Couple With Little Cash, but Good Income Can Swing Home Purchase
QUESTION: I have a good job, earning about $60,000 per year gross. My wife earns about $35,000 annually. But a few years ago, we had illness and unemployment, so our credit was ruined, although we are now paying our bills on time.
We only have about $10,000 in the bank and with a baby on the way, we are worried we will never be able to buy a home. After the baby is born, my wife plans to go back to work, since her mother will give the baby good care. Is there any way we can buy a home in our precarious situation?
ANSWER: Of course you can buy a home. You are to be congratulated for making a comeback from your financial difficulty. Surprisingly, your bad credit is not a serious drawback. However, the problem is your lack of cash for a down payment and closing costs.
But the situation is not hopeless, although your choice of homes will be limited by the credit and cash problems.
One alternative is to buy a home with a large, assumable first mortgage, such as an older VA or FHA loan, and an anxious seller who will carry back a large second mortgage. If the home has been on the market for sale several months and the seller doesn’t need much cash, this situation will be ideal.
Another alternative is to buy a free and clear home where the seller will carry back the first mortgage for income. Retirees are especially good candidates for seller financing.
Still another choice is to lease a home with an option to buy. Look in the “Houses for Rent” newspaper classified ads. After you inspect a house you like, offer to lease it with an option to buy. To get the owner excited, offer to pay a large non-refundable “consideration for the option,” perhaps $5,000.
Be sure to negotiate a substantial rent credit toward your down payment. For example, I have several tenants paying $1,500 per month to rent their homes, but each month they get a $500 rent credit toward their down payment when they exercise their purchase option at a locked-in price.
Beware of Short-Term Balloon Payment Loan
Q: I have an opportunity to buy my first house. The seller had to foreclose on a previous buyer, so she is anxious to resell the house since she lives out of town. The VA first mortgage is assumable and the seller will carry a second mortgage if I make a 10% cash down payment.
However, the seller wants the $22,000 second mortgage due in just two years. I think this is too short a time. Do you think I am being unreasonable to insist on at least a five-year term for the second mortgage?
A: No. A two-year balloon payment on a second mortgage is very dangerous, unless you have a plan for paying off that loan. You could wind up like the first buyer, losing the house by foreclosure if you are unable to make the balloon payment. A five- or even 10-year balloon payment will be much safer for you.
Favors ‘For Sale’ Sign on Sold House
Q: Usually I agree with your sound advice. But I must disagree with your recent answer to that home buyer who objected to the realtor leaving a “For Sale” sign on the house until the sale closed. As a realtor with over 15 years experience, I have learned that many home sales fall apart before the sale closes.
For this reason, my salespeople leave the for sale sign on houses because this encourages backup offers just in case the first sale isn’t completed. There are so many flaky buyers that even the most solid sales often don’t close for one reason or another. Putting a “Sold” sign on a house before the deed is recorded is asking for trouble.
A: I am shocked that you advocate leaving a “For Sale” sign on a house that has been sold. That is false advertising. If you recall, the question came from a home buyer who had removed all the contingencies, had an approved mortgage loan and was just waiting for the scheduled closing date.
When the buyer’s friend called the realtor about the house the realtor said the house was sold, but there was another nearby house the agent had available for sale. That is a classic bait-and-switch scheme, which is illegal.
As a longtime realtor, I am surprised you don’t realize your best advertising for listings is a “Sold” sign on a house. When the neighbors see your sign, they know your firm gets results. But leaving a “For Sale” sign on a house for a long time is bad advertising because it looks like your company doesn’t know how to find buyers.
I agree the “Sold” sign should not be put up until the contingencies are removed and the buyer has obtained necessary financing. Some realty agents prefer to use a “Sale Pending” sign. If the sale falls apart, you can always take down the sign.
Beware of Contingency Without Deadline
Q: When I accepted a purchase offer for the sale of my home I knew it contained a contingency clause for the buyer to obtain a mortgage. But that was almost two months ago. She has applied with several mortgage companies, but the agent tells me she hasn’t been able to find a mortgage she likes. How much longer do I have to wait before I can put the house back on the market for sale?
A: It is a shame the real estate agent did not insist that the financing contingency clause have a deadline. Without such a time limit your buyer can take her time shopping for a mortgage. I suspect she is delaying the sale in hopes mortgage interest rates might fall.
Since you have given the buyer two months, you have been more than reasonable. Perhaps a letter to the buyer and her agent setting a deadline of two additional weeks to obtain a firm mortgage commitment will get some action by the buyer.
Upgrading Property Can Create Wealth
Q: I am 27 and have about $30,000, which I am thinking of investing in real estate. My wife and I own our home and it has proven to be our best investment. What do you think are the best opportunities for a novice investor like me?
A: I recommend realty investments that can be upgraded to increase their market value. Then you won’t be dependent on inflation to raise the value of your property.
Personally, I like fixer-upper houses that need improvements to raise their market value. If you had more money you could accomplish the same goal by purchasing run-down commercial property, such as neglected small shopping centers and upgrading them. By improving sound, well-located property, you will be improving your community while creating wealth at the same time.
Don’t Pay Off a Loan at Low Interest Early
Q: We owe about $24,000 on our home mortgage at 6.5% interest rate. I have been following your discussions about adding extra principal payments to the regular monthly mortgage payment to pay off the loan early and save interest. That seems to make sense, if the mortgage interest rate is high. But in our situation, do you think we should pay an extra $100 or so principal each month?
A: No. If you pay an extra $100 payment each month to reduce your loan’s principal balance, you just invested that $100 at 6.5% interest. That’s not a very good investment. However, if you had a higher interest rate mortgage, perhaps 10% or above, then I would recommend adding extra principal payments each month to save interest.
The Difference in Terminology for Loans
Q: I have been enjoying your articles for several months and I notice you always use the word mortgage to refer to a loan on a house. But I also have heard the term trust deed used to describe home loans. Is there any difference? Is a mortgage better than a trust deed?
A: As you probably know, this column is published nationwide in many newspapers. Because virtually everyone understands a mortgage is the device used to pledge real estate as security for a loan, I refer to mortgages while discussing real estate loans. However, in many states deeds of trust are used as security devices.
A mortgage involves two parties, the borrower and the lender. But a trust deed involves three parties, the borrower, the lender and the trustee. The trustee has nothing to do until the loan is paid in full and the trustee reconveys legal title to the borrower or the borrower defaults and the trustee conducts a nonjudicial sale of the property.
Most lenders prefer trust deeds because of the speed of foreclosure sales, and there is usually no redemption period after the trustee’s sale. However, in most states there is a redemption period after a mortgage foreclosure sale.
How to Be Sure You Get a Valid Title
Q: My dad became a millionaire in real estate. Although I am just a university freshman, I know already that I want to earn my fortune in real estate too, perhaps as you do by fixing up run-down houses.
I am reading all the books I can about real estate and am enrolled in two basic real estate courses at a nearby community college two evenings a week. But I am not clear about how a property buyer can be sure of getting good title.
Last week I read a newspaper article about a scam where a husband forged his wife’s signature on the deed to their home and left town with the sale profits. How can a buyer be sure of getting good title?
A: When buying any property, always get an owner’s title insurance policy. This will protect you from unexpected title risks, such as forged signatures in the chain of title, income and property tax liens, claims of undiscovered heirs and a zillion other title loss possibilities. Even when buying real estate from friends and relatives, if you get an owner’s title policy you won’t have to worry. Best wishes for a successful real estate career.
Single-Family Home Better Than a Duplex
Q: Which do you think is a better investment, a single-family house or a two-family duplex? I ask because I am considering buying either.
A: I recommend buying a single-family house over a duplex, presuming both are in sound condition in a good location. The primary reasons are that there is far stronger demand for single-family houses than for small income properties such as duplex, thus causing houses to usually appreciate in market value better than small income properties, and you may not enjoy living next door to your tenants and being at their beck and call.
