Orlando Florida Real Estate Blog

Check out these 10 things to avoid in your home finances

Most advice columns tell you how you should do things. But there are all kinds of things you shouldn't do, either. Here are 10 frequent financial mistakes that consumers routinely make -- and you should avoid.

Don't:

1. Choose the Wrong Mortgage: With the advent of instant refinancing, home loans are no longer the lifetime obligations they used to be. Still, you don't want to be saddled for even a short period of time with the wrong one. Investigate all your options, then lay your choices side-by-side and do the math, making sure to compare worst-case scenarios. Be sure to look at initial interest rates, future interest rates and payments (if different), and the possibility of prepayment penalties.
   
2. Confuse "Pre-Approved" and "Pre-Qualified" with a Loan Commitment: These are debatable terms in real estate because not all lenders apply the same definition to each expression. In fact, one leading real estate dictionary contains neither expression because their definitions are uncertain. According to one school of thought, however, when you are "pre-qualified," the lender is making an educated guess about how much you can borrow based on information you've provided. When you are "pre-approved," the lender has verified everything you have told him or her and is offering to lend you up to a given amount at current interest rates -- under certain conditions. Whether pre-qualified or pre-approved, final clearance and a check at closing -- a loan commitment -- are subject to an appraisal satisfactory to the lender, good title, a last-minute credit check, and other verifications. When meeting with lenders, always ask how they define each term and what additional steps will be required to obtain a loan.
   
3. Have Too Much Credit: Excessive credit is almost as bad as no credit or even bad credit. Even if you pay your bills on time, lenders tend to focus just as much on how much credit you have available to you as they do on timeliness. So being up to your ears in car loans and credit cards is a sure way to be turned down for a mortgage. Postpone any big ticket purchases until after you buy your house.
   
4. Lie on Your Loan Application: Exaggerating your income on a mortgage application or putting down other untruths can be a federal offense. Lenders rarely prosecute liars. But if they find out later, they can call your loan due and payable. Don't ever sign your name to a loan application that is not completely filled out, either. Loan officers have been known to stretch the truth to get a client approved, but it's the borrower who ends up paying the price, often in the form of monthly loan payments he can't afford.
5. Hide If You Can't Make Your Payments: The worst thing you can do is ignore phone calls and letters from your lender when you are behind on your payments. Lenders have many options at their disposal to help keep borrowers from losing their homes to foreclosure. But they can't do anything for you unless they can talk to you about your difficulties. Lenders are the enemy only if you give them no other choice.
   
6. Skip a Home Inspection: Failing to make your purchase contingent on a satisfactory home inspection could be a costly mistake. Independent home inspectors examine houses from stem to stern. They'll be able to tell you whether the roof and/or basement leaks, whether the mechanical systems are in good shape and how long the appliances should last. They can't report on things they can't see, but at least their trained eyes are better than yours. So don't pass just to save $300-$400; that's money well spent.
   
   
7. Hire Just Any Agent to Sell Your House: All real estate agents are not the same. You want to look for those who specialize in your neighborhood and are top producers. Ask your candidates how they plan to market your house, what you can do to make the place more attractive to prospects and how much you should ask. If you don't like any of the answers, looks elsewhere. And above all, stay away from relatives. Unless Aunt Bessie or Nephew Nick fit the description above, keep looking.
   
8. Fail to Check Out a Remodeler: Never, ever hire a contractor who knocks on your door or says his prices are good for only a few days. Reputable remodelers don't solicit door-to-door, and they don't cut prices just because they happen to be in your neighborhood. Check out a potential contractor thoroughly by calling several of his past clients, your local better business bureau, his bankers and suppliers, and your local consumer affairs agency.
9. Pay Too Much Upfront: If a contractor asks for more than a third of the contract price as a downpayment, chances are something's wrong. At worst, he's a scam artist who has no intention of returning after he cashes your check. At best, he's undercapitalized and can't afford to purchase materials on his own. Or, in between, he could be using your money to pay workers on another job. Never give a contractor cash, either.
   
10. Burn Your Mortgage: It's a wonderful feeling when you make your last house payment. After all, the place is now yours, all yours. Many people celebrate by holding a mortgage burning party. But they torch the original document. Don't. Make a copy and burn that instead. Keep all your loan docs in a safe place.

More people buying into new developments are being left high and dry when their builders file for bankruptcy. Here's how homeowners can protect themselves.

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The proposal would establish a new category of “higher-priced mortgages” that should include virtually all subprime loans.¹ The proposal would, for these loans:

• Prohibit a lender from engaging in a pattern or practice of lending without considering borrowers’ ability to repay the loans from sources other than the home’s value.
• Prohibit a lender from making a loan by relying on income or assets that it does not verify.
• Restrict prepayment penalties only to loans that meet certain conditions, including the condition that the penalty expire at least sixty days before any possible payment increase.
• Require that the lender establish an escrow account for the payment of property taxes and homeowners’ insurance. The lender may only offer the borrower the opportunity to opt out of the escrow account after one year.

The proposal would, for these and most other mortgages:

• Prohibit lenders from paying mortgage brokers “yield spread premiums” that exceed the amount the consumer had agreed in advance the broker would receive. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans.
• Prohibit certain servicing practices, such as failing to credit a payment to a consumer’s account when the servicer receives it, failing to provide a payoff statement within a reasonable period of time, and “pyramiding” late fees.
• Prohibit a creditor or broker from coercing or encouraging an appraiser to misrepresent the value of a home.
• Prohibit seven misleading or deceptive advertising practices for closed-end loans; for example, using the term “fixed” to describe a rate that is not truly fixed. It would also require that all applicable rates or payments be disclosed in advertisements with equal prominence as advertised introductory or “teaser” rates.
• Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. Lenders could not charge fees until after the consumer receives the disclosures, except a fee to obtain a credit report.

Footnotes

Answer: This is a more complex question then anyone might believe, but allow me to offer a brief overview.

We know there are a huge number of foreclosures in the U.S. and that the numbers are rising. For instance, the foreclosure listing service RealtyTrac.com reports that in October foreclosures were up 94 percent over the same month last year.

The difference between fair market values and the sale price for distressed properties is called the "foreclosure discount" and some of the homes listed by RealtyTrac sell at enormous price reductions. However, in some markets there is little or no discount. Thus the size of the discount depends on local market conditions. In general terms, the more distressed homes available for purchase -- the larger the percentage of foreclosures and REOs relative to all homes being sold in a given market -- the greater the foreclosure discount.

Homes which have been foreclosed are sold at auction. The lender typically bids the amount of the loan in an effort to recapture the value of the principal, but this is not always the case. If the property does not sell at auction then the lender has made the winning bid and takes title to the property as "real estate owned" -- a REO.

Is it better to buy at auction or from the lender? The answer depends on the local market and the lender. In some markets, you can buy REOs in big numbers, say 100 or 1,000 at a time, and with significant discounts. In other cases, you can buy foreclosures one-by-one.

In considering foreclosures and REOs you have to look at more than price. Yes, there may be a discount, but what repairs will be required? Will you have to evict former owners? Squatters? In some cases foreclosures will be a bargain even with expenses, but not always.

If foreclosures seem interesting, you want to check the listings with care, work with an experienced broker and attorney, and have cash available for acquisition, repair and retention. Foreclosure professionals try to turn over properties as quickly as possible to reduce carrying costs, maintenance and security expenses, generally in six months or less -- and sometimes in just a few days if the property can be wholesaled to a contractor or investor for repair.