Mortgage Sanity

Although the majority of today’s mortgage lenders are honest and reputable, there are still some unscrupulous individuals out there who will do whatever they can to separate you from your money. Even among good institutions, the loan that’s offered may not always be the best one for you; and though legal, it could actually be downright terrible. Here are fifteen warning signs – in no particular order – that you may be headed for a bad deal:

1. The lender pushes the advantages of an ‘option’ mortgage - To make the monthly payments fit within your budget, you can choose to pay based on a 15- or 30-year amortization schedule, an interest-only amount, or a small percentage of the interest due. By nature, many choose the smallest payment amount, which results in negative amortization of their mortgage (the principal balance actually goes up each month). Added to this is the fact that most of these loans have an adjustable rate, which means that you could eventually find yourself having to pay double or even triple your initial monthly payments.

2. You’re offered an extremely low-interest-rate loan - Rates are rising. If you’re offered, for example, a 1.25% mortgage that allows you to borrow a lot of money for a relatively small monthly payment, know assuredly that it has an adjustable rate. And just as in our first example, you’re very likely to be looking at negative amortization with impending ‘payment shock’ just over the near horizon when the rate adjusts.

3. You’re encouraged to embellish or falsify your loan application - Some lenders may tell you “its okay” or “it’ll make you look better financially” and that the information won’t be scrutinized too closely. Don’t bet on it. Remember, their commission is tied to your getting the loan, so the only person to trust with your best interest is you.

4. You’re encouraged to borrow more than you need or accept payment terms which make you uncomfortable - Again, you must look after you own financial well-being. For the lender, a bigger loan means a bigger commission. It’s you who will have to make the monthly payments.

5. The lender doesn’t give you the required disclosures - The Good Faith Estimate, Truth-in-Lending form, Right of Rescission form and other disclosures must be provided to you at the time of application or shortly thereafter. All lenders know this; it’s the law and it’s not likely to be forgotten. If you don’t receive them, be very wary.

6. You’re asked to sign a blank form - The lender promises to fill it in later in order to ’save time’ (or for any other reason). Don’t do it! Nor should you sign any document containing incorrect information. If you’ve signed it, you’ve agreed to it.

7. You see any references to a prepayment penalty - Lenders use this clause to keep you locked-into a mortgage. These days, there are countless loans available without this penalty; you shouldn’t have to accept it. In other words, keep shopping.

8. There’s a balloon payment - This acts as a de-facto requirement to refinance your mortgage after a certain period of time which, of course, means more fees to be paid to the lender. If you must accept a balloon, make sure that it’s at least five years down the road.

9. The lender requires you to sign a contract for the payment of an origination fee even if the loan doesn’t close - If the transaction falls through, you could still be on the hook for thousands of dollars. Besides, it removes the incentive for the lender to actually help in getting the loan to closing.

10. You encounter high-pressure sales tactics - If the lender states that their offer is only good for a very limited amount of time, be careful. Ask yourself why someone with a legitimately good offer would push you to accept it immediately. If they don’t want you to be able to think about it, something could be wrong.

11. If it sounds too good to be true, it likely is - Deals that offer terms which are way below those of other lenders in your local market, or promise services that can’t possibly be provided, are probably not telling you everything that you need to know. Read the ‘fine print’.

12. Your questions aren’t answered to your satisfaction - Disreputable lenders will count on your unfamiliarity with the mortgage lending process as well as your trust in them to give you the best deal for your circumstances. If they don’t answer your questions clearly and concisely, there could be something that they would rather you didn’t understand.

13. At the closing table you discover substantially different terms or a completely different loan product than what you agreed to - The lender is counting on you to sign because of the time and money you may have already invested in the process. You have the right to walk away.

14. You see an arbitration clause - Agreeing to settle any disputes with the lender by arbitration actually strips you of many of your legal rights as a homeowner, providing the lender with an opportunity to take advantage of you. Never agree to this.

15. The lender promises you everything that you ask for, but fails to put it in writing - Insist upon everything that you negotiated in you deal to be put into writing, on company letterhead, and signed by a decision-maker. This especially applies to any lock-in agreement for interest rates. If they won’t do this, move on; under the law, verbal agreements are no agreements at all.

One of the best things about applying for a mortgage loan online is that you can find many leading lenders that provide multiple, competing loan offers for one application. You can quickly compare lenders’ offers and do all of this with no obligation to commit to any one lender.

Whether you are looking to refinance, get a home equity loan, obtain a second mortgage or a new home purchase loan. It’s important to make sure that if you do apply online, that you are applying with a leading lender who is reputable, and who’s site is secure. Most online mortgage lenders do not ask for the most sensitive personal information on line, but wait to talk to you on the phone to gather the most sensitive information. However, you can still get a reliable mortgage quote on the internet by entering your basic loan application information.

1. Number of open credit accounts - Lenders always look at the number of open lines of credit that an applicant has, and analyze this information to determine the potential risk they face. Their computer software is able to calculate the remaining available balances on those open lines, as well as the likely minimum payment amounts. The software will always consider the worst case scenario, and therefore will project a hypothetical situation where the applicant has maxed out all available lines and is paying the minimum required on all those accounts. This will then be factored into the debt-to-income ratio and some income analysis will be done to see if the applicant would still be capable of paying the mortgage every month.

2. Number of closed credit accounts - Lenders will analyze your credit history report to see if you’ve recently closed any major revolving lines of credit prior to applying for a mortgage. Since your report will specify exactly when the account was closed, as well as if it was closed at the creditor’s request or the account owner’s request. If a large number of credit accounts were closed at the same time, lenders may ask for additional information about the reasons for the closures.

3. Length of employment - Since the ability to pay the loan every month is directly affected by an applicant’s employment; this is obviously a major concern for lenders. The longer a borrower has had the same job, the more experience he will have with his weekly or monthly paychecks. Conversely, an applicant who has recently changed jobs may not yet be used to the new pay scale, or to the new paycheck’s deductions, etc. A longer employment with the same company also implies to the lender that the applicant is stable and dependable. On the flip side, a loan applicant with a scattered employment history and only a short period of time with the current employer could indicate potential problems in the future. If a borrower changes jobs frequently, the likelihood that new employment compensation will not be stable is a concern.

4. Payment consistency - This is one of the most important aspects of a loan applicant’s credit history. Aside from everything else, the borrower’s ability to make timely payments every month will usually be the deciding factor in whether or not a loan application is approved. Lenders are usually willing to take everything else into consideration for approval except for this. If a lender sees that there are credit lines with 30, 60, or even 90 day late periods on a regular basis, then this implies that the borrower does not make enough money to pay those balances, or the borrower simply is not responsible enough to make monthly payments. Neither one of those determinations is good for an applicant. The payment history is also most closely examined for the proceeding year, because lenders are more concerned with what you’ve done recently rather than several years ago.

5. Length of credit profile - A loan applicant’s credit report will indicate the age of the oldest open credit account. This particular account is always analyzed by lenders more closely than the others because it gives clear indication as to the consistency of the borrower’s ability to pay on time. Lenders understand that people’s situations change and sometimes things get difficult, but the borrower’s ability to recover from such circumstances will be clearly indicated in the history of the oldest account. If sporadic and severely late payments are shown throughout the applicant’s oldest account’s history, then the lenders are likely to believe that such actions are merely ordinary behavior.

6. Time at current address - An applicant’s length of time at his current address is always taken into consideration by lenders because it implies potential dangers that are similar to the applicant’s length of employment. If a borrower has lived in the same place for several years, the lenders see stability and consistency, and will feel comfortable that the borrower has been able to balance income and living expenses. If a borrower shows multiple recent addresses and address changes, then the lenders are likely to view this as instability and a chance that income may not be enough to cover living expenses.

7. Debt-to-income ratio - Another very important aspect of the loan applicant’s credit profile is his debt-to-income ratio. This is a calculation that lenders will complete to determine the amount of debt compared to the amount of income. If the ratio indicates a level of debt that is above what the lender’s experience has deemed acceptable, then the loan application will be declined.

8. Bankruptcy - A credit report that indicates an applicant filed for bankruptcy will be scrutinized much more than one without such a notation. Bankruptcy of any kind is a clear indication that the borrower was unable to adequately manage his monthly expenses, or merely took on more credit than he was able to handle. Neither one of these scenarios will benefit the loan applicant.

9. Multiple collections accounts - When an applicant’s profile lists credit accounts that have been turned over to collection agencies, the lenders are always extremely nervous about approving such loans. Accounts with collection agencies indicate that the borrower was either unable to pay the monthly minimums, or merely ignored such demands. The fact that a collection agency was involved also indicates that the borrower was either unable or unwilling to work things out with the original creditor, and this is a major cause for concern. The simple fact that an account was turned over to a collection agency means that the applicant’s credit profile will list an account with consistent late payments and past due unpaid balances. Many times, the report will also note that the original credit closed the account and wrote off the unpaid principal as bad debt. This notation is severely damaging to a loan application.

10. Judgments - A judgment listed on a credit profile indicates that a borrower failed to repay an original creditor, then also failed to make arrangements with a collection agency, and was then taken to court by one of the two organizations, where a judge ruled in favor of the creditors and arranged some form of repayment or compensation. If an account went so far without payment or resolution, this clearly indicates to a mortgage lender that the applicant was either unable or unwilling to satisfy his obligation. This dramatically reduces the applicant’s chances of approval because, most of the time, a mortgage is the largest debt a person will get, and if he was unable to responsibly handle his existing, smaller, debt then how will he handle a much larger obligation.

11. Liens - Liens on an applicant’s credit report are very often the result of a judgment, so they are viewed in much the same way and with the same level of hesitation by lenders. A lien will usually be attached to an applicant’s assets or possessions of value.

12. Multiple credit cards/lines maxed out - When an applicant’s credit report lists multiple lines of credit that have reached their available limit, this makes lenders nervous because it indicates that the borrower was required to use credit to purchase necessities for which he did not really have the income. Again, this implies that the borrower is living beyond his means and may be unable to pay the mortgage.

13. Repossessions - A credit report that notes the repossession of an automobile could potentially result in a declination because this is simply another indicator that the borrower was unable or unwilling to repay a previous loan, and the situation deteriorated to the point that the tangible collateral securing the loan needed to be taken by the creditor. A repossession of an automobile is nearly identical to a home foreclosure, but on a smaller scale. Seeing this on a mortgage applicant’s credit report will make lenders extremely hesitant to approve a loan.

14. Evictions - If an applicant was evicted from his apartment, the lender will be very wary of approving a loan for this individual because eviction indicates an inability or unwillingness to pay. This scenario is very important to lenders because rental fees for an apartment fall into the category of housing and living expenses, and therefore have a definite connection to the mortgage loan. If a borrower was forced to leave his previous residence due to non-payment, what evidence exists that this will not happen again?

15. Foreclosures - Foreclosures listed in a mortgage applicant’s credit history are one of the most significantly negative entries. They indicate that the borrower has been in the exact same situation before, and it did not turn out well for the mortgage lender. The applicant’s previous loan experience will be very important to the new potential lender, so a foreclosure within the past several years will make it extremely difficult for any mortgage applicant to obtain approval.

16. Credit counseling services - When lenders see that an applicant has used the services of a credit counseling company, they are always hesitant to approve a loan for that individual. Use of a credit counseling service is a clear indication that the borrower was unable to repay his previous or existing obligations per their original agreements and terms, and was also unable to work things out independently with the original creditors. Lenders who see such notes in a credit file will be very nervous and more likely to decline an application, or in the least approve it with much higher interest rates to offset their additional risk with such a borrower.

17. Multiple recent new accounts - If a lender sees on an applicant’s credit profile that he has opened several new credit accounts in the recent past, this is a major cause for concern because the only way lenders can interpret this information is to assume that there was a need for the applicant to pay money he did not actually have. The mortgage companies’ experience has taught them that the average consumer in good standings has no need to immediately open several new credit accounts at the same time, unless there is an undisclosed problem that required a significant amount of money.

18. Number of credit inquiries - A common misconception in the lending industry has been that multiple credit inquiries within a short period of time will result in negative credit scoring and concern from mortgage lenders. This is not entirely true. Indeed, lenders will look more closely to the applicant’s file when there are multiple notes indicating requests for credit or applications. However, these inquiries’ effect on a consumer’s credit score and potential mortgage approval will depend on the type of credit being investigated. If the inquiries all come from auto loan lenders or other mortgage companies, then there will be not negative effect on the consumer’s application. The majority of lenders will consider multiple inquiries within a short period of time to be one large inquiry, thereby having little negative effect. Additionally, it is important to mention that the number of “permissible” inquiries into one’s credit in a short period of time also depends on the length of that consumer’s credit history. Obviously, those with a longer credit history will be allowed to have more inquiries than those with little or no history.

19. Student/education loans - Lenders do not worry too much about the amount of student loan and college education debts that an applicant has, provided that the current payments have been regular and on time. Many of the more technologically advanced lenders have software that will take education debt into consideration in a different fashion than other types of debt. This difference usually comes in the form of a smaller influence and less consideration on the overall debt-to-income calculation because lenders typically believe that more education will ultimately result in higher salaries.

20. Automobile loans - Provided that a borrower pays his car loan on time every month, lenders will not usually hold such loans against him when considering his overall outstanding debt. This is also true because such loans are secured by the car itself, and there is small likelihood of non-payment of that loan dramatically effecting the mortgage.

The definition of a “Jumbo Mortgage” is a mortgage loan whose total amount is higher than the standard conventional limits.  Of course, with the ever-increasing cost of real estate in our country, it is becoming more and more difficult for consumers to purchase homes that are below this threshold.  This is also not to mention that the defining line between standard and jumbo mortgages is not set in stone, and is actually controlled by two of the largest lenders in the United States, Freddie Mac and Fannie Mae. 

These two organizations actually end up purchasing a rather significant portion of all residential real estate loans in the United States, and the sheer size of their portfolios allows them a powerful influence over the lending industry.  Currently, the threshold for conventional mortgages is $417,000 in the lower 48 states, and $625,500 in the remainder of U.S. territories.  Freddie Mac and Fannie Mae have decided that any loans over this amount are outside their comfort zone, and therefore will not be considered for purchase or servicing. 

For those home buyers in the market for properties requiring financing above the jumbo threshold, they will experience little difference from that borrower’s perspective.  With the number of jumbo mortgages increasing every year, the availability of quality programs to service such a need has also grown.  Today, the programs available for jumbo mortgage loans are nearly identical to those accessible to standard mortgage seekers.  The differences a jumbo mortgage borrower will most likely experience are higher interest rates, higher minimum down payment requirements, and longer available amortization schedules. 

Jumbo mortgages are most commonly held with alternative lending institutions such as insurance companies and private investment groups specializing in real estate lending.  Since these lenders are outside the mainstream, and are sometimes the only option available for borrowers at such a level, the requirements for qualification are sometimes more stringent. 

These alternative lenders may have more strict rules because they are taking on significantly more risk by loaning these larger amounts.  Most lenders agree that homes over the jumbo threshold fall into the “Luxury Home” category.  This segment of the real estate market is commonly subject to additional risks, most notably a lack of consistent appreciation.  Without predictable growth, or superior confidence of resale, the lender’s ability to recoup their money in the event of default is at risk.  There is indeed a cost associated with such risk, and that is translated into higher interest rates.

Because jumbo loans are not just for the wealthy anymore, the lenders providing such financing have had to address the fact that a significant portion of their borrowers will be average middle-income families who just happen to live in an area with dramatic home prices.  Since high real estate prices do not necessarily coincide with the salary increases of the average American, jumbo lenders were the first to offer and implement some changes to what had become a stagnant pool of loan choices. 

The simplest adjustment to come in recent years has been the 40-year, and sometimes even the 50-year, amortization schedule.  These loans are no different that the traditional 30-year loan, they just have lower payments thanks to the longer term.  Also, jumbo lenders will usually have different templates for those borrowers who get ARM’s, and other lenders will have different requirements for jumbo loans that do not exist for standard conventional loans. 

To the jumbo mortgage applicant, the front-end experience is not too different from that of the standard loan applicant.  The bulk of the differences are internal, and will only indirectly effect the borrower in terms of rates and payment totals, and directly effect him with requests for additional verification documents or further independent analysis of the property.

Lease Purchase Agreement - What is it and How Does It Work?

A Lease Purchase Agreement is a contract between the owner of a property and a potential purchaser of that same property, wherein the purchaser is permitted to live in the property as a renter for a period of time before actually buying it. This concept presents a potentially significant opportunity for both the buyer and the seller, yet also presents some serious potential problems for all parties involved.

The Lease Purchase Agreement is Specific and Complex

The Lease Purchase Agreement is a complex contract that needs to contain very specific language relating to several different situations and points of necessary discussion. It is much more complicated than a standard real estate purchase contract; in fact, the Lease Purchase could be described as a combination of the standard rental lease contract and the standard real estate purchase contract, with several additional sections and items. Due to the complexity of these agreements, there is a danger to both the buyer and the seller that things will not work out as anticipated if the contract is not structured appropriately from the beginning.

Benefits to Both Seller and Buyer

The potential buyer of the property benefits from this type of contract because it gives him the opportunity to actually live in the house and the neighborhood before committing to purchase the home. Additionally, it gives him sufficient time to arrange for financing, repair his credit, save for a down payment, etc. The seller is also granted the same opportunity and time frame to search for another suitable home, arrange his own finances, etc.

Three Basic Segments: Rental Contract

There are three basic segments of a Lease Purchase Agreement: the Rental contract, the Property Purchase contract, and the Option contract. The Rental contract is nothing more than you would expect out of any standard landlord-tenant agreement, wherein it is agreed that the owner of the property is responsible for all maintenance and upkeep, while the tenant is responsible for payment of the rent every month, etc. The terms of this portion of the overall Lease Purchase contract must be negotiated and confirmed right along side of everything else.

Property Purchase Contract

The Property Purchase portion of the Lease Purchase Agreement contains everything that you would expect out of an ordinary real estate contract. Here, the buyer and seller agree on everything from price, to the physical condition of the property, and any other stipulations they deem necessary and appropriate.

Option Portion of The Contract

Lastly there is the Option portion of the contract, which is the most significant and important piece of the entire agreement. It is in this section that the real details of the relationship and the sale of the property will be stipulated and maintained. Although the buyer and the seller may include any items or scenarios that they feel necessary, there are some common threads that nearly every Lease Purchase Agreement has, and they are as follows:

¬ A certain portion of the tenant’s rental payments will go toward reducing the final sale price of the property.
¬ There is a maximum period of time that the buyer may remain as a tenant/renter before he must exercise his option to purchase the property (the expiry of the lease).
¬ If the renter chooses not to purchase the property at the end of his lease, he shall forfeit an agreed-upon percentage of those rental payments that were previously credited toward his purchase price.
¬ If the seller chooses not to sell the property at the expiry of the lease, the tenant will be refunded an agreed-upon portion of those rental payments that were previously credited toward his purchase price.
¬ The sale price of the home will both be determined at the outset of the lease and remain unchanged regardless of any potential changes in the fair market value of the property, or the sale price of the property will be determined by an independent appraisal at the exercising of the purchase option.
¬ The seller will inform the buyer whether or not independent financing arrangements are necessary, or if the seller is willing to hold a note on the property himself and simply convert the rental payments into mortgage payments.

Different Situations to Suit Both Seller and Buyer

Being that every situation is different and unique, there are countless other potential additions or subtractions that may be written into any Lease Purchase Agreement. The important fact is that this type of arrangement could possibly suit both the buyer and the seller very well. There is no clear-cut template for these types of contracts, therefore there exists some danger that one party could end up in a better position than the other. For this reason, it is essential that all parties involved conduct their due diligence to ensure that the contract is fair and valid.

What is Rehab Financing?

Rehab Financing is the term that describes a unique type of loan arrangement that a real estate investor may obtain for the purposes of buying a home with the specific intention of re-selling it again after having completed repairs or upgrades. There are an increasing number of lenders, most of them outside the normal mortgage channels, who are willing to loan real estate investors the money needed to pay for repairs and/or upgrades to properties.

Specialized Finance Companies

The majority of these specialized finance companies use independent appraisers and experienced real estate professionals to assist in assessing whether or not the proposed real estate venture has merit and a good likelihood of generating a profit. These individuals are typically former property appraisers and/or contractors with a background in home repair or other real estate focused experience. Provided that the lender’s analysis proves a definite potential profit can be made from the suggested borrower’s plan, they are very likely to offer a quick approval for the loan.

Requirements and Considerations a Lender Will Evaluate Before Giving Approval.

Of course, simply having a good plan and a positive assessment does not guarantee that borrowers will get approved for their Rehab Loan. There exists a myriad of other requirements and considerations that the lender must evaluate before giving approval for financing, and the chance of successfully rehabbing the property is only one of them. The lender will always consider such things as the real estate investor’s prior experience, credit history, employment history, and current financial resources. With loan applications of this type, it is also not uncommon for these lenders to interview the applicant to discuss actual ideas and comprehensive planning methodology.

Less Stringent Credit Requirements

Since these loans are typically very short-term, the lender will usually have less stringent requirements as far as credit score, credit history, employment length, and financial resources. This is because the loan is designed to offer the borrower the opportunity to quickly purchase, repair, and/or upgrade a residential property with the specific intention of reselling it within a short period of time. Therefore, the lender is not typically concerned with the borrower’s long-term ability to repay a loan over several years or even decades.

Previous Real Estate Experience and Business Resources are Important 

These lenders are usually most concerned with the borrower’s previous real estate experience, personal and business resources available to assist with the project, and their own independent analysis of the project’s merit. Assuming that each of these things falls within their pre-determined criteria for approval, a borrower may find his application for funding approved rather quickly, allowing him the opportunity to immediately begin his project.

Uses for Rehab Loan Funds 

Most real estate investors will use the funds from a Rehab Loan for multiple things, the most common being to pay the mortgage for the interim period while the work is being done, and also to pay for the contracting services that are required to complete the desired upgrades and/or repairs to the home. Less common, but still plausible, is the idea of using some of the proceeds of the Rehab Loan as a down payment on the property in the event that the borrower does not have sufficient independent funds available to successfully qualify for a mortgage without a down payment.

Rehab Loan is Not a Mortgage 

It is extremely important to clarify that this type of loan is not a mortgage. In fact, the real estate investor typically secures alternative financing through other channels prior to applying for a Rehab Loan. Since the Rehab Loan is usually only for the amount necessary to complete the repairs/upgrades to a home, the investor still has to come up with enough money to actually purchase the property. However, it is also important to note that a large majority of investors obtain 100% financing when buying investment properties, therefore the actual cash outlay for them is minimal. Additionally, the proceeds from the sale of the house after repairs should be enough to cover the required mortgage payments, rehab loan payments, contractor fees, and any other miscellaneous expenses incurred during the working stages.

A Project Should be Fully Researched and Evaluated 

With so many costs and expenses to analyze and prepare for, this type of procedure has the potential to become extremely confusing and potentially disastrous to the inexperienced real estate investor or property flipper. For this reason, it is highly recommended that a project like this be fully researched and evaluated before any actual contracts are signed or negotiations are concluded.

What Are Tax Lien Certificates?

The popularity of using Tax Lien Certificates as a method of obtaining residential real estate has increased exponentially over the past decade. Using this technique allows real estate investors the chance to acquire homes without shelling out substantial sums of money or going through the grueling process of obtaining mortgage loans. There are obviously some risks associated with this type of investing and property acquisition, but these risks are usually considered negligible by investors who are familiar with the tax lien market.

How a Tax Lien Certificate Works 

So how can you acquire property by using tax lien certificates? Well, in nearly every state in our country, if a home owner does not pay the taxes due on his property then the city or county will issue a lien on that property. Most states also allow for that lien to become what’s referred to as a “primary” lien, meaning that it takes precedence over any other claims against the property, and therefore must be addressed before anything else.

Tax Liens are Auctioned or Sold to Investors 

These liens are usually sold to investors in an auction style format as a way for the state or municipality to generate further revenue. Investors who are familiar with this process will attend the auction and bid on the tax liens they want. Once a bidder has successfully taken possession of a tax lien, he then becomes the person with the primary claim against a property, regardless of the amount of the taxes that are due. The sum total of the taxes has no bearing on it’s placement in the priority list of creditors and claimants, and is always placed first by the state.

Investors Make Money off the Interest and Penalties 

Very simply, this means that the home owner will be unable to sell the property or obtain additional financing without first satisfying the tax lien. Any time that a tax lien is issued against a particular property, there is a mandatory interest penalty that is attached to the lien that becomes a permanent addition to the total balance due. If and when a home owner decided to satisfy his outstanding property taxes and have the lien removed from his property, the holder of the lien would be entitled to keep the mandatory penalties and interest fees that have accrued since the issuance of the lien. The original amount of the taxes due would be forwarded to the appropriate jurisdiction by the investor. This scenario guarantees that an investor will receive profit on his purchase of the tax lien, and the amount of that profit will be different in every jurisdiction.

Potential to Take Possession and Title to a Property 

The most attractive part of investing in tax lien certificates is the potential to take possession and title to a property. The legislation in the majority of states stipulates that if a home owner neglects his taxes for a certain number of years, then the holder of the tax liens has the right to foreclose on the property immediately following the acceptable grace period. The most common grace period for a home owner to satisfy his back taxes is three years. If he does not pay the taxes due after three years, then the investor may begin foreclosure proceedings and take title to the property.

The best part about this situation is that the tax lien holder then owns the property free and clear, and is in no way obligated to deal with or repay the mortgage company. This is how an investor may acquire a property for a miniscule amount of money and owe nothing on it. Or, in the least, be assured of a sizable return on his investment when the interest and penalties are added to the lien.

Mortgage Lenders Often Pay Outstanding Tax Balances 

Now, because this scenario presents a significant risk to the mortgage company, it is not uncommon for lenders to actually pay the outstanding balance due on the property taxes and simply add that sum into the outstanding mortgage loan. The lender stands to lose quite a bit if the home owner loses possession and title to the property. In that situation, the borrower is still responsible for the outstanding loan balance, yet there would no longer be any collateral with which the loan was secured. For this reason, it is very uncommon for mortgage companies to pay the tax lien on the home owner’s behalf. However, there are always lenders who are not up to speed on such situations, and that is why the tax lien market is so popular with would-be real estate investors.

What is an Assumable Mortgage?

Assumable Mortgages are something that have been mostly ignored and pushed aside in recent years simply because of the current state of interest rates. With rates at an all-time low over the past several years, the necessity and attractiveness of Assumable Mortgages has decreased significantly. However, with increases in rates looming in the foreseeable future, there is a good likelihood that such mortgage programs will once again come to the forefront of both investor and broker radars.

Buyer of a Property Takes Over Mortgage Payments  From Seller

The general concept of the Assumable Mortgage is relatively simple, yet the actual details of such a contract can be extremely complicated and difficult to successfully implement. In brief, an Assumable Mortgage is one in which the buyer of a property simply takes over the mortgage payments from the seller, thereby avoiding the necessity of a new loan. Of course, that is over-simplifying the idea, as there are a great many details that need to be considered and agreements made before such a transition could ever be concluded.

Contract Must Contain Language Allowing the Mortgage to Be Assumed 

To begin, the seller’s mortgage contract must already contain language stating that it is indeed able to be assumed by a future buyer of the property. Without this language, there would be no point in even investigating the effectiveness of such a deal. Keep in mind that the lender must now evaluate the new borrower’s ability to repay the outstanding balance of the existing loan, and therefore they will review the borrower’s situation just as they would with any new applicant. This means that the buyer will be subject to the same application paperwork, credit check, employment verification, and income verification procedures as any other brand new loan applicant.

Most Mortgage Contracts Have Stipulations Governing These Situations 

Plus, most mortgage companies today have multiple clauses inserted into loan contracts that reference just this situation. Many of them are prohibiting the assumption of mortgage payments by anyone other than the original borrower, or are stipulating that if they were to permit an assumption then they would also reserve the right to increase interest rates to those currently considered acceptable and appropriate. If the lender were to raise the interest rate on the existing mortgage in the event it was assumed by another lender, then this essentially defeats the purpose of the deal.

Factors to be Considered Before Assuming a Mortgage 

However, if the home buyer meets all of the lenders pre-defined criteria to become eligible to assume the seller’s mortgage, there are still several other factors that need to be considered before such a deal can be concluded. The actual sale price of the house is usually the largest consideration at this point. Depending on how long the seller has owned the property, and how much the value of the property have appreciated,