The real estate meltdown of the last two to three years has hit the housing, real estate and mortgage lending industries hard. What previously seemed a risk-free investment, now is viewed with suspicion and caution. However, we have all heard that smart investors make more money during the bad times than the good. Could this be the time to buy a home? If you are a first-time buyer or have the capital to cover the down payment and initial costs of buying a home and your credit rating is good, the answer to that question may be a resounding yes.

Fannie Mae, the government sponsored secondary market real estate investor, has just published a survey showing that according to the latest estimates home prices will continue to decline during the next 12 months. The same survey reports that the price of rents is set to rise. More specifically, homes are projected to drop in price by 0.5 percent while rents are expected to rise by 4 percent. Of course these are just educated guesses by consumers who are responding to the current market. This survey reflects the attitude of consumers to the real estate industry. This gives you an idea of the general “feeling” of the industry that bare figures cannot.

According to 70 percent of those questioned in the survey felt now was a good time to buy a home. Of course, the reverse is also true. It is also a hard time to sell a home. If you have the cash and the credit to be a buyer in this difficult economy, you can call the shots. This is a buyer’s market and you have a wide selection of properties and prices you would not have had access to three or four years ago.

However, the Fannie Mae survey was not all good news for buyers. Another point most consumers agreed on was in a lack of confidence in the ability of investors to sell the properties they buy at a profit. The old saying “as safe as houses” is no longer true in the minds of many consumers. So how does this lack of trust in the market affect the opportunity created by lower house prices? The current market seems to be especially designed for first-time buyers and people investing in a home to live in. If you are looking for a home to live in for the foreseeable future and have the cash and credit to buy it under the more stringent credit environment we are now in, it maybe just the time for you to buy a home.

The real estate collapse of the last three years has caused the federal government to come up with regulations designed to avoid this from happening again. Mortgage regulation rules are being presented under the Dodd-Frank Act of 2010. The Dodd-Frank Act is part of the far-reaching financial regulatory reform that sets out to promote financial stability and improve the accountability and transparency of the financial system as a whole. This was a reaction to the list of bail-outs of companies that were “too big to fail” and required on-going hand-outs from taxpayers to stay in business.

One of the changes proposed under this Act is to force mortgage lenders to take 5 percent of the credit risk of mortgages pooled in securities if the mortgages do not meet certain requirements. These are mortgages that are put together as an investment unit and which can be bought or sold in a similar way to stocks in a company. One of these requirements, which is making mortgage lenders unhappy, is that borrowers must pay at least 20 percent of the home’s purchase price as down payment. The idea behind this rule is to stop borrowers from buying homes they can’t afford just because loans are available. According to some analysts, cheap and available loans were one of the reasons house prices increased artificially and later crashed when the market came to its senses and corrected itself. Canada has a similar down payment requirement as part of their comparatively stricter financial regulatory system, which may have had a lot to do with why Canada was not affected as seriously by the real estate driven recession of 2009.

Critics of the 20 percent down payment rule claim this will price out many borrowers who can’t afford to come up with 20 percent of a home’s purchase price. Figures from 2010, seem to support this claim. Around 39 percent of home buyers in 2010 put a down payment of less than 20 percent, according to a poll by CoreLogic. The question, of course, is if the low down payments are because people can’t afford to pay 20 percent or because they are not required to do so? Additionally, even if many buyers can’t afford the 20 percent rule, is that necessarily a problem? Could it be argued that buyers who can’t afford to pay 20 percent of their mortgage are simply not in a position to buy and should focus their efforts on saving for a down payment? Of course, the real estate mortgage industry claims it is time for the government to stimulate the mortgage industry not weigh it down with restricting regulations. How do you feel? Is this regulation a much needed protection against another crash, or is it an example of federal government choking the growth the real estate industry so desperately needs?

Do you know what a mortgage servicer is? Many borrowers do not know that the company which receives their monthly payments and sends nasty letters when they are behind on their payments is often not the company or investor that sold them the mortgage in the first place or even the current investor. In the mortgage industry there are three main players, mortgage originators, mortgage servicers and mortgage investors. Mortgage investors put forward the money for the loan, mortgage servicers handle the payments and communication with the borrowers and mortgage originators sell the mortgage. In some cases, all three roles are played by the same company but often these roles are split between specialized companies.

Of course, throughout the life of your mortgage fees are paid to the companies that manage your mortgage. The origination fee you pay when you sign for a mortgage is part of the payment mortgage originators receive. Every month interest is paid to the mortgage lender and a portion of the interest and mortgage fees goes to the company that manages your payments. These fees do not stop when you are behind in your payments and you are applying for a mortgage modification.

Mortgage modifications are paperwork intensive procedures which require a lot of research and communication between borrowers, mortgage servicers and mortgage lenders. This may help you understand why mortgage modifications often take so long to get processed even when borrowers clearly qualify for them. Mortgage servicers receive a fee for their work during mortgage modifications. However, the rules that regulate how much they receive have just been changed.

Fannie May requires mortgage servicers to only charge a fee, if the loan modification is approved. That has been the case for some time now. However, how much mortgage servicers can charge has recently changed. Why? Fannie Mae states recent simplifications in the mortgage modification process as a basis for the reduction in fees charged by servicers under the government sponsored mortgage assistance programs. The current limit is 0.25 percent of the mortgage amount or whatever the mortgage servicer received before the loan modification.

The maximum allowed servicing fee for mortgage modifications is not the only change announced by Fannie Mae. Mortgage investors and mortgage servicers must also adapt to changes in foreclosure time frames and rules on mortgage delinquency management. Now, if mortgage servicers exceed the allowed time frame to assess a loan modification, Fannie Mae will impose penalties so servicers remediate the problem and improve their performance.

Our previous article introduced the two main factors lenders consider when assessing your mortgage application: your ability to pay it and your willingness to do so. Let’s delve a little deeper into the minutiae of how these two factors are calculated.

One way of calculating your ability to pay a loan is to assess your housing expenses to income ratio, also known as your debt to income ratio. Although there is no magic income to debt ratio that all lenders use to assess a loan modification, many lenders consider the government’s Making Home Affordable requirement of 33 percent debt to income ratio as a good guideline. What does this mean? The debt to income ratio of a borrower describes what percentage of their monthly income is used to pay for housing expenses. For instance, if your household has an income of $4,000 and you pay $2,000 towards your housing expenses, you have a debt to income ratio of 50 percent, which incidentally would be way to high for a reputable lender to approve. So if you are in the business of applying for a mortgage, reduce your fixed debts, such as car loans, credit card payments and other loans before you apply so your net income looks better when compared to your housing expenses. 

Is he willing to pay the mortgage?

Walking away from a mortgage seems to be more and more common among homeowners. Although it is understandable that many homeowners decide to simply let go of their homes and stop paying their mortgages when the market value of the house is much lower than the balance remaining on the mortgage, this is little comfort for lenders who end up with a property they can’t sell and holding a large foreclosure bill for the privilege. It is a priority for lenders to assess the likelihood of you being willing to pay back the mortgage. How can they do that? By looking at your history and financial background. They will run a credit check on you and see how your have managed your finances in the past. Do you regularly max out your credit cards? Have you declared bankruptcy? Have you ever been through a foreclosure? What kind of debts have you incurred in the past? How regular are you with mortgage, rental or even service (water, electricity, phone or satellite) payments? All these builds up your financial profile and helps lenders decide what kind of a borrower you are. Of course, the more reliable you appear to lenders, the more likely they are to approve your mortgage and provide you lower interest rates.

Believe it or not, mortgage lenders are in it for the money. Yes, I’m sorry it is me who has to break the news for you, but with the exception of a handful of institutions, such as your parents and your rich Aunt Martha, lenders do not hand over their money so you can buy a new home out of the goodness of their hearts. This means they must decide who they lend money based on hard and cold financial facts. Well, that and some smart guessing and estimating work. This article will look into the two factors a mortgage lender looks at before deciding if you are eligible to receive a loan. Knowing what lenders look for in a borrower could help your prepare better for a mortgage application and increase your chances of getting approved.

So what do lenders want to know about you before they trust you with their cash? They want to know if you are able to pay back the loan and if you are willing to pay it back. The former is pretty straightforward to calculate. However, the latter can be a little more of a challenge because it goes into the realm of attitude and intention, which are always difficult to assess unless you have a mind reading instrument handy. Of course, you are a completely trustworthy borrower and lenders would be crazy not to do business with you. We know that, but how can we help borrowers see that also. This series of two articles will look at this question by looking into how lenders asses your application and what you can do to increase your chances of getting accepted and ensuring you can truly afford the mortgage payments.

Can you afford it?

That is the first question a lender will consider when assessing your mortgage application. To answer it lenders require borrowers to provide answers to a battery of questions, such as what is your monthly income? What are your fixed expenses? How much debt do you already have? How long have you been working with your current employer? What collateral can you provide for your mortgage? And in some cases, is there anybody who will co-sign your mortgage? Providing this information should not be a problem for you. After all, you should have done your homework and found out this information before you even considered buying a home to see if you could actually afford it. Lenders are simply checking on the work you should have already done. So what is an acceptable level of debt? What guideline or trigger do lenders follow to kill your application based on your income and debt. We discuss this in second article of this series.

Owning your own home is a dream for many Americans. Although two-thirds of American households own their home, many more would like to. However, in the last few years, the American dream has become and American nightmare for those that do own their home but face the risk of foreclosure and losing life savings and any equity locked into the home..  Sometimes this occurs because of unforeseeable problems, like losing a job you have had for years or falling sick and no longer been able to work. Yet often the cause behind mortgage financial problems is a lack of foresight in homeowners before they buy the property. This article will look at five steps you can take to minimize the risk of defaulting on your monthly mortgage payments and saving your home from foreclosure.

Step 1. Calculate Your Net Monthly Income.

Before you know how much you can afford to pay towards a new home you need to know exactly how much you earn. Add the gross pay you receive every month. This includes all the wages and salaries form your jobs and any profit from your businesses. You should also include any interest or dividends you regularly receive from your investment portfolio. From this amount you must now deduct all your fixed expenses, such as your income tax, your social security payments, retirement fund payments and so on. The result is your net monthly income.

Step 2. Deduct Debts and Other Pending Obligations.

Make a list of your long term monthly debt obligations. This includes your car payments, credit card debts and any other debts you estimate you will take longer than 10 or 11 months to pay. Add the numbers on your list and deduct the total from your monthly net income. This information, as well as the data collected in Step 1, is generally also requested by lenders when you fill in your mortgage application. So keep a copy of the information you collect during this exercise.

Step 3. Other Expenses

Add your regular monthly expenses, This includes food, medical care, gifts, charity, entertainment, savings, clothing and education. Deduct the total from the figure you calculated in step 2.

Step 4. Calculate the REAL Cost of the Mortgage

Ask your potential mortgage lenders for a list of ALL the expenses related to your mortgage. This includes property taxes, mortgage payments, mortgage insurance, water, phone and other services, maintenance costs and furnishings.

Step 5. Compare your Income with Your Housing Expenses.

This is the most crucial step when assessing if buying a mortgage is a good or dangerous idea. Compare the result of step 4, the total housing expenses of purchasing and maintaining your home, with the total of step 3, which is your adjusted net monthly income. If your total housing expenses represent more than 30 percent your household’s monthly income, you may want to reconsider the wisdom of buying at this moment, because the slightest change to your work or increase in interest payments could lead you into financial disaster.

So, you want a new home. However, you are a first-time buyer or you don’t have the financial resources to come up with a traditional down payment. What can you do? You can apply for a low down payment mortgage by purchasing a mortgage insurance policy. As discussed in our previous article, mortgage insurances reduce the lender’s risk because the insurance provider commits itself to covering the financial loss if the borrower does not honor the loan’s payments. This reduction in the risk of lending money for a home allows lenders to reduce their down payment requirements. There are two types of mortgage insurance: government insurance and private insurance.

Government Mortgage Insurance

There are three main government mortgage insurance providers: the Federal Housing Administration, the Department of Veteran Affairs and the Department of Agriculture’s Rural Housing Service. However, most of us can only apply for an FHA mortgage insurance, because the Department of Veteran Affairs and the Department of Agriculture’s Rural Housing Service mortgage insurances are restricted to veterans and farmers (or homeowners in certain rural areas), respectively.

Private Insurance

There are many mortgage insurance providers in the private sector. In fact, most lenders either provide their own mortgage insurance or are associated with a mortgage insurance provider. It is a good idea to approach several lenders and ask for details on the mortgage insurance providers they work with and their fees. This applies for lenders who work with the FHA and with private insurance companies.

The Cost

The cost of mortgage insurance varies from one provider to another, from one region to another and by house type and cost. Typically the mortgage insurance of a property will represent 1 or 2 percent of the property’s buying price as well as yearly payments. Government mortgage insurance tends to be cheaper and have less stringent requirements. However, private mortgage insurance providers are required to stop the insurance once you pay for 20 percent of the mortgage balance. Government mortgage insurance providers on the other hand do not generally allow you to cancel a mortgage insurance until the loan has been repaid.

The Bottom Line

Mortgage insurances can provide borrowers with a way of paying for the down payment of a home. However, they do increase both the monthly cost of a mortgage and the overall interest paid on the mortgage balance. Therefore, only buy mortgage insurance if you cannot afford to pay a down payment. If you do have the cash for a down payment, there are probably few investments that provide a better return than reducing the balance of your mortgage and kick starting the equity on your home. 

The typical down payment for a home is around 20 percent of the property’s purchase price. This means that if a property is worth $200,000, the down payment will typically cost $40,000. Unfortunately for most buyers, this figure is way beyond what most people can save for and give as a cash payment. Some people get round this obstacle by getting a second loan to pay the down payment, but not all lenders approve this and in any case this practice comes with problems of its own. What problems? Well if you have to take out two loans to pay for a mortgage and the down payment you could easily overstretch your household finances and default on one of the loans. Defaulting on a mortgage or down payment loan is very dangerous because they both use your home as collateral. This is a fancy way of saying that if you do not make the payments you will be forced to sell your home to pay your debts. Don’t think you have to miss too many payments for a lender to start the foreclosure process. If you do not show signs of repaying just one or two payments banks can start filing for foreclosure. Even if you manage to come up with the late payments, you will also be charged penalties and extra interest payments to compensate the lender. Enough said, large down payments are a financial hazard for homeowners.

Ok, but what alternative do I have? I don’t have the cash to pay a 20 percent down payment, so what am I expected to do except find a second lender? Welcome to low down payment mortgages.  Yes, if you know where to look and who to ask you can find lenders who agree to sell you a mortgage with a down payment of only 3 to 5 percent. These mortgages are quite naturally called low down payment mortgages.

Why do lenders offer such low down payment deals? As you probably expected, it is not out of the goodness of their heart or because they want to help you out. Lenders who accept low down payments do so because they find a way of protecting their investment using a special mortgage lending tool: mortgage insurance.

Mortgage Insurance is a confusing term for many borrowers. Generally when you buy an insurance policy, the buyer is protecting himself from the potential loss of the insured property. However, in the case of mortgage insurance, the insurance buyer is not covering himself or herself but the lender. That means that if the lender cannot pay for the loan, the mortgage insurance will absorb the loss incurred by the lender. In other words, mortgage insurance protects lenders from the financial loss of a homeowners who stops paying his mortgage. This sharing of the lender’s risk between financial institutions and the mortgage insurance provider allows lenders to drop the interest rate they can offer their customers.

How can you apply for mortgage insurance? There are two main methods, which we will discuss in our next article.

The American dream of owning your very own home is, in most cases, just that: a dream, if you do not have the required down payment to buy it. Down payments are a useful instrument for lenders who want to ensure the borrower has the financial wherewithal to pay the loan’s monthly payments. By paying a down payment the borrower is immediately creating equity for the lender so that if the borrower defaults on the mortgage some of the expenses of foreclosure and reselling the property are covered. Of course, a down payment also helps buyers reduce the interest paid on their mortgage and speeds up the repayment process.

However, down payments are also a huge barrier for many families who may be able to afford the monthly payments of a mortgage but struggle to put together the money for a down payment. Nevertheless, owning your home continues to be one of the main financial goals of American families. In the United States two-thirds of all households own their home. So, if you feel you will never be able to buy a home because you don’t have the cash for a down payment, you can be sure that many others have been in your position and are now homeowners.

This series of articles will look into one of the main obstacles to getting a mortgage and buying a home: the down payment and how buyers can go about finding the resources to pay for it. However, our first question is much more general and one all home owners should ask themselves before applying for a mortgage. The question is: Why Buy A Home? The truth is buying a home is not for everyone. Although buying your own home can provide personal satisfaction, tax savings, a sense of community, stability and an investment in the future, it doesn’t come without its issues. Buying a home comes with added expenses, such as property tax, general maintenance and repair expenses.

However, if you are reading this article, you are probably already sure about the benefits of buying a home and simply require a little help to find the down payment you need to get the ball rolling. The truth is the typical 15 to 20 percent down payment is simply too much money for most families to save. For instance, a family might be able to afford an $800 to $1,200 mortgage payment for a $300,000 home, but find it impossible to cover the $60,000 down payment traditional lenders require. Thankfully there are methods you can follow to reduce a down payment to 5 or even 3 percent of the property’s price. Our next article will explain how you can get lenders on board and pay less for your down payment regardless of where you live and the value of your home. .

The series of storms, tornadoes and flooding that have hit Alabama have caused thousands of families to lose their homes and increased the number that face foreclosure due to the financial and employment consequences of these disasters. The Housing and Urban Development (HUD) has reacted by announcing disaster assistance to victims. On April 29, 2011, Shaun Donovan, Secretary of HUD, stated he would speed the processing of federal disaster assistance to people affected by the storms in Alabama. This relief will come in the form of foreclosure assistance, Mortgage Help and other forms of financial assistance to families in the area. This article will look at some of the avenues HUD is using to allocate resources where they are needed the most.

Foreclosure Relief

Families affected by the storms will receive an immediate 90-day respite from any foreclosure and broader forbearance on mortgages with the FHA under foreclosure. This will grant homeowners a chance to arrange their finances and save their home from foreclosure.

Mortgage Insurance

Victims of natural disasters will also receive 100 percent mortgage insurance on loans they apply for to rebuild their homes or buy a new one. Banks and other lenders can apply to the FHA for up to 100 percent insurance on the loan’s balance including closing costs. The purpose, of course, is to stimulate the investment of money in the disaster area and help homeowners with the daunting task of rebuilding their home or finding a new one.

Home Rehabilitation and Mortgages

HUD also provides victims with mortgage insurance so they can finance their mortgage and the rehabilitation of their damaged home with a single mortgage. Effectively, HUD is covering the lender’s risk so that banks and other lending institutions are willing to offer loans to families who would otherwise not qualify for credit.

Relocation of State and Federal Funds

HUD provides states with Development Block Grants and HOME programs which are used for a variety of purposes. Communities and institutions in Alabama have been authorized to redirect these funds to cover the cost of emergencies and critical needs. The same institutions have also been granted with special authority to expedite the allocating of funds to speed up the repair and replacement of damaged homes.

These are only some of the programs and aid resources available to victims of natural disasters. If you want to find out more about what programs you can apply for if you have been affected by the Alabama storms, tornadoes and flooding, click here. Programs you will find in this section include the Disaster Housing Assistance, the Reprogramming of Public Housing funds and Assistance from Ginnie Mae.