Real Estate Search Direct

Have you seen the increase in houses for sale over the past year? Do you wonder why? Here is an example to illustrate.

Bill bought a house in 2006 for as much as he could afford. He got an option ARM. Have you heard about those in the news lately? They are loans with a low introductory interest rate and give you the option to make different payments. You can pay a payment that will pay off the principal in 30 years, an interest only payment, or a minimum payment that doesn’t even pay all the interest.

Bill rented the house out for more than the minimum payment and had a positive cash flow on the property. So Bill did it again with another house. And another. Bill ended up with 6 properties and they were all rented for more than the minimum payment.

Bill thought he was doing well. He had $3000 extra cash from his rental properties each month. But then Bill’s loans started adjusting. One by one his minimum payments increased. Soon he was paying $2000 per month for people to live in his houses.

He tried to refinance, but the extra interest had added to his principal and he owed more than the properties were worth. No bank would lend him the money.

Bill stopped making the payment on one house and used the rent he received to help pay the mortgage on the other five. He still couldn’t make ends meet, so he stopped making payments on a second house.

Now he was able to make the payments on four of the houses by collecting the rent on all six. But after a few months, the bank foreclosed on the two houses he wasn’t making payments on.

The renters moved out and Bill was stuck again. Finally, Bill gave up making any payments at all. He lost all of his houses to foreclosure.

Now the bank owned six houses that they didn’t want, so they put them up for sale.

So do you wonder why so many houses are for sale lately? Of course not all of them were from Bill or people like him, but many of them had option ARM loans on them before the bank took them back. So how can you get the right financing for your house?

Well, it is important to make sure you get the right kind of loan and be sure you understand all the terms of the loan.

• Before you start looking for a house you should learn about mortgages and know what you can afford.
• Check your credit score and know what can affect it to get the best interest rate
• Understand the difference between interest rate and APR
• Know how much you can afford for a down payment, and how much for a monthly payment.
• Don’t count on refinancing to keep the loan affordable.  Get a loan you can live with.
• Avoid Interest Only loans, option ARMs and Hybrid loans.
• If you can’t afford to buy a house, don’t buy it.  You can start by buying a smaller house and later upgrade when you can afford it.
• Find a mortgage broker or loan officer that you feel you can trust.

When you feel you are ready to buy a home, the first thing you should do is make a financial plan.  Determine what you are spending now and what will you be spending after buying your new home.

Learn what affect your credit score will have on your mortgage and learn what steps you can take to improve your credit score.  Review your credit report from all three credit bureaus and if there are any errors, dispute them.

Avoid making large credit purchases before you are ready to buy.  Avoid any changes to your financial situation, including job changes.  Even if you have an opportunity for a better job, you should wait until after you buy your house to make the move.  A short job history can ruin your chances at getting a loan.

For more tips on preparing to buy a home subscribe to the Real Estate Search Direct newsletter at the upper right corner of the blog.