Buying a Home With a Credit Score of 450 - Highly Unlikely

Reader Question: Is a credit score of 450 enough to buy a house?

The real question here is, can a person get qualified for a mortgage loan with a credit score in the 450 range? The answer, unfortunately, is that it's highly unlikely. I answered some similar questions recently. One person who wrote in had a 580 credit score and the other person was asking about buying a home with a score less than 600. So those are probably worth a read.

Instead of repeating what's included in the Q&A sessions above, let me offer some advice on how to improve your credit rating as quickly as possible. It's going to be necessary before you can qualify for a home loan, so you might as well start now. Here are some of the steps you should take.

1. If you haven't done so already, get copies of your credit reports from all three of the reporting agencies. Here's some guidance on how to do that. Make sure there aren't any errors in your reports. If there are, dispute the errors with the agency that produced the report.
2. You might want to pay down some of your debt, if your debt-to-income ratio is not so great. Start by paying down those credit cards with the high interest rates.
3. It's also a good idea to close any credit accounts you haven't used in a long time, or the ones with really low balances that you can afford to pay off. However, it's usually wise to keep your oldest accounts open. Closing your old credit accounts could shorten the length of your credit history -- and that could have a negative impact on your overall score.
4. From this day forward, make sure you pay all of your bills on time. If you do have to make a late payment for some reason, try to catch up as quickly as you can. Most creditors will report the delinquency when a payment is more than 60 days past due, and that means it goes onto your credit report (and lowers your score).
5. You might want to spend some time reading through our new blog that offers free credit help to consumers. It has only been online for a couple of weeks, but it's really taking off. So you might find some helpful information there as well.
   

To summarize, there's not much chance of getting a mortgage and buying a home with a credit score of 450 -- especially in this economy, when lenders have really tightened up. So instead of pursuing that, it's probably best to focus on improving your credit score. This will help you qualify for a loan in the near future. Good luck!

Student Loans Affecting Credit Scores - What to do?

Reader Question: I am in school, and I also work as a bartender and waitress. My BIG problem is this: each semester that I get a loan from the bank, my credit score drops almost 15-20 points. I want to buy a home in the next few years (or sooner), but by the time I graduate in two years, I will have a horrible credit score because of this. Should I drop out in order to salvage the ALL IMPORTANT credit score? I am so upset about this.

Like many of the questions we receive, this is one that only you can answer. But we can certainly offer some insight that may help you. The real question here is which do YOU value more: getting an education or protecting your credit score?

One thing you might want to consider before making any rash decisions is exactly what is causing your score to drop? Is it truly the fact that you take on additional student loan debt each semester, or is there another underlying reason that can be corrected without requiring you to make a choice between your credit score or your degree?

Credit scores used to be a big mystery. Lenders used to tell us there was a complicated calculation involved that was very difficult for the average person to understand. We now know exactly how credit scores work and what factors influence them the most. The biggest chunk of that score is how you pay your bills. Do you have a consistent history of paying every account on time, or have you had some late payments recently or in the past? Have you had any accounts sent to collection? Either of these situations can significantly impact your credit score.

The next thing to examine is how much money you owe and how much credit you have available. For example, if you have several credit accounts with balances consistently close to their limits (i.e. nearly maxed out), that will impact your credit score. To creditors, this could give the appearance that you rely on these credit accounts to live from day to day, and that you're unable to pay them off. It is best to keep your balances low and use those credit cards as only when necessary.

Your score is also affected somewhat by having several open accounts that are used very little or not at all (i.e., accounts that lack a consistent payment history). This tells creditors there may be a possibility you will max those accounts out, potentially increasing the outstanding debt by a significant amount.

Also, the longer you've had credit accounts, the more points you are assigned toward a positive credit score. So sometimes it is best to keep that credit card you got when you were just starting out, instead of playing the balance-transfer game to chase after those low introductory rates. If you close your oldest accounts, you are in essence shortening your credit history, which could negatively affect your score. Often, a credit card company will reduce your interest rate if you've been a customer in good standing for a few years. This is a much better option than constantly opening and closing credit accounts.

Just as important is your mix of credit. If you only have credit cards -- or in your case, student loans -- you won't represent a consumer who has experience with other types of credit such as installment loans, auto loans and mortgages.

Numerous inquiries and new applications can also have an affect on your score, especially if you are young and your entire credit file is fairly new. To a creditor, an excessive number of inquiries and new applications can represent a consumer who is suffering from a cash flow problem and is searching for credit to help compensate. So this too can affect your score in a negative way.

Now that you know exactly how your credit score works, you can better answer the question -- is it really those loans each semester that are causing your score to drop, or is there another perfectly good explanation? When you can answer this question, you'll be able to make the best decision for you and your future. Good luck!

Which Credit Score Is Needed for a Mortgage Loan?

Reader Question: Which credit score is needed for a mortgage loan?

This question could mean one of two things, and I'm not sure which way it leans. So I'll address both angles.

Angle 1: If you mean to ask what credit score you need in order to get approved for a mortgage loan, then it's a hard question to answer right now. A lot has changed over the last few months (and this is still ongoing), so all of the old "rules of thumb" have been altered.

In the past, a credit score of 620 used to be commonly cited as the "magic number," above which you would qualify for the best interest rates on a loan. You could still qualify below that, but you certainly would not have received the best rates -- you would have been considered a subprime borrower.

But all of this has changed. Today, you need a higher credit score to do just about everything, and that includes qualifying for a mortgage loan. This article explains why. To get the best rates on a home loan today, you would probably need a 720 or above. But who knows what the situation will be 30 or 60 days from now. There's a lot of uncertainty in the air, and many lenders are still operating in "survival mode" right now.

The only way to find out if you can get approved for a loan is to apply for one. You can use the tools listed on the right side of this page to get online mortgage quotes.

Angle 2: If you mean to ask which of your three credit scores a mortgage lender will consider, then here is my response. You have three main credit scores, and they are based on the information provided by the three credit-reporting agencies (TransUnion, Experian and Equifax). The FICO score produced by Experian is the one most commonly used by mortgage lenders. With that said, many of them will use a merged score that averages out the three ... or they'll look at two out of the three scores to come up with their own average.

You can learn more about this subject from the credit information section of our website.

Can I Buy a Home With a Horrible Credit Score?

Reader Question: I have horrible credit ... can I still buy a home?

Let me start with the easiest and shortest answer and we will build from there. No, you cannot buy a home with a horrible credit score, especially not in this economy. In the past, you have had a slim chance of finding a subprime lender to offer you a loan in spite of having a horrible credit rating. Today, however, it's next to impossible. These types of loans and lending practices are practically extinct today.

A lot has changed over the last couple of years, and the economic nightmare is still unfolding before our eyes. Turn on CNN and see for yourself. The "easy lending" practices are of the 1990s and early 2000s contributed to the housing crisis we are dealing with now. Driven by limitless greed, the subprime lenders were giving loans to just about anyone who applied, including people with horrible credit scores.

The rest is history. These loans were unaffordable for the people who obtained them, but the problems were pushed into the future through the use of adjustable rate mortgages with low initial rates (a.k.a. "teaser rates"). When those ARM loans began to reset to higher rates, the foreclosure rates skyrocketed in this country. Long story short, these bad loans and record-breaking foreclosures led to the economic crisis we are now dealing with.

So my advice is not to try and get a loan with horrible credit (which is highly unlikely), but instead to focus on improving your credit situation. This is important to you now, but it will only become more important over the coming months and years, because lending standard are likely to get even stricter in the future.

How Much to Offer On a Foreclosed Home

Reader Question: What is a good price to offer on a foreclosed home?

This is a hard question to answer because so many variables are involved. The process of buying a foreclosed home varies from one state to the next, one property to the next, etc. It's much less predictable than a regular home purchase. So while I can tell you how the bidding process usually works, I can't offer any specific pricing strategies on a hypothetical property.

There are several scenarios through which you can make an offer on a foreclosed home. It depends on how far along the foreclosure process is for that particular home. For example, if the bank allows the homeowner to sell the home through a short sale process, then your purchase offer will need to be approved by the lender (not by the seller).

However, if the bank / lender has actually foreclosed on the property, then you will probably have to attend a real estate auction to bid on the home. In this scenario, the home will be listed at a starting price, and the auction attendees will then bid on it. The highest bid wins, like any other auction. One thing to realize is that you'll need financing lined up before attending a foreclosure auction. You must be able to buy the property that very day, if you happen to be the highest bidder.

Another scenario takes place if the home does not sell through the foreclosure sale / auction. In this case, you can submit a sealed bid to the owner (which will be the bank or lender who foreclosed on the property).

See also: The Foreclosure Buying Toolkit

Buying a Home During the Housing Crisis

Reader Question: We want to buy a house in the near future, but we are troubled by the news about the economic crisis in this country. What should we know about buying a home during the housing crisis we are experiencing?

We have been receiving questions like this a lot lately, so I'm happy to answer it for you and other readers of this blog. Instead of overwhelming you with the history of the housing crisis and other economic background, I'll focus on three of the most important things you should know when buying a home during this financial crisis we are in:

1. You have a lot of leverage when buying in this economy.
2. You need a very good credit score to get a mortgage loan.
3. You may see your house values drop in the short term after you buy.

Let's examine these items one at a time:

1. The Housing Crisis Creates a Buyer's Market

Supply and demand are the primary forces that determine where a particular area is considered a buyer's market or a seller's market. Right now there are a lot off homes for sale, partly due to all of the foreclosures (and people who sold to avoid foreclosure).

On top of that, there is a shortage of qualified home buyers right now. A lot of financial institutions have failed already. And those lenders that have survived are much stricter with their lending criteria, requiring higher credit scores among other things.

So in most places across the U.S., the current housing crisis has increased supply (more homes) while decreasing demand (fewer buyers). As a result, those buyers who do qualify for financing have a lot of leverage when negotiating with sellers. It's certainly something to keep in mind as you move forward in your home buying process.

2. You Need Better Credit Because of the Crisis

I touched on this issue above, and I've written an entire article on this subject, so I won't belabor the point here. Suffice it to say that buying a house during the current housing crisis will require you to have an excellent credit score, a favorable debt-to-income ratio, and other qualifying factors. Lenders giving out loans to poorly qualified borrowers is the main reason we are in this mess to begin with.

So if you want to buy a home in the current economic landscape, you will need to be highly qualified. Otherwise, you may not be approved for a mortgage loan. Of course, if you can afford to pay for a house in cash, this is a moot point. But for most buyers, it's a very real concern.

3. Your Home Value May Continue to Drop

Some people refer to a "bottom" of the housing market, as if prices can only fall so far before they hit bottom and rebound. This is nonsense. Sure, every economic cycle has a top and bottom. But there is no such thing as a "hard bottom" beyond which prices can no longer fall. Because of this housing crisis, property values could continue to drop for a long time to come. Financial experts can make educated guesses on the subject, but nobody really knows what the housing market will do in 3 months, 6 months, or even 2 years from now.

This is something else to keep in mind when buying a home during a housing downturn. Sure, you might pay less for the house right now (than if you'd bought it six months ago). But what will the home be worth next year? It's hard to say.

If you plan to stay in the home for a long time, this will be less of a concern for you. It's still something to think about, though. On the other hand, if you plan to live in the home for only two or three years, this should be a big concern for you. Depending on the final effects of the housing crisis you could end up selling the home for much less than what you pay for it.

But that's how real estate works. There's always a certain amount of speculation involved with the process. Hopefully, after reading this article, your decisions will be fueled by knowledge and awareness -- in addition to speculation. Good luck with your home buying process.

Related Article:

• Consider the Housing Crisis on Election Day
• Mortgage Crisis of 2007 - A Love Story
• The Credit Help Blog - Ask a Question

Free Credit Bureau Report With No Strings Attached

by Brandon Cornett

Yesterday, I received the following question from a confused consumer through my Credit Q&A blog:

"I see a lot of offers for free credit bureau report online, and even on TV commercials. But whenever I visit the actual website and read the information there, it seems like I have to sign up for something and pay a fee. Is there any way to get my free reports with no strings attached? Where do I go?"

If you share this reader's confusion, let me start by saying you are not alone. This is one of the most common questions I receive from consumers, and it's easy to understand why. I see those "free credit report" commercials on TV all the time. I also encounter a ton of banner ads for companies who offer the same thing.

But therein lies the confusion. Some of them charge a fee, while others do not. Some offer credit scores and other items in addition to the reports. It's completely confusing, so I am happy to set the record straight.

Here's what you need to know:

Free Reports from All Three Credit Bureaus

By law, you are entitled to one free credit bureau report per year, from all three of the companies who maintain them (TransUnion, Equifax and Experian). These companies have a joint website through which you can request all three of your reports at once. The website is AnnualCreditReport.com. In terms of getting your credit bureau reports for free, this is the only website that the Federal Trade Commission (FTC) endorses and recommends.

Many companies will actually package all of this information together and then add on some kind of credit monitoring / identify theft prevention service. So they use the "free" credit reports and scores as an enticement, but then you find out that you have to sign up for the monitoring service in order to get the freebies.

That's why I used the phrase "no strings attached" in the title of this article. To the best of my knowledge, the only place where you can get a totally free credit bureau report with no strings is through the jointly owned website mentioned above -- the one recommended by the FTC. Hopefully this will alleviate your confusion once and for all.

How to Rebuild Your Credit - 3 Important Steps

by Brandon Cornett (a.k.a. Captain Credit)

2008 has been quite a year for the real estate industry and housing market. Unfortunately, most of the news was bad. We saw record numbers of home foreclosures, financial institutions failing, and credit drying up to the point that only the "chosen few" can qualify for a home loan.

So in 2009, many Americans will have to rebuild their credit scores in order to secure financing for new homes, cars and other major purchases. If you're one of those people, but you have no idea how to proceed, this lesson is for you!

Why You Need Better Credit

Make no mistake about it. In 2009, and into the foreseeable future, consumers will need higher credit scores to do just anything that requires a loan.

Lenders are nervous these days (the ones who are still around, anyway). They will scrutinize your financial background, your credit, your debt-to-income ratio and other factors to see what level of risk you bring. If you fail to measure up, you can kiss that mortgage or car loan goodbye. Like it or not, this is the reality we will face for the coming months and years.

Steps to Rebuilding a Credit Score

Without further ado, here are some of the most important steps you need to take in order to rebuild your credit and improve your financial health:

1. Review Your Credit Report for Errors

In a perfect world, the three companies who maintain credit reports in this country (Experian, Equifax and TransUnion) would never make mistakes. But this is not the case. While I wouldn't say that mistakes are common, they do happen quite a lot. So the next step in the process is to order copies of your credit reports from each of the companies mentioned above. You can do this for free by visiting AnnualCreditReport.com, a website that is jointly owned by Equifax, TransUnion and Experian.

It's important to do this as soon as possible, because it can take a long time to get corrections made to your reports. If you find errors, you can submit a request to have it corrected through the website of the company that produced the report. Visit their website and look for a link that says "disputes." There are laws that require these companies to process disputes in a timely fashion. But unfortunately, these laws are toothless and rarely enforced. So you will have to be persistent and stay on top of the company until your report is fixed. The last thing you want is for erroneous information to drag your credit score down lower than it should be.

2. Pay Down Your Credit Card Balances

Financial "experts" love to disagree on things. I guess it makes them feel smart to dispute what their colleagues say. But this is a topic that many of them agree on. Paying down your credit card balances is one of the best things you can do to rebuild a bad credit score -- and your financial health in general. When you combine this with item #3 below, you will be on the road to recovery in no time.

There are good kinds of debt and bad kinds. A mortgage loan with a reasonable interest rate is a good kind of debt. It actually helps you build strong credit to make mortgage payments over time. But those high-interest credit card balances don't do you any good. So work out a budget that allows you to start paying them down. You'll have to pay more than the minimum amount due each month, and you may have to scale back on certain luxuries ... but nobody ever said this process would be easy.

3. Pay All Bills on Time

This is one of the most common reasons for bad credit situations in the first place -- falling behind on the bills and missing payments. Think about it from a lender's perspective. Why would they want to loan money to somebody with a clear history of not paying things back? When you look at it from this angle, it's easy to see why this can hurt you so much when applying for a loan.

If you are missing payments because you can't afford to pay them, then you have a budgeting and debt problem. In this case, you should try to reduce your spending as much as possible, or perhaps consolidate your debt into a lower rate.

If, like a lot of people, you simply forget to pay your bills, then you need to create a system that makes it easier for you. Instead of putting bills aside when you get them from the mail, handle them right away. Better yet, get set up with auto-pay so you don't even have to think about making the payments on time. This is one of the biggest things you can do to rebuild your credit and improve your overall financial picture.

Improving a bad credit score is all about discipline and awareness. You must have the discipline to make payments on time, reduce unnecessary spending, and pay down your credit card debt as much as possible. It's hard work. I'll admit that. But it can seriously improve your financial picture ... and your life in general.

Current Home in Foreclosure - Want to Buy Another

Reader Question: I have a home that just went into foreclosure. I have moved into a house that I would like to finance in the future. How long will I have to wait to get it financed after foreclosure on another home?

Somebody asked a very similar question about three weeks ago, so that's worth a read. Of course, a lot has happened over the last three weeks. More banks are struggling, more bailout issues, foreclosure rates are still soaring, etc. The economy is in a tremendous state of flux right now, so it's hard to say how long you might have to wait. It could be a long time, given the foreclosure issue. Banks are not making loans to anyone they deem risky right now.

Did you talk to your current lender about ways to avoid foreclosure? I'm not sure where you are in the process, but many lenders have "workout programs" for avoiding foreclosure altogether. A repayment plan is one of those options, and there are others as well.

If you're past that point, and foreclosure is inevitable, there's not a lot I can tell you. I wish I could! It's just a really tough time right now, so predictions are out the window. My advice is to work on improving your credit score as much as possible in the meantime. A home foreclosure will lower your credit score some, so you want to build it back up over time.

I think eventually, when some of the "dust" has settled from this current mess we are in, banks will be somewhat forgiving toward foreclosure victims. After all, the lenders themselves have some blame in this mess. So if you can work on improving your credit to show that you're not a risk to lenders, they may be willing to "forgive" the foreclosure in your history.

I just can't predict -- or even guess -- how long what will take. I'm not sure anyone can right now. I don't know how much help I was, but good luck anyway!

Free Online Credit Report With Credit Score

Reader Question: Where can I find a free online credit report with my actual credit score included?

The first point I want to make (for the benefit of other readers) is that these are, in fact, two different things. Many home buyers think that credit "scores" and "reports" are just two ways of referring to the same thing. This is not the case, and understanding the difference between them will prevent confusion as you request your free online credit reports and scores.

Your credit reports are basically a record of your financial history. These records are maintained by three privately held companies -- Experian, Equifax and TransUnion.

Your credit score, on the other hand, is a number between 500 and 850 that's based on the information in your credit reports. A higher score is better. This number is usually created through a computational process developed by the Fair Isaac Corporation (FICO for short). That's why they are sometimes referred to as FICO scores as well.

Here's something else that surprises a lot of people. You have three of each -- three credit reports maintained by the companies mentioned earlier, and three scores based on the information in those reports. So if you really want to know about your credit picture, you have to get all three of each.

By law, you are entitled to one free credit report per year, from all three of the companies that keep them. Equifax, Experian and TransUnion have actually created a joint website where you can get your annual free credit report online -- it is appropriately named: AnnualCreditReport.com.

As for requesting your credit score online, you have to do that separately. You can do that through the FICO website. In fact, I just did some research while writing this response, and I noticed that you can get all three reports and scores online through the FICO site:
Get All 3 FICO Scores and Credit Reports!


Hope that helps. Good luck!

You can learn more about this topic from our Consumer's Guide to Credit.

Do I Need a Mortgage Cosigner Because of My Age?

Reader Question: I am 58 and planning to purchase my first home. Will I need a cosigner on the mortgage loan?

My initial thought was "no." But it's been a while since I've researched these laws, so I had our researcher look into the issue of mortgage cosigners and the age factor.

The Equal Credit Opportunity Act makes it illegal for creditors (including mortgage lenders) to discourage you from applying based on sex, race, marital status, nationality and age.

According to this legislation, the only time a creditor may consider your age is if "you’re 62 or older, and the creditor will favor you because of your age." A mortgage lender may also use a person's age to determine their creditworthiness. For example, if a person is about to retire due to their age, their income might drop considerably. So a mortgage lender can factor this into their risk calculation.

I recommend reading through the Equal Credit Opportunity Act that's hyperlinked above. It spells out the things I've mentioned, plus a lot more.

So unless you have issues with your credit and/or credit score, or you have insufficient income to qualify for your mortgage, it is highly unlikely a cosigner would be necessary or required.

Hope that helps. Good luck with your home buying process!

The U.S. Housing Crisis - Consider it on Election Day

The other day, a seemingly deranged individual emailed to complain about a blog post I did about the financial crisis in this country. In that post, I explained my views on why it's important to consider the U.S. housing crisis when you go to the polls on Election Day.

Specifically, I suggested that John McCain would be a bad choice for president, because he staunchly opposes the kind of regulation that could have prevented the housing crisis we have experienced. This person said I should be "ashamed of myself" for pointing out this view, and then went on to decry the previous actions of the Democratic Party.

For the benefit of this individual, and for everyone who plans to vote on November 4th, let me restate my views on this matter:

John McCain Will Perpetuate the Housing Crisis

Not only that, but he will also plant the seeds for a future housing crisis like the one we are experiencing right now. Unless, of course, the Congress opposes him. Back in the 1990's economists were warning about a future mortgage / housing crisis that would take place in this country, if the mortgage industry was not regulated in some way. As we painfully know, those predictions came true.

Unfortunately, things are even worse than those economists predicted. Our economy is in the worst shape it has been in since the Great Depression, and we have not yet hit the so-called "bottom."

Now, I know that many readers will shout about the evils of government regulation on corporations. But let me ask you this. Why do we have laws and regulations on personal conduct? Why do we have traffic laws? Why do we have laws against drunk driving, murder, burglary, extortion and white-collar crime?

We have laws on these things, of course, because it makes sense to do so. It protects society as a whole. So why should the government have a hands-off policy of laissez-faire when it comes to big business? Did we learn nothing from Enron and all the rest? What is wrong with sensible regulation on the way companies disclose information ... the kind of regulation that could have prevented the housing crisis that wrecked our economy?

In light of current events, I think that the people who oppose tougher regulation on lending institutions fall into one of two camps. They are either (A) employed by said lending institutions or (B) utterly insane.

The reader who emailed me -- and apparently a lot of other people in this country -- seem to think that this election is a partisan issue where the past actions of one party should make you vote for the other party by default. To these people I say, wake up and smell the economic wreckage around you.

I am speaking in purely economic terms here (because this is the Home Buying Institute after all) when I say the following:

If left unchecked, John McCain will plant the seeds for the next housing crisis in this country. He is vehemently opposed to the kind of regulation we so desperately need. Don't take my word for it ... check out his voting record for yourself. McCain himself claims that he is "fundamentally a deregulator."

Of course, in light of recent economic events, McCain now realizes that this label is going to hurt him in the election. So he is now in the process of turning on a dime to stress the importance of strong regulation. In other words, he is saying: Don't look at how I've voted for the last two decades ... just listen to what I'm saying this week.

Would McCain be the kind of president who would work to prevent another housing crisis ten years down the road? Not so much. He would be too busy planting the seeds for that crisis by allowing financial institutions to operate above the law.

Or, if I get my wish, we will wake up on Wednesday, November 5 and realize that McCain is a moot point ... because he lost the election. Only time will tell.

In closing, I leave you with some recent commentary on this subject, provided by the always-insightful Sarah Palin:



Blog topics: housing crisis - john mccain - election - regulation

What Happens at the Real Estate Closing Process?

Reader Question: What happens at the closing?

They shut the doors, bolt the windows, and draw the curtains on you. And no matter how much you knock, nobody will let you out. Ever.

Actually, that was just a bad dream I had once. At a real estate closing you will sign a bunch of paperwork (ideally reading some of it as you go), and you will settle up with any payments that need to be made. This usually includes your agent's fee, escrow fees, property taxes, and other adds and ends.

We have a bunch of information on this subject in the Closing section of the website. I recommend reading through all of those articles. There are only a half-dozen or so, and they're all pretty short. This will give you a much better idea of what happens during the closing process.

One of the most important documents to watch out for before your closing is the HUD-1 settlement statement. You should get this a couple of days before your closing date, and it will outline the costs you are expected to pay. According to RESPA laws, you are supposed to get a HUD-1 statement at least one day before you close on the home.

Of course, the best part of all (for the buyer) is when you get the keys to your new place!

ARM Loan Adjusting to Higher Rate

Reader Question: My boyfriend bought a house almost two years ago. His mortgage is an adjustable mortgage. It will adjust next year. His loan is at a 10.25% on a $68,000 loan. He says that in his contract the loan won't get too high? Is this true? And if not, what could his loan be estimated to go up to?

Your boyfriend should contact his lender to get an estimate of what his new mortgage payment will be, after the adjustment next year. Lenders are required to provide this kind of information in accordance with loan disclosure laws. This will help him decide what to do -- whether to refinance or to keep the current loan, for example. In fact, getting away from an adjusting ARM loan is one of the top reasons people refinance their mortgages.

Much of the legislation on loan disclosure (particularly for adjustable rate mortgage loans) is currently being revised. This comes as a result of the subprime mortgage crisis. Adjustable rate mortgages are not "evil" in and of themselves. But when lenders don't disclose the significance of the interest rate increase after the adjusting process, homeowners can be caught off guard by the larger payments.

This is part of the reason why record numbers of Americans are losing their homes to foreclosure right now -- they got a low "teaser" rate on an ARM loan, they kept the loan through the adjustment period, and they couldn't afford the new payments.

If he plans to stay in the home for many more years, he might want to run the numbers to see if it makes sense to refinance.

I can't predict how your boyfriend's ARM loan will adjust. He will have to contact his lender for that kind of information. But I can tell you it's important to do so. The last thing he wants is to be caught off guard by a huge increase in interest, which equates to a larger monthly mortgage payment. Better to look into it now.

Buying a Home in the Current Economy

Reader Question: Given the very recent economic events, would you advise purchasing a home at this time or waiting?

From a buyer's perspective, there's really an upside and a downside to the current economic "crisis." So let's take a look at both sides:

The downside is that it's harder to qualify for a mortgage loan these days. You need a higher credit score and a more favorable debt-to-income ratio, among other things. This is especially a problem for people with past financial problems, bankruptcies, poor credit and such. Of course, if you have good credit, this might not be an issue at all.

The upside is that home prices have dropped considerably in most areas, when comparing current data to the prices from a couple years ago. Bad for sellers ... good for buyers.

The question for home buyers (and even for sellers) is, how much further will prices drop? Or will they start to rebound sometime soon? Sure, you could save money on a home right now. But how do you know the value of the property won't continue to drop after you buy it, due to continue weakening of the economy? The answer, of course, is that you don't know. That's the question mark that always applies to real estate purchases.

So to revisit the question at hand, it's hard for me to advise for or against buying a home in the current market. I think in some cases it makes sense, while in other cases it does not. For example, a first-time home buyer with great credit who plans to stay in the home for many years ... that would be a case where buying a home might make a lot of sense in the current economy.

But somebody with bad credit, or somebody who plans to turn around and sell within a few years, should probably avoid a home purchase at this time. It's something to be carefully considered on a case-by-case basis.

Hope that helps. Good luck!

Real Estate Agent's Responsiblity Before Closing

Reader Question: Is it the real estate agent's responsibility (to the buyer) to make sure that the buyer gets the house on or before the closing date stated in the contract?

The short answer is no, it's not the agent's responsibility. Here's the longer answer:

The closing date will be determined by the lender and title company. It is usually the buyer who will work with their lender to get the closing scheduled and coordinated. Then the seller will be notified of the date.

Of course, it's in your agent's interest to help you dot the I's and cross the T's leading up to your closing process. Because that's when they get paid -- during the actual closing. But it's not their contractual obligation.

The primary duties an agent performs for a buyer include:

• Helping the buyer find a home that meets his or her needs
• Helping the buyer validate the asking price
• Preparing the purchase agreement / contract for the buyer
• Negotiation with the seller, if necessary

After that, many real estate agents feel that their work is done until the closing day. Other agents will be more proactive in helping you stay on track between contract and closing. An agent's level of involvement after the house is under contract will vary from one agent to the next. Contractually, however, they are not required to do much of anything during that stage.

Hope that helps. Good luck!

Causes of Current U.S. Financial Crisis - And Why You Should Vote Democrat

What are the causes of the current financial crisis in the U.S., and what can we do to ensure it doesn't happen again in our lifetime? These are the questions we will address in this entry.

It's election time again, and this time around we have a chance to save our devastated economy. Scratch that ... to save our entire country from further devastation. In less than a month, you will be able to cast your ballot for the next president. So as somebody who watches the housing and mortgage markets very closely, let me offer this advice:

I you want to see an end to the current financial crisis ... if you want to see our government shift course and policy to ensure we don't have another financial crisis anytime soon ... if you think a reasonable amount of regulation on the lawless pirates of Wall Street is a good thing ... if you would like housing prices to rebound sometime in our lifetime ...

If you want all of these things, you should vote Democrat on November 4th.

Republican leadership (or, more accurately, a lack of leadership) is one of the primary causes of the current financial crisis we are dealing with in this country. I'll come right out and say it. The mortgage and financial giants helped pay for George Bush's past presidential campaigns so that he could essentially do their bidding once elected. They got their wish. And boy are we paying for it now!

But let's go back a few years to see what caused this current financial crisis and what we might have done to avoid it. In doing so, we can better avoid a future crisis of similar proportions.

A Brief History of Crisis and Crime

During most of the 1990s, a trend emerged in the mortgage industry. It was the rise of the subprime mortgage loan, a term we are all painfully familiar with right now. While subprime loans have been around for much longer, they became extremely popular during the aforementioned time frame. Popular in a bad way, mind you.

Basically, a subprime mortgage is one given to a borrower with a low credit score -- a borrower who wouldn't normally qualify for a traditional loan (and with good reason). But their are plenty of negatives associated with these loans, and those negatives are largely what caused the current financial crisis we are dealing with.

Most of these loans were adjustable rate mortgages with low "teaser" rates for the first few years, and then a ridiculously high interest rate later on at the "reset" point. But many of the big subprime lenders had a habit of downplaying the risks when dishing out record numbers of these loans to Americans.

For a long time, economists in this country warned that the out-of-control subprime market would lead to serious financial problems in the near future. Many of them even predicted a financial crisis would occur within the next decade or less. When you consider that their warnings began about a decade ago, you can see that they were right on the money!

Later, in 2004, we had additional warning bells. During the annual housing policy meeting, Edward Gramlich (a member of the Board of Governors of the Federal Reserve at that time) stated that: "the relatively high delinquency rates in the subprime market do raise issues ... For mortgage lenders the real challenge is to figure out how far to go. ... If lenders do make new loans, can conditions be designed to prevent new delinquencies and foreclosures?"

How far to go, indeed! Everyone knew that subprime lending had gotten out of control, and that it would fuel foreclosure rates like nothing we have ever experienced before. Red flags and warning signs were plentiful along the way. So why didn't somebody do something? Why did the federal government turn a blind eye for years, up until recently?

Ah, now we get to the heart of the matter. And this is why I warn you against voting republican on November 4th. Here's the big "secret" that many Americans don't seem to realize...

The Subprime Lenders Helped Bush Get Elected

Make no mistake about it, folks. George Bush is on the side of the lending industry and financial giants whose greed is a primary cause of our financial crisis. They helped him get elected, because they knew they would need an advocate to ward off regulation. That way, they could continue the very practices the economists were warning us about.

But it's hard to crack down on somebody who gave millions of dollars to your campaign. For example, during his 2004 presidential campaign, Bush received $7.8 million from Ameriquest (a giant of the subprime mortgage industry). They also helped pay for his inauguration.

Ameriquest's financial "love" didn't stop with the president. They contributed money and gifts to many legislators at the federal and state level. According to the Wall Street Journal, "[Governor] Arnold Schwarzenegger's campaigns received at least $1.4 million, along with stacks of tickets to a Rolling Stones concert that were used to lure big donors."

Sensible Regulation Can Prevent a Financial Crisis

Due to the financial contributions outlined above (among others), there was very little regulation of the subprime industry during George Bush's fist and second terms. Some people will beat their fist on their chest and say, "Government should never regulate business. It's Un-American!"

To these people I say: Wake up and smell the reality all around you. This whole argument is equally simple-minded and dangerous. Let me ask you this. Why is it okay to regulate the actions of people (with laws), but not the actions of corporations? What's the difference?

In fact, I would argue that it's even more important to regulate financial entities that have the power to bankrupt millions of Americans and wreck the U.S. economy. If ever a set of rules was called for ... it's with Wall Street.

November 4th = A Chance to Get it Right

And that brings us back to the present. In about a month, we will go to the polls and choose one of two men to be our next president.

On the one hand, John McCain is vehemently opposed to government regulation of big business. In other words, he wants to continue most of the policies that caused our current financial crisis. But then, why should McCain be concerned about the current crisis? It doesn't affect ultra-rich Americans like him. While millions of Americans are losing their homes, John McCain can't remember how many houses he has. Talk about being out of touch with economic reality!

On the other hand you have Barack Obama, who is an advocate of sensible regulation -- the kind of regulation that could have prevented the financial mess we are in now. Obama, who only recently paid off his student loans, is very much rooted in the reality of the current financial crisis in this country.

So my question to you is this:

Who do you think will be better equipped (and motivated) to get us out of this financial crisis? An ultra-rich de-regulator like McCain, whose staff is largely made up of lobbyists? Or Barack Obama?

Seems like a no-brainer to me. And on November 4th, we will find out how many voters are using their brains as well.

Closing Process on a Foreclosure Home

Reader Question: When purchasing a foreclosure home, how long should it take to get keys to the property after closing.

The closing process for a foreclosure property is very similar (sometimes identical) to the closing on a regular home. Once you have closed on the home, it's yours. So you should either get the keys at the time you close or shortly thereafter.

The steps leading up the closing, however, can sometimes be a long and frustrating process. I often get questions from frustrated investors / buyers who have been waiting an unusually long time to close on a foreclosure property.

There are several reasons for such delays. For one thing, state laws may require a certain sequence of events to take place, and that sequence could be time-consuming. On top of that, lenders are taking longer to do everything these days (and requiring more paperwork) as a result of the financial crisis we are in right now.

But once you reach the actual closing process, you should get the keys right there on the spot or shortly afterward. Unless, of course, something goes wrong during the process.

Buying a House With Credit Score of 580

Reader Question: Buying a home with credit score of 580 means what regarding the loan?

To be perfectly honest (which is what we do here), I would be surprised if you could get a mortgage loan right now with a score in the 580 range. Most lenders will consider this a subprime borrowing situation. And as you probably know, these types of loans have become all but extinct over the last year or so.

Turn on the news right now, and I can practically guarantee that you'll see something about the current economic crisis, and how banks are all sweating bullets right now. Many financial institutions have already failed, and many more are operation in what I call "self-preservation" mode. Basically, everyone is afraid to lend money right now. And those lenders who are still offering loans have increased their lending criteria.

Another reader / home buyer asked a similar question about buying a home with a credit score less than 600 points, so I recommend giving that Q&A session a read as well.

I wish I had better to news to offer, but I don't. I do have some good advice though. Stay where you are for right now, and focus on improving your credit score. If you increase your score into the mid 600 range -- or, better still, into the 700s -- you'll have a much easier time qualifying for a loan. You'll also get a better interest rate on the loan, which means a smaller mortgage payment each month.

Good luck to you.

How to Make an Offer on a Home

Reader Question: I am looking at a home priced at $138,900. I need to know how to determine a starting bid on the home?

If you are using a real estate agent, consult with him or her on the matter. Making an offer on a home is one of the key areas where an agent can help.

If you're not using an agent, you'll have to do the research yourself. The asking price for the home should be determined by the recent comparable sales in the area. For example, if you are looking to make an offer on a 4-bedroom, 2-bath home with 2500 square feet, your real estate professional will pull recent sales in the neighborhood and/or nearby similar neighborhoods to determine the fair market value of the home you would like to buy.

If you are buying on your own, without the help of an agent, you will have to find some way to look at comparable sales in the area. There are also some "house value" websites that can give you a ballpark idea of what a home is worth, based on recent sales.

Of course you will want to consider things such as upgrades to the home, larger lot size, pool and other improvements when coming up with your asking price.

Difference Between Short Sale and Foreclosure

Reader Question: What is the difference between a short sale and a foreclosure?

The difference is that a short sale is a technique used to avoid a foreclosure. So they are two separate but related things.

Through a short sale process, the mortgage lender agrees to accept less than the full amount the homeowner still owes on the mortgage. They do this to sell the home quickly and cut any further losses. The first question most people ask is, "Why would a lender accept less than what is owed to them?" Here's the answer:

The lender has two motivations: (1) to get the non-performing loan off their books as quickly as possible and (2) to avoid a full foreclosure process (which can be expensive and time-consuming). Selling the home for less than market value is a way to expedite the sale, because investors are quick to snatch up such homes.

The homeowner's motivation, of course, is to avoid having a foreclosure on his or her credit (which will make it harder to get a loan in the future).

So the short sale is used so that both parties may avoid the headache, hassle and expense of a complete foreclosure. In such scenarios, it's the closest thing to a "win win" that both parties can achieve.