senior loan officer for EverBank. Today, things are different. “Conventional mortgages are typically not assumable,” he said.
Some government-backed loans, such as Federal Housing Authority loans, are assumable, but you will have to meet the lender’s requirements and you may have to “come up with the difference between the existing balance and the purchase price,” Bork said.
What to Consider
You should start by comparing the loan amount to the value of the home.
“The balance of the loan needs to match up with the amount available for the remainder of the purchase price,” Bork said. Otherwise, you will have to pay to cover the difference.
You should also consider the current interest rates. If the interest rate on the assumed loan is close to or lower than current interest rates, it may make sense to assume it. If the interest rate is much higher, you may end up paying more in the long run.
Finally, make sure you completely understand the terms of the loan. Is the interest rateadjustable? Are there any surprise fees or balloon payments? Don’t take on a loan unless you know the terms.
Meeting the Lender’s Qualifications
When you take over a loan, “Lenders will undoubtedly use the same underwriting guidelines that they normally do,” Bork said. Meaning, you will have to be able to qualify for the loan before you can take it over.
The lender will look at your credit history and scores. While different lenders have different requirements for credit, having good scores with no delinquent accounts will give you the highest chance of approval.
Lenders will also look at your income and debt-to-income ratio. If you are carrying too many other debts, or if your income isn’t high enough to safely cover the mortgage payments every month, you may not be approved to take over the loan.
If you co-own a property with someone else, you may not need to go through the process of assuming the loan. For example, if you and your spouse get a divorce, you can continue to live in the home and make payments as long as your name is on the loan and title before the divorce.
If you co-own a home with a spouse or family member and that person passes away, you may also be able to simply keep the loan and home the way they are. However, ask an attorney or lender to look over the documents and facts with you to make sure.
Prospective first-time homebuyers face several challenges, including the need for a down payment and the financial stability to qualify for a home loan. While home prices and affordability vary from one market to another, individual buyers must find a balance between what they can comfortably afford and what they want in their first home.
Know Your Market
Before you decide on a particular home type or a specific neighborhood, you need to get an idea of the price range of homes in your area.
Most buyers begin their search for a home online and then contact a REALTOR® who can help them focus their priorities. Many buyers start looking for a home based on their commute to work or a specific school district or community that appeals to them.
If you can explain what appeals to you about a particular location, a REALTOR® with local knowledge can identify similar neighborhoods that may have less expensive homes yet matches your wish list. For example, if you want to use public transportation to get to work, you may find that a commuter bus functions as well as a subway and yet gives you a broader price range of homes to consider.
Shift Your Priorities
If your main priority is to live in a specific neighborhood, you may need to compromise on the size or style of your home. Instead of opting for a four-bedroom, single-family home with a two-car garage, you may find a three-bedroom townhouse with a one-car garage can meet your needs for space while being more affordable.
Some first-time buyers opt for a condominium because it can be less costly and require less maintenance, but it’s important to remember that a condo also has a monthly condo association fee that will be part of your housing expenses. You can also stick to your preference for a single-family home and look for one that is smaller to meet your budget.
You and your REALTOR® can also look for a home that’s been on the market longer than the current norm in its area. The sellers of that property may be willing to drop their price a little to get their home sold. A home may go unsold for a variety of reasons, including a price that’s too high, a bad location, a flaw in the design, or perhaps issues with the condition of the property.
If you go into the process with an open mind, you may find that you can overlook a minor flaw in order to live in your preferred neighborhood.
Consider a Fixer-Upper
Research shows that buyers prefer a home that’s in pristine condition, but a home that requires some cosmetic improvements such as fresh paint, landscaping, new carpet or window treatments can be a bargain. First-time buyers in particular need to carefully evaluate their ability to make these improvements themselves or to pay for repairs and maintenance.
You should always have a home inspection when you are buying a home, but it’s even more important when the home has not been upgraded or maintained. A home inspector can help you estimate the cost of repairs. One option, if you lack the cash for home improvement projects, is an FHA 203(k) loan that allows you to wrap your repair costs into your mortgage.
An open mind and a broader search can yield a more affordable option for first-time buyers.
Prospective homebuyers are always looking for a bargain price but, typically, when a property can be snapped up for a low price there’s a reason.
Most often, a house with a drastically reduced price will be on the market as a short sale because the owners are hoping to avoid a foreclosure or because the property has already undergone foreclosure.
While the price may be enticing, it’s important to understand what you are buying. First and foremost, a foreclosure or a short sale will nearly always be sold “as-is,” meaning that the owners, whether they are a bank or the residents, won’t be fixing anything before the sale.
Advantages of Buying a Distressed Property
The main reason to buy a distressed property is the price. In most cases, a foreclosure or short sale will be priced below market value because the sellers are in a hurry to complete a sale and because they don’t want to spend the money to repair a property in order to bring a higher price.
If you are eager to become a homeowner or want to invest in real estate, a foreclosure can be a good place to start, provided you know what you are doing. A REALTOR® experienced in distressed properties can guide you to make sure you purchase a home that will eventually increase in value.
When mortgage rates are low, you can take advantage of inexpensive financing to buy a bargain and then sell it later for a profit.
Disadvantages of Buying a Distressed Property
The main risk in purchasing a foreclosure is the reason the property is set at a low price: the condition.
If you are purchasing a house that is in bad shape, you will need to set aside funds to hire contractors or to pay for materials to improve it. Some foreclosures are in OK shape, but others lack appliances, have damaged walls, and may need extensive electrical or plumbing repairs. You may or may not be able to have an informational home inspection on a distressed property, but even if you do, it will be up to you to finance any repairs.
You should also be aware that not all distressed properties can meet the requirements of a lender, given the property’s condition. You will need an appraisal, and for many loan products the lender will need to assess whether the property can be lived in and has value.
Tips for Buying Distressed Property
If you have experience fixing up homes or a network of trustworthy contractors you can hire, buying a distressed property in bad condition may still be a good deal. If not, you may want to work with a REALTOR® and a home inspector who can give you a good sense of what it will cost to bring the home into good condition.
Many investors purchase distressed homes with cash, so it’s best to be prepared for potential competition from cash buyers. If you don’t have the cash yourself, you can work with a lender to secure a strong loan prequalification. To be an even stronger bidder, you may want to increase the size of your down payment or your earnest money deposit.
In some cases, a distressed property will require complex paperwork before you can take possession of the property, so be prepared to be patient.
Most important, educate yourself and work with professionals who can recognize the value in different properties so that you don’t find yourself owning a distressed property that requires too much work or sits in a location that negatively affects its long-term value.
Abandoned properties are potential low-cost purchases that may be attractive to prospective homebuyers.
An abandoned property is usually a property whose original owner is no longer in possession of the home, and due to financial difficulties the house is run down and in need of repair. However, some abandoned properties turn out to be in good condition, with an owner who wants to unload it before foreclosure. This could provide the right buyer with an opportunity to purchase the property at a considerable discount.
Purchasing an abandoned property follows the same procedures as buying any other piece of real estate. Before setting out on your journey to find an abandoned home, review your financial situation. Remember, there will be additional expenses over and above the original sale price.
A prequalification from your bank or lender will help you estimate what mortgage amount you qualify for. Many banks also require pre-approval letters so you can make quick decisions on the property you wish to purchase.
Finding Abandoned Properties
Most abandoned homes are on their way to foreclosure, but the bank has not yet initiated the process. Various lists of abandoned properties are available. Check the classifieds for homes whose listings contain certain phrases that may indicate an abandoned property, such as “immediate possession,” “must sell,” “below market value” or “under appraisal.” REALTORS® have valuable knowledge of abandoned properties in the area and can provide you with selections of homes about to be foreclosed on by the bank.
Some properties may look abandoned, but are not listed for sale. If you find an interesting property like this, visit your county clerk’s office. There, you can find information about the homeowners, the home’s current appraised value, liens or tax problems. You could then try tracking down the owners and asking them to sell their property. If the property has had liens or tax problems, the owners might be more willing to sell.
Placing a Bid
Assuming you have found a potential home and been pre-approved, you will want to figure in the costs needed to get the home in good condition.
Get a thorough maintenance inspection performed and note what needs to be fixed and how much it will cost. Add in the cost of the appraisal fee, pest and lead inspection fees, title insurance, closing costs and any legal fees that might be involved. Crunch the numbers before you consider a bid. A REALTOR® can also accompany you to the house and point out the extra expenses you will incur after the purchase. A REALTOR® can also help you figure out how large your bid should be.
Look for the right opportunities and you will find the home that is just right for your budget.
Location is a huge factor in successful home ownership. Just a mile—in some cases just a city block—can make a difference in home values, health risks, crime and the general quality of life for you and your family.
Everyone has different priorities but neighborhoods that are more likely to cause trouble for your housing investment often share certain qualities. What makes or breaks a neighborhood, and what are the signs of decline?
Here are four ways to evaluate an area:
Sale prices in an area offer a good barometer of what’s happening on the ground. A neighborhood where homes linger on the market for years, where owners constantly drop their selling prices or sell for much lower than they initially asked for, might not serve as a great investment for a new home buyer. Most of that information is publicly available. A REALTOR® can answer questions too. Pay very close attention to small fluctuations in urban areas. In San Francisco, for example, by merely crossing to the other side of the street you can pay up to 25% more for a comparable house.
Looks That Aren’t Deceiving
If you see streets dotted with “out of business” signs, or if the schools look in dire need of upgrades, the area may not be for you. Evaluate the quality of transportation—areas with better transit options tend to hold their value more. If you spy dirty streets, poor local services, few recreational facilities, or a shortage of restaurants and other amenities, you may be witnessing signs of a neighborhood in decline. Purchasing property in such an area could put your investment at risk and create havoc in your daily life.
Focus on the Details
If you’re looking at a specific house or apartment, pay close attention to what’s nearby. Some things that might signal a less desirable area:
Driving through a prospective neighborhood and looking at the condition of properties nearby can help you spot other signs of a declining neighborhood. Poor yard maintenance, shoddy landscaping, discarded junk in driveways, gardens growing weeds and broken fences could mean owners lack pride in their homes, and possibly in their community.