Look before you leap into a policy

All homeowners insurance isn’t created equal. That’s why it pays to review your coverage every year to ensure your policy meets your evolving needs. Begin by understanding the types of coverage available.
Actual cash value coverage reimburses you for the value of your home based on its current condition, explains Marjorie Young, senior vice president at E.G. Bowman Co., a New York City insurance brokerage. If your home was built 10 years ago, you’d receive only the depreciated value of decade-old windows, cabinets, appliances, and so on.
Most insurers recommend the more comprehensive replacement cost coverage. With it, says Young, you’ll be reimbursed for the amount it will cost to rebuild your home like new with the same kind and quality of materials. Depreciation doesn’t factor into the settlement equation.
To get the full benefit of replacement coverage, you need to purchase enough insurance to cover the total cost to rebuild your home, excluding the value of the land. Many people make the mistake of insuring at the market value, says June Walbert of USAA Financial Planning Services in San Antonio. But the amount you could sell your home for today isn’t necessarily the same as how much it would cost to rebuild.

Mortgage rates have plunged to record lows, below 4%. That’s great — but only if you can actually qualify for a loan, and that’s not easy. After giving away the store during the housing boom — with disastrous results — lenders have tightened their underwriting standards, leaving many would-be home buyers out of luck.
But there are steps a home buyers can take to find the right mortgage, and qualify for it. Here are seven:
1. Improve your credit score: A credit score below 620, as measured by the Minneapolis company FICO, will knock most potential buyers out of the running for a mortgage. And even if you can qualify for a loan, lenders reserve their best interest rates for borrowers with the highest credit scores — typically 740 and above. If a bad credit score pushes up your interest rate by even one percentage point, you could end up paying $85,000 more over the life of a $400,000 loan, according to Tracy Becker, president of North Shore Advisory, a Westchester credit repair company.
To see where you stand, start by checking your credit report, which is available free at annualcreditreport.com, preferably at least six months before you’re ready to shop for a home. You can get a free report once every 12 months from each of the three credit reporting companies — Experian, TransUnion, and Equifax. Make sure there are no mistakes on the report — for example, if you see incorrect reports of outstanding balances or late payments, you should dispute them with the credit reporting company.
Matthew Gratalo of Real Estate Mortgage Network in River Edge gave an example of a client named Smith; his credit reports were full of problems, including a foreclosure and a bankruptcy, that belonged to another Smith.
These reports are the basis for the credit score created by FICO. The score, which ranges from 300 to 850, is used by lenders to determine whether you’re eligible for a loan, and at what interest rate. You can get a copy of the score for $15.95 at myfico.com.
Your credit score can be badly damaged by even seemingly minor problems, like late payments on credit cards, or a $50 unpaid medical bill, or a cellphone bill that goes to a collection agency.
If your credit profile is ugly, there are ways to beautify it, though it may take some time. One key step is to make sure to pay your bills on time. Set up e-mail or text reminders from the credit card company to let you know when a payment is due. Pay down your debt as much as you can. Don’t close unused credit cards, but don’t open new cards, either.
“You may not be a great buyer today, but you have the ability to change that dramatically,” said Al Engel, executive vice president at Valley National Bancorp in Wayne, N.J.
2. Decide what type of loan is best for you: Fixed mortgages offer the security of knowing your rate will never rise; since rates are near or at record lows, there’s a pretty good argument to be made for locking them in now. On the other hand, an adjustable offers even lower rates and might work if you expect to move within a few years.
A 30-year loan will keep monthly payments lower, but if you can swing it, a 15-year will have a lower interest rate and will save you tens of thousands of dollars over the life of the mortgage. For example, a $300,000 loan at 3.7% for 30 years adds up to $497,466. Choose a 15-year loan at 3% instead, and you’ll save more than $120,000.
If you have less than 20% down, you have the choice of a Federal Housing Administration mortgage or a conventional mortgage with private mortgage insurance. FHA loans allow down payments as low as 3.5% but carry an upfront fee of 1.5% of the mortgage amount, plus an annual fee of 1.15%, according to Keith Gumbinger of HSH.com, a Pompton Plains, N.J. company that tracks the mortgage market.
Private mortgage insurance is cheaper, typically costing less than 1% a year and varies according to the borrower’s credit score and down payment. Another advantage of PMI is that it is canceled eventually — once the home owner has 20% equity in the property. But to get a conventional loan with PMI, you’ll probably need to have 10% down and a better credit score than the FHA requires, lenders say.
3. Shop around: Check with several lenders, not just the one recommended by your real estate agent. Compare interest rates and closing costs like fees for the application, appraisals, and so on. These costs generally run around 2% of the loan amount, according to Gumbinger.
To check on the lender’s reputation, call the state Department of Banking and Insurance at 800-446-7467, though the department regulates only state-chartered, not federally chartered, banks.
There are fewer “bad actors” in the market to watch out for, after the shakeout of the mortgage industry during the housing bust, Gumbinger said.
Michael Moskowitz, president of Equity Now, a mortgage lender, encourages home buyers to ask mortgage companies for the names of previous customers and check on their experience. “You need to make sure you’re dealing with someone reputable,” he said.
4. Get a preapproval: Lenders will give prequalification letters — informal estimates of how much house you can afford. But you should go further and get a preapproval letter, which is a tentative commitment from a lender. To get one, you’ll have to show the lender documentation of your income, assets, and debts. Though a preapproval is not binding on either the lender or the home buyer, it’s a way of showing sellers and real estate agents that you’re a serious buyer.
A preapproval letter and a copy of your credit score — assuming it’s 740 or above — can be a strong argument in your favor if you’re competing with another buyer for a home, Becker said. Sellers sometimes accept lower offers from more qualified buyers who are able to show they can actually close on the deal.
5. Be prepared to show lots of paperwork: Fannie Mae and Freddie Mac, the government entities that guarantee loans, are forcing lenders to demand much more documentation these days, including pay stubs, tax returns, and bank statements — “anything that can prove you are the borrower you claim you are,” Gumbinger said. And they will ask for fresh documents, like pay stubs, just before the closing, to make sure nothing has changed.
“We’ve got to be able to touch, feel, and see the source of income to repay the loan,” Engel, of Valley National, said.
Because of these tighter documentation standards, Gratalo recommends that you start saving pay stubs, bank statements, canceled rent checks, and other paperwork several months before you even start shopping for a house or a mortgage.
6. Consider locking it in: Many lenders will offer borrowers the chance to lock in their mortgage rate free for up to 45 days, and some will lock in for up to 60 days, either free or for a small fee. Gumbinger advises buyers to seriously consider locking in the rate, especially now, since there’s not much room for rates to fall.
“The odds don’t favor significantly lower interest rates,” he said. He recommends a 60-day lock-in, which should be long enough for most closings.
7. Don’t mess it up at the last minute: Once you have your loan approval and make an offer on a home, don’t throw the whole deal into doubt by making moves that will change your credit profile. Don’t quit your job or take out a big car loan, for example. Don’t apply for a new credit card, even if the merchant offers you 10% off if you do.
The lender will recheck your employment status and credit profile just before the closing. REALTOR® and lenders say closings are routinely delayed when a buyer decides to lease a new car or apply for a new credit card after being approved for a mortgage.

A solid game plan can help you narrow your homebuying search to find the best home for you.

When looking for your new house, make sure to take into consideration how long you plan to stay there. Image: Thinkstock Images/Comstock/Getty Images
House hunting is just like any other shopping expedition. If you identify exactly what you want and do some research, you’ll zoom in on the home you want at the best price. These eight tips will guide you through a smart homebuying process.
1. Know thyself
Understand the type of home that suits your personality. Do you prefer a new or existing home? A ranch or a multistory home? If you’re leaning toward a fixer-upper, are you truly handy, or will you need to budget for contractors?
2. Research before you look
List the features you most want in a home and identify which are necessities and which are extras. Identify three to four neighborhoods you’d like to live in based on commute time, schools, recreation, crime, and price. Then hop onto REALTOR.com to get a feel for the homes available in your price range in your favorite neighborhoods. Use the results to prioritize your wants and needs so you can add in and weed out properties from the inventory you’d like to view.
3. Get your finances in order
Generally, lenders say you can afford a home priced two to three times your gross income. Create a budget so you know how much you’re comfortable spending each month on housing. Don’t wait until you’ve found a home and made an offer to investigate financing.

Gather your financial records and meet with a lender to get a prequalification letter spelling out how much you’re eligible to borrow. The lender won’t necessarily consider the extra fees you’ll pay when you purchase or your plans to begin a family or purchase a new car, so shop in a price range you’re comfortable with. Also, presenting an offer contingent on financing will make your bid less attractive to sellers.
4. Set a moving timeline
Do you have blemishes on your credit that will take time to clear up? If you already own, have you sold your current home? If not, you’ll need to factor in the time needed to sell. If you rent, when is your lease up? Do you expect interest rates to jump anytime soon? All these factors will affect your buying, closing, and moving timelines.
5. Think long term
Your future plans may dictate the type of home you’ll buy. Are you looking for a starter house with plans to move up in a few years, or do you hope to stay in the home for five to 10 years? With a starter, you may need to adjust your expectations. If you plan to nest, be sure your priority list helps you identify a home you’ll still love years from now.
6. Work with a REALTOR®  — Call/Text/Email Regina Wallace 

Also ask if the agent specializes in buyer representation. Unlike listing agents, whose first duty is to the seller, buyers’ reps work only for you even though they’re typically paid by the seller. 
7. Be realistic
It’s OK to be picky about the home and neighborhood you want, but don’t be close-minded, unrealistic, or blinded by minor imperfections. If you insist on living in a cul-de-sac, you may miss out on great homes on streets that are just as quiet and secluded.

On the flip side, don’t be so swayed by a “wow” feature that you forget about other issues—like noise levels—that can have a big impact on your quality of life. Use your priority list to evaluate each property, remembering there’s no such thing as the perfect home.
8. Limit the opinions you solicit
It’s natural to seek reassurance when making a big financial decision. But you know that saying about too many cooks in the kitchen. If you need a second opinion, select one or two people. But remain true to your list of wants and needs so the final decision is based on criteria you’ve identified as important.

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With vacancies declining and rental prices rising, the climate in the housing industry is clearly warming up to rental properties. According to Moody’s Analytics, “weak income gains, favorable demographics, and the foreclosure crises” are all causing people to choose renting over buying, and demand for rent will remain solid over the next two years.

Between 2000 and 2008, real per capita income grew at an annualized rate of 2 percent compared to 0.8 percent in 2010 and 2011, according to the report. In addition, many households simply don’t have enough for a down payment, and until households gain more in terms of finances or confidence in the economy, fears of homeownership won’t be put aside.
A survey released by Integra Realty Resources reported 31 percent of respondents said a lack of a down payment was the main reason holding them back from making a purchase, 24 percent said it was the fear of making a bad investment, and 21 percent said the uncertainty of the economy was the main reason.
Another reason the rental market is booming is because of the emergence of a younger age group heading households. The younger age group are the least likely to own a home and more likely to rent, according to Moody’s.
While the overall rental rate is 35 percent, the renter rate for those between the ages of 25-29 is nearly 65 percent, and for those under 24 years old, it is 77 percent, according to the Census Bureau.
And, growth for those between the ages of 20-29 is not likely to slow down, either. The report stated that this group has been growing at an average pace of 0.9 percent from 2007-2011 and grew only 0.3 percent between 1990 and 2006.
Another factor helping to strengthen demand for rent is the foreclosure crises. As many former homeowners who were foreclosed on search for a new residence, single-family rentals have become the next best thing to owning a home since a previous foreclosure makes it difficult to obtain a mortgage. Foreclosures stay on one’s credit for 7 years, and some lenders do not approve of a loan within that period.
While rent is strengthening, Moody’s stated new construction is being developed that will keep rent prices from escalating. According to the report, developments with five or more multifamily units have increased from an average of 67,000 at the end of 2009 to 221,000 in the three months ending in April.
On the other hand, Moody’s waved away concerns for the increasing pace of multifamily construction and said apartment construction has actually fallen short of its normal pace. All the while single family rentals are also tightening as shown through the declining single-family vacancy rates.

It’s time for your annual check-up. The good news is that for this one, you won’t have to don one of those revealing hospital gowns—and you may walk away with a healthier pocketbook. We’re talking about a homeowners insurance check-up, a task you should complete once a year, ideally around renewal time. This will ensure your policy still provides the right level of coverage for your family, and your premium isn’t costing you more than it should.

Remember, homeowners insurance is essential. The coverage is designed to protect your home and its contents, as well as shield you from liability for accidents and such on your property. Block out an hour of your time, call an insurance agent, and get answers to these three important questions.

Today’s mortgage broker is a different breed from those of the housing bubble days. Here’s why — and when — it makes sense to use a mortgage broker.

Banks have been tightwads when lending money, and consumer eligibility requirements are tougher than ever for mortgages or refinancing. In this difficult environment, a mortgage broker can tailor a loan that suits your needs. And, thanks to new Federal Reserve rules, you’ll be protected from predators.

Mortgage brokers, middlemen who connect loan applicants with lenders, got a bad rap during the mortgage crisis, when the housing bubble and easy mortgage money attracted unscrupulous characters to the profession. Some steered consumers toward inappropriate loans that made them money. That changed in April 2011, when the Federal Reserve issued rules amending Regulation Z (Truth in Lending Act), which state:

Brokers are only compensated based on the mortgage loan amount, not on a loan’s terms and conditions. (This eliminates an incentive to put borrowers into expensive loans.)
They receive compensation from the borrower or the bank. (Previously, both borrower and lender may have compensated the broker.)
They must choose loans in the consumer’s best interest.
Most brokers represent six or seven lenders, and shop competitively amongst them. If you work directly with a bank, you’ll have access to its products alone. A mortgage broker can help mitigate potential headaches by handling every aspect of the process.

“Good mortgage brokers act as financial advisers,” says Dave Donhoff, an independent financial adviser in Kirkland, Wash. “They’ll analyze your needs, and locate the best loan for you. They may also get better rates, because they work with different lenders.”

Licensing

Before the financial crisis, it was relatively easy to become a mortgage broker, but things have changed. Each state has its own supervisory group, and a majority of licenses are handled by the National Mortgage Licensing System (NMLS), which was established in 2008, to improve supervision of the industry.

“A licensed broker must now have 20 hours of education, pass a state and national test, and undergo fingerprinting and background checks,” says Donald Frommeyer, president of the National Association of Mortgage Brokers (NAMB).
Consider going with a broker if:
You want someone to support you through the process.
You’re a less-than-desirable loan candidate (low credit score, spotty work history, self-employed).
You want flexible terms (lower down payment, mortgages with terms other than 15- or 30-year).
You don’t have time to shop around.
However, if you meet the higher standards that banks currently require, including a credit score over 740, a steady income, no debt, and assets in the bank, you can go directly to a bank. But you may not receive the personalized attention that mortgage brokers offer.

Costs of using a broker

Brokers get paid either:
By the borrower, through upfront origination fees
By the lender, with the bank paying a percentage of the loan amount
“There’s no common standard in fee-setting, but the average fee for brokers is around 1% to 2.5% of the loan amount,” Donhoff says.

Frommeyer, who has been in the business for approximately 35 years, says that brokers can generally get you a better interest rate, about 0.25% below what banks offer. How may this play out? On a $200,000 loan at 4.25%, for example, you’ll pay $983.88 per month, with total interest payments of $154,196.72. Bump the rate to 4.5%, and you’ll pay $1,013.27 per month, with total interest of $165,813.42. You’d save $352.68 annually — which equals $10,580.40 over 30 years — and an additional $11,616.70 in interest over the course of the loan with the lower rate.

To find a mortgage broker, get recommendations from friends, REALTORS®, or search the NAMB database to find a certified professional near you. Check licensing with the NMLS. A good broker can take the headaches out of the mortgage loan process.

A tool in the fight to stave off more foreclosures and help rally the housing market gets jammed by debate.

Facing heightened pressure from the White House and Congressional Democrats, Federal Housing Finance Agency Acting Director Edward DeMarco doubled down last week on his opposition to allow Fannie Mae and Freddie Mac, the agencies he regulates, to reduce the principal on underwater mortgages.

Is DeMarco bypassing an effective tool that would not only help home owners get out from under crushing debt but also fuel the embryonic housing recovery?

A moral hazard

Reducing the principal on underwater mortgages is one of the more controversial policy proposals to combat the housing crisis. In fact, it’s considered by some to be a moral hazard.

On one hand, with millions of home owners still underwater, principal reduction can help prevent even more foreclosures. On the other hand, forcing banks and the GSEs to reduce principal might encourage home owners able to make their monthly payments to purposefully default in order to qualify for a principal reduction. In addition, some believe that helping folks who may have overextended themselves on their mortgage isn’t the best solution.

A measured approach

Policymakers should encourage principal reductions, but the decision on when to use it is best left to the lender and borrower.

Some Senate Democrats are pressuring DeMarco to reconsider his position for Fannie- and Freddie-backed loans. Sen. Tim Johnson (D-N.D.) urged the FHFA director to take additional steps to help families stuck in high-interest mortgages, and Sen. Robert Menendez (D-N.J.) said the FHFA has displayed a “dismal lack of initiative” in combatting the housing crisis.

The president’s top housing official, Secretary of Housing and Urban Development Shaun Donovan, points out that banks already allow principal reduction on loans. “If banks are doing that with their own portfolios, I think it shows they have clearly made the decision that it protects their own investments,” he said during a Senate Banking Committee hearing last week.

After all, borrowers who have their principal reduced are more likely to keep making their monthly payments.

To help spur a change in FHFA’s policy, the Obama administration upped the financial incentives for administering principal reductions, which are already part of the Home Affordable Modification Program (HAMP).

But DeMarco believes other tools, like rate reductions and longer loan terms, are better than principal reduction. He also argues that FHFA’s role is to minimize American taxpayers’ losses since the government had to bail out Fannie and Freddie in 2008.

But what he doesn’t seem to realize is that prudent principal reduction would prevent millions of foreclosures, benefitting taxpayers, home owners, and lenders over the long term. Reducing the principal on a mortgage makes more economic sense than allowing the home to be foreclosed on. Foreclosures hurt everyone: the lender, the owner, and even neighbors who live near vacated properties.

Principal reductions shouldn’t be mandated for all underwater mortgages. But it’s an important option for home owners and lenders trying to stave off a foreclosure. And with Fannie and Freddie owning or guaranteeing 60% of mortgage loans, taking principal reduction off the table will do nothing to help the housing market and the rest of the economy bounce back.

Do you think Fannie Mae and Freddie Mac should allow principal reductions?

By: Dona DeZube

If you own a condo, or hope to buy one someday, changes in FHA’s mortgage program could end up costing you — and further crimp the housing market.

More and more condo sellers and buyers are being shut out of the housing market. That’s because of tougher condo qualifying rules for FHA loans — on top of an already tough lending market.

You may not realize it, but buyers can’t use an FHA loan to purchase just any condo. You have to buy in a condo community that’s been vetted by FHA and approved — and your condo board has to re-certify every two years.

Since FHA insures about one-third of consumer mortgages, the lack of FHA financing is contributing to depressed or artificially low condo values. All this adds up to more unnecessary uncertainty for the housing sector.

Why is FHA important?

Credit-worthy buyers like FHA because they can become home owners with a 3.5% down payment compared with having to put down up to 20% for a convention loan. An affordable down payment option is especially important when you’re a first-time buyer.

The lack of FHA mortgages has hurt the condo market from South Florida to California. Between December 2010 and September 2011, only 2,100 of the 25,000 condos (that’s 8.4%) nationwide whose approvals expired were able to renew their approval, FHA Spokesman Lemar Wooley told housing columnist Ken Harney.

What does this mean for sellers?

If your condominium doesn’t have FHA approval and your condo board can’t or won’t get it approved or re-certified, buyers can’t use an FHA loan to purchase your home. When one-third of condo buyers are looking at only 8.4% of the condos on the market (instead of your unapproved condo), your value is going to nose-dive.

What does it mean for buyers?

If you’re considering buying a condo with an FHA loan, the rules limit your choices. You’ll have to confine your home search to approved condominiums. Since all other FHA condo buyers are doing the same thing, you’ll compete with more buyers for the approved condo you want. More competition means you’ll likely end up paying more when you buy.

FHA condo approval rules too tough

Bottom line: The rules driving condos away from FHA approval are unrealistic given the current housing market and economic conditions.

If more than 15% of your neighbors are more than 30 days late paying their condo fees, your building can’t get approved. Since condo associations don’t report late payments to credit bureaus, home owners association (HOA) dues are often the last bill paid. Right now, 30,000 U.S. community associations have delinquency rates above 20%, according to the Community Associations Institute. If an association is in good financial shape, then having 15% of owners paying 30 or even 60 days late shouldn’t be a huge issue.

No more than 50% of the homes in your condo building can be rentals and any units a bank owns (like foreclosed units) count as rentals. That’s problematic in today’s economy, but there’s no data to support the idea that having 50% owner occupancy is good or bad. It would make more sense for FHA to look at the overall health of the condominium association.

No more than 25% of the building can have mixed-use commercial space. Connecting jobs to housing reduces transportation costs and saves energy, so removing this rule makes sense from an environmental standpoint.

Your condo’s board members have to certify the condo meets state and local laws pertaining to condominiums and don’t know any reason that home owners might become delinquent on their dues in the future. If it turns out not to be true, they could be fined $1 million and sent to jail for 30 years. That potential punishment frightens condo board members — many of whom are volunteers — who then decide not to apply for FHA approval or re-certification.

The FHA rules are wrong for buyers, for sellers, and for the housing market. First-time, credit-worthy home buyers need to be able to buy condos using FHA’s 3.5% down payment. Empty-nesters looking to downsize into condos deserve access to safe, affordable FHA loans, too. If sellers can’t sell their units to a whole segment of buyers (those using FHA), the price they can get for their home will fall.

Unit we move new owners into some of the millions of condos now sitting vacant, the housing market can’t recover.