Foreclosure Prevention Scams On the Rise

It never fails. When people find themselves adrift in financial troubles, the sharks will soon arrive on scene. Such is the case right now, with a disturbing rise of foreclosure prevention scams in the United States.

It works like this. John and Jane Smith can't make their mortgage payments anymore, for any number of reasons. So their lender eventually starts the foreclosure process. When the bank files the initial paperwork to foreclose on the property, it becomes a matter of public record. And anyone with access to a website like RealtyTrac or Foreclosure.com will know about it the pending foreclosure, within a couple days of the filing.

Then the phone starts to ring, and the letters start to arrive in the mail. They all promise the same thing:

Dear Homeowner. Are you about to be foreclosed on by the bank? If so, we can help! We offer foreclosure prevention services to help you avoid the process altogether, by communicating directly with your mortgage lender. Our foreclosure prevention solutions have a success rate of over 93% -- one of the highest in our industry. Best of all, you can get started with a single up-front payment of $1,500...

Now we are getting to the heart of the matter. These so-called foreclosure prevention companies will virtually guarantee success, and then they'll require you to pay some kind of fee in advance. In most cases, they will also tell you to cut off all communication with your lender, so they can "advocate" on your behalf.

Here's what usually happens. The desperate homeowner will sign up for the foreclosure prevention services and pay the fee in advance. As instructed, they will cease all communications with their lender, leaving it to the foreclosure avoidance company. Some time later, they will receive another notice from the lender, this time saying that the home will be foreclosed upon by a certain date.

The homeowner is baffled! In a full panic now, they contact the lender directly and ask what the problem is. "I've been working with a foreclosure prevention company. They were supposed to contact you about some kind of payment plan or something."

To which the lender usually replies: "We have never been contacted by any such company on your behalf."

Do you think I'm exaggerating? I wish I were. In truth, this kind of scam is happening with disturbing frequency right now, fueled by the record-breaking number of home foreclosures in the United States. Pick up the latest issue of Consumer Reports magazine, and you'll see what I mean. They put these foreclosure prevention scams at the top of their list of "financial traps" that are flourishing right now. And in that article, they tell real-life stories just like the hypothetical one I presented above.

How to Avoid Foreclosure Prevention Scams

So how can a homeowner find legitimate help, with so many sharks swimming around? If you are behind on your mortgage payments and looking for help, there are things you can do. Here's how to get legitimate help to avoid foreclosure, while avoiding scams at the same time.

• Be wary of anyone who contacts you directly. If your pre-foreclosure situation becomes public knowledge (which it will), you can expect the letters and phone calls to start rolling in. About 99% of the time, these are the companies you should avoid. Legitimate foreclosure prevention services typically do not hunt you down -- you have to approach them.
• Stay away from any company that requires some kind of up-front fee. While it's true that some of the reputable organizations charge a small fee for their counseling services, they typically do it after they have helped you -- not before. Up-front fee are a classic red flag of a foreclosure prevention scam. They charge in advance because they know they're not going to do anything.
• Do a Google search for a company's name to learn more about them. If they fall into the "shark" category, you'll probably find a lot of complaints about them online.
  
• Try to find a local housing counselor who is certified by the Department of Housing and Urban Development (HUD). You can look them online at www.hud.gov/foreclosure.
  

Yes, there truly are legitimate ways to avoid foreclosure. Most lenders want to avoid the process as much as you do. They would much rather find a common solution that keeps you in the home, even if it means some type of loan modification to make your payments more affordable.

Related articles:

• Three Ways to Avoid Foreclosure
• How to Stop Foreclosure on Your Home

Home Sales Increased in December 2008 - Surprisingly

Despite expectations to the contrary, homes sales for existing homes actually increased during the month of December. Foreclosure properties had a lot to do with this, as rock-bottom prices encouraged reluctant home buyers to take the plunge.

Home sales went up by 6.5 percent in December of 2008, with around 4.74 million sales nationwide. In November, there were approximately 4.45 million sales in the U.S. These numbers were reported by the National Association of Realtors.

As prices drop, and more and more bargain hunters enter the market, we will slowly but surely reduce the surplus of homes that are currently for sale in the U.S., and this is a good thing.

But despite the unexpected increase in home sales for December, housing prices are expected to continue falling through most (or all) of 2009. At least, this seems to be the general consensus among most economists. The average sales price in the U.S. right now is $175,400, as compared to this time last year when the average was $207,000.

How far will home prices fall? When will we see the bottom of this market? These are difficult questions to answer, especially with a new administration taking charge. But most economists feel that we've yet to hit the bottom of the market. We will certainly keep you posted on these and other developments related to home buying.

What to Look for When Buying a House

Summary: What should you look for when buying a house for the first time? What do you need to know about mortgage shopping, house hunting and other parts of the buying process? These are common questions among first-time buyers, and you'll find answers in this articles.

Because of recent actions by the Federal Reserve, mortgage rates are enticingly low right now. Earlier today, in fact, we blogged about the rates for a 30-year fixed mortgage dipping below the 5% mark. As of right now, most of the people taking advantage of this have been homeowners looking to refinance.

But there are also many first-time home buyers coming out of the woodwork to capitalize on these low rates. Being new to the process, many of them want to know what to look for when buying a house.

There are many checklists online that point out the different things you should look for when visiting a home. But most of these lists only address part of the picture -- the physical structure itself. In truth, the process of buying a house starts long before you visit your first property. So I'd like to take a broader look at that process. Here's my top-ten list of things to look for along the way, starting at square one:



Financial Prep Work

Before you start looking at homes for sale, you need to take a good hard look at your own financial situation. A lender is going to do the same thing, you might as well do it first. Here are some things to look for and consider during this process.

• How is your credit score? In order to get qualified for a mortgage loan in this economy, you'll probably need a score of 670 or higher. To get the best rates a lender has to offer, your FICO score will have to be even higher, probably in the 760+ range. Learn more about the credit score needed to buy a house.
  
• How much debt do you have right now? This is another area lenders will look at when you are buying a house and shopping for mortgages. In particular, they will look at your debt-to-income ratio to see how much new debt you can realistically handle. Learn more about the DTI ratio for mortgage qualification.
• Do you have money saved up? Most lenders these days will require you to make a down payment on the home, probably in the 20% range. You'll also need money to cover the various closing costs associated with the home buying process. Learn more about how to prepare for closing costs.
  
• Do you have a home buying budget yet? If not, you need to do some financial homework to find out what you can afford to pay each month toward your mortgage.
  

Type of Mortgage Loan

When most people talk about what to look for when buying a house, they gloss over the subject of mortgage loans (or ignore it completely). This is a disservice to the reader, because it's an important topic that must be considered when you are buying your first house.

• First of all, you'll want to research the key differences (pros and cons) between the adjustable-rate mortgage (ARM) and the fixed-rate mortgage loan. Many buyers get themselves into trouble when using ARM loans, simply because they don't fully understand them. Learn more about the different types of home loans.
  
• When you start applying for a mortgage loan, it's usually best to compare offers from a handful of different lenders. That way, you can see who is willing to offer you the best rate based on your qualifying criteria. The Internet makes this easy to do (see next item).
  
• I always recommend that people start with online quotes from mortgage lenders, because it's quick and easy. It also lets you compare multiple offers, which we just talked about.
  

Looking for a House

Now you can see what I meant when I began this tutorial. There are a lot of considerations to make before you even reach the house hunting part of the process. So let's assume that your finances are well in hand, and that you understand the different types of mortgage loans. Here's what to look for when shopping for a house in your area.

• Don't underestimate the importance of the neighborhood and schools in the area where you're shopping. In addition to being quality-of-life items, these things affect property values. You should also research the property taxes in the area where you want to live. Sometimes on part of town will have a higher tax rate than another area of town.
  
• Don't be blinded by first impression the house makes on you. You need to maintain an objective eye when you go inside the house. Otherwise, you're likely to overlook some of the important details.
  
• Take a checklist with you and make notes when touring each house. This will force you to evaluate certain aspects of the property that are important to you.
  
• Bring a digital camera to get pictures. This helps you recall details later on, especially when you're looking at a lot of houses in a short span of time.
  
• How is the commute? If you'll be driving to and from work each day during rush hour, then you should visit the home during rush hour to judge the traffic. This is something a lot of first-time buyers forget to look for when buying a house -- only to regret it later on.
  

These are by no means the only things to look for when buying your first house, but they are some of the more important considerations. If you'd like a more comprehensive review of this process and the steps involved, check out the article below.

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Read all 101 steps to buying a home
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30 Year Fixed Mortgage Rates Fall Below the 5% Mark

On January 15, the Wall Street Journal reported that the interest rate on the benchmark 30-year mortgage fell below 5%. Like most news sources, they were citing the weekly mortgage market survey compiled by Freddie Mac.

So today I went to the source and saw it for myself. Sure enough, the January 15 weekly report showed 30-year fixed mortgage rates at 4.96% (as a benchmark). Average rates in that same category were just over the 5% mark. What does this mean for consumers? Well, it could mean that now is the time to buy a home or refinance your current mortgage loan.

Should I Buy a Home?

If you have a good credit score, stable income, and enough money for a down payment, this could be a very good time for you to buy a home. I don't ever remember seeing the 30 year fixed mortgage rates as low as they are right now. So if you can qualify for the best rate a lender has to offer, you could get a very affordable loan.

Not only that, but you'll have all the benefits of a fixed-rate mortgage (as opposed to an adjustable rate). This brings financial security as well, in the form of predictability. When you get a 30-year fixed mortgage, you know that the interest rate will stay the same over the life of the loan. For a first-time home buyer, this might not seem like such a big deal. But anyone who has ever had an ARM loan can easily see the benefits of a fixed rate.

When you get a lower rate on a mortgage loan, you are essentially shrinking the size of your monthly payment. Interest is one of the key components of a mortgage loan -- the others being the principal amount borrowed, interest and taxes. So if you're a well-qualified home buyer in this market, you could get double benefits from a 30-year fixed mortgage rates being offered today. You get a more affordable loan, and you get the long-term predictability of having a fixed interest rate.

Questions you should ask:

• Do I have enough for a down payment on a home, ideally in the 20% range? If not, start saving money.
• Is my debt-to-income ratio favorable? If not, pay down your debt.
• Is my credit score good by 2009 standards? If not, focus on boosting your score before you apply for a 30-year fixed rate mortgage.
• Have I determined my home buying budget? If not, use a mortgage calculator to get a rough idea of what you can afford.
  

Should I Refinance My Mortgage?

Mortgage applications are rising, and the vast majority of those applications are for refinance loans. Why? Because homeowners can benefit from the incredibly low 30 year fixed mortgage rates as much as home buyers can. By refinancing into a lower rate, you could potentially save a lot of money over the life of your new loan.

But there's more to the process than just the interest rate. So before you decide to refinance your current mortgage into a lower 30-year fixed rate, you've got some homework to do. You must run the numbers to see if the money you save is greater than the cost of refinancing the loan.

Home Prices In My Neighborhood - Where Can I Find Them?

Get started here: What's Your Home Worth?

The economic crisis has made homeowners increasingly concerned with home prices. How do I know this? Well, aside from the obvious reasons, I keep track of search engine trends. It helps me provide the kind of information people are looking for the most. And lately, a lot of people are searching the phrase home prices in my neighborhood (and variations of that phrase).

I have good news and bad news. Let's start with the bad. I just read an article on Bloomberg.com that suggested home prices would continue to drop until the latter half of 2010 -- at least, in most parts of the U.S. This creates concern among homeowners for several reasons:

• People who plan to sell their homes in the near future (perhaps due to a job transfer) are worried they won't be able to sell.
• People who wanted to refinance their mortgage loans in the near future (perhaps to escape their ARM loans) are afraid they might be upside down in their mortgages.
• People who don't plan to move or refinance are also concerned, because a drop in home prices means a loss of equity.

This is why so many people are researching home prices in their neighborhoods lately. And it brings us to the good news I mentioned earlier. Thanks to the Internet, it's easier than ever to find home prices in your neighborhood. I should be more specific. It's easier than ever to find recent sales data for homes that have sold in your neighborhood.

"Enough with the introduction," you say. "Tell me where to find home prices in my neighborhood already!" Without further ado, here are 5 ways to find house values via the Internet.

1. HomeGain.com
This website offers a wealth of information, tools and resources related to home buying. You can shop for houses, find a real estate agent, and yes ... even find home prices and recent sales data. Start here: What's Your Home Worth?

2. HouseValues.com
You can probably figure out what this website offers just from the name. You guessed it! The provide property value information based on recent sales. This site is also a big lead-generation tool for real estate and mortgage folks, so there's a good chance you'll get some phone calls and/or emails after using it. Just an FYI. But it's a way to find home prices in your neighborhood via the Web, so it deserves a spot on this list.

3. Zillow.com
This is another one of the companies that helped pioneer the world of online home valuation. You can get a "Zestimate" of how much your home is worth, based on data from recent sales in your neighborhood. There's also a ton of home buying and selling information on the site.

4. Domania.com
I can't think of anything unique to say about this website, other than it offers similar tools to those listed above. In fact, they all do pretty much the same thing. I know the individual companies argue over whose service is superior, but let's face it ... they all give home prices based on the same kind of neighborhood sales data.

5. Local Agent Websites
With a bit of digging, you should be able to find some good information on the blogs and websites of local real estate agents. You'll have to find the sites that get updated often, so a Google blog search might be the best place to start. Some agents update their sites daily or weekly, with plenty of information about home sales and prices in your neighborhood.

So there you have it, five places to dig up pricing information for houses in your neighborhood. Clearly, these are not the only website that offer such information -- just some of the best options out there.

Mortgage Applications Rise Again for January 2009

Homeowners across America are rushing to refinance their homes, as the prime interest rate continues to hover at record-low levels.

Mortgage applications are up for the first week of January 2009, and it's really no surprise. After all, we are seeing some pretty enticing interest rates across the board. A home buyer with excellent credit could qualify for a 30-year fixed mortgage with a rate near 5%.

The lower rates are part of a broader stimulus plan designed to get the economy moving again. And many consumers seem to be getting the message. Some lenders are nearly overwhelmed with the number of loan applications pouring in.

Refinancing loans, in particular, are getting a lot of takers. In fact, refinance applications are currently making for about 85% of all mortgage applications nationwide (including regular purchase mortgages).

The good news is that conditions should stay like this for the next few months, at least. This means more home loans being given out, more people refinancing, and a slow but steady in overall economic activity. We can sure use that.

How to Apply for a Mortgage Loan

In correlation with the continued rise in mortgage applications, we have gathered some useful tips for anyone who wants to apply for a loan. These articles will be particularly useful for first-time home buyers and mortgage shoppers.

• Get a Mortgage Quote Online - The Internet has simplified many aspects of the home loan application process. As a result, it's easier than ever to get quotes from lenders. This section of the website explains how the process works and provides tools to help you get started.
• The Mortgage Approval Process - What happens when you submit your application to a lender? How do they evaluate you for a loan, and what can you do to increase your chances of getting approved? You'll find answers to these questions and more in this helpful article.

Lender Wants Me to Buy Down Interest Because of My Credit Score

Reader Question: "I am in the process of buying a house and my credit report in August 2008 was Equifax 718, TransUnion 732, and Experian 744. My mortgage broker told me I could get the loan for 5% after buying down .25% interest. Then she ran another credit report in January 2009. My credit came back Equifax 721, TransUnion 737, and Experian 722. Now she claims that because of the credit report, I need to pay down another .25% to get to 5% because of my credit report. I realize this is still a great rate, but I don't understand why it changed. What do you think?"

I think it may have more to do with the lender than your credit score. Your score does not magically alter the approval process for the lender. They look at your score, and they then decide what they are willing to offer you. But they do this internally, based on their own business model and lending practices.

I don't know enough about this scenario, but based on what you've said it sounds like an old-fashioned "we want more money" situation to me. Maybe the lender is just trying to generate more up-front revenue from the deal. Or maybe your score truly has slipped below a certain criterion they've established.

It also depends on which of your scores they are looking at. Are they taking the middle score, the average of all three, or some other variation. For example, if they're only looking at the Experian number (which is common), then they are seeing a 22 point drop. That might be the reason for their different offer.

Out of curiosity, I sent your question to somebody else who has worked in the finance industry for many years. Here is her response:

"Well, the minimum scores have changed and the fees have increased. I would say now that they know that their scores are, they should shop around to see if there is a better deal out there. Brokers are not always the best option -- they get paid through some part of the deal."

Hope that helps.

Citigroup Makes Proposal for Mortgage Modification Program

Citigroup (one of the largest mortgage lenders in the United States), has been working with certain members of the U.S. Senate to come up with a new mortgage modification plan that would save homeowners from future foreclosure.

The latest program would allow bankruptcy judges in the U.S. to modify the existing mortgage loans of certain homeowners -- particularly those who are declaring bankruptcy. Current laws prevent judges from altering home loans in this way, but the new plan would change the bankruptcy laws to allow the courts to modify mortgages in this way. The end goal of all this is to make the loans more affordable for the homeowners, so that they could keep their homes even while declaring bankruptcy on other assets.

The plan was originally put forth by Senators Richard Durbin and Charles Schumer, and it is now being supported by Citigroup (who initially opposed such a plan).

But the mortgage modification proposal is encountering new opposition from a key industry group. The American Bankers Association (ABA) has said it opposes the idea because: "it will leave in place overly broad mortgage cram-down authority and other provisions that will harm thousands of banks across the country that have made, and continue to make, good loans," (this according to Floyd Stoner, the executive director for public policy at ABA.

How Are Property Taxes Calculated When Buying a Home?

Reader Question: "I have two questions. My first is, when buying a home how are your taxes calculated? Is it based on the selling price (foreclosure), or the appraisal value (much higher)? Also my husband signed loan application papers with a mortgage company and for a while could not get in touch with them, so he got approved with another mortgage company, is this okay? Or will there be penalties?"

Property taxes are based on the county's assessment of the home value. If you feel the county's assessment is too high, and that you're paying too much tax on the home, you can dispute the assessed value of the property.

If you wish to pursue this, you can probably find some information on your county's website. Or you could just call them and ask how to dispute the assessed value of the home. In most cases, you would simply fill out a dispute form and submit it through proper channels. They will then reassess the property and, if necessary, adjust your property taxes.

As for your second question about going with a different lender, you'll have to read the fine print in the application form you submitted to the first lender. In most cases, there is some kind of fee for canceling an application. Read through the paperwork for a clause labeled as "Cancellation Policy" or something similar.

Related article:
Tax Adjustments During the Closing Process

Hope that helps. Good luck.

Need a Mortgage for the House and a Loan for Repairs

Reader Question: If we are buying a house in an auction for $50,0000, but it needs about $40,000 in repairs to make it livable, can we get a mortgage for $90,000? Or do we have to apply for a $50,000 mortgage and a home repair loan for $40,000?

You would have to get a mortgage loan to cover the cost of the house, and then get a separate loan for the repairs. The only time when you can roll other costs into a mortgage is when you have equity built up that you can leverage -- as is the case with a home equity loan or a mortgage refinance.

If I were you, I would talk to the lender who is giving you the mortgage loan. If they offer regular consumer financing (in addition to home loans), they'll be able to give you some good advice. For instance, they can probably tell you how likely you'll be to get approved for the second loan. After all, they'll already know a lot about you -- your credit score, income, debt, etc. So they'll be in a perfect position to give you some advice.

Of course, if your lender only offers mortgage loans, then you'll have to approach another company for the second loan needed for repairs. In either case, I would get some input from somebody before moving forward.

Hope that helps.

Do I Need a Real Estate Agent to Buy a Second Home?

Reader Question: If buying a second home, do I need a real state agent?

That's a question only you can answer. I don't know how familiar you are with the home buying process, or how comfortable you are going through the process alone.

With that being said, I firmly believe that almost anyone can buy a home without a real estate agent, if they do some research and preparation. I bought the home I'm in now without using a real estate agent. We bought it through a builder during a buyer's market, so the process was very simple. I did not need a real estate agent for anything, so I didn't use one.

Even if the seller or builder paid the agent's commission (which is common in real estate transactions), I still don't like to see somebody make a lot of money for a little bit of work. But that's just me. Some agents do the least amount of work as possible during the transaction, while others bend over backward for their clients. It's like any other industry -- there's an incompetent agent for every knowledgeable one. So if you do use one, choose carefully.

Of course in a seller's market, it's harder to buy a house because there's a lot of competition from other buyers, and properties get snatched up quickly. You have to be able to present an offer quickly, and this is where a real estate agent can be useful. But this type of market is rare, because of the economy -- I don't think there's a true seller's market anywhere in the U.S. right now.

If I were you, I would think about each step in the home buying process to determine if you can do it yourself:

• Can you search for and evaluate properties on your own? The Internet certainly makes this a lot easier, so you're probably good in this department.
• Next, can you evaluate the seller's asking price by looking at recent sales data? Again, the Internet can help you here. There are a lot of home value websites online these days, and they take a lot of the mystery out of the pricing game.
• What about the paperwork? You'll have to create a purchase agreement when you make your offer on the home. If you decide not use an agent, you could have a real estate lawyer write this up for you. There are also many websites where you can download these forms in Microsoft Word format.
  

Once the offer is accepted, the real estate agent's job is pretty much done. At least in my opinion. After that, you will work primarily with your mortgage lender (for the appraisal), the home inspector, the escrow company, etc.

So if you can do all this on your own, you don't really need a real estate agent to help you. If you're uncomfortable with anything mentioned above, or if you don't have time to do it yourself, then you might need the help of a real estate agent.

Buying a Home After a Chapter 7 Bankruptcy Filing

Reader Question: How long will it take for me to be able to purchase a house after I file Chapter 7 bankruptcy?

I hate to fall back on this phrase so often, but ... it depends. Your credit score will obviously take a big hit if you file bankruptcy. But it's hard to say how long it will take to rebuild your score afterward, because there are so many variables involved.

I can tell you this much, though. From a mortgage lender's perspective, a Chapter 7 bankruptcy is worse than a Chapter 13 filing. These are the two most common forms of bankruptcy filed by individuals, but the difference in the debt repayment (or lack of it).

With a Chapter 7 filing, you are essentially walking away from your debts. This is the last thing a mortgage lender wants to see when considering you for a loan. With a Chapter 13 bankruptcy, on the other hand, the individual will typically repay the debt through a court-approved payment plan. So while they are both harmful to your credit score, at Chapter 13 filing at least shows that you made efforts to pay the debt.

Here are some related Q&A sessions you might want to peruse:

Improving Your Credit Score After Chapter 7 Bankruptcy
This person wanted to know how to improve a credit score after filing for Chapter 7 bankruptcy. The response I posted offers some tips that might someday be relevant to your situation. Here's another article on the same subject.

Buying a Home After a Chapter 13 Filing
This was basically the exact same question as yours, but from a person who filed Chapter 13 in 2005. As I mentioned in this response, only a mortgage lender can tell you when you're qualified for another home loan. So if you rebuilt your credit after bankruptcy and wanted to know your chances of getting a loan, you would have to apply for a loan at that time.

Buying a Home After a Bankruptcy Filing
Just another Q&A session on the same subject. This person did not specify the type, so my response covers both Chapter 7 and 13. I think by reading the three of these previous Q&A articles, you'll have a much better understanding of the big picture (i.e., the connection between bankruptcy, credit scores, mortgage loans, etc.).

I hope this answers your question. Good luck.

Benefits for First-time Home Buyer and Single Mom

Reader Question: What benefits can I get for first time buyer, a student and a single mom?

At the moment, there aren't many benefits to be had. The economic recession has eliminated much of the home buyer assistance that used to be available -- at least as far as grants and other "free money."

As a first-time home buyer, you would be eligible for the $7,500 tax credit for first-time buyers, as long as you purchase a home by the July 2009 deadline. Of course, you have to pay this back in annual installments over a 15-year period, so it's more like an interest-free loan than a true tax break. Still, it's worth looking into.

I'm not aware of any current home-buying programs for students, but that's only because they're typically offered through universities and private organizations (as opposed to the government). So it's hard for me to keep up with those kinds of programs. If I were you, I would research it through your college or university. They would be able to tell you about any home buying assistance for students that they might offer.

As for being a single mom, I dug up some information about this once before. The article is more than a year old though (and probably closer to two), so you'll have to follow the links to get updated information. Here's a link to the article: Home Buying for Single Moms

Related Q&A sessions:

• Am I eligible for the first-time buyer tax credit?
  
• Single mom and full-time student buying a home

I hope that helps you out some, or at least puts you on the path to better answers.

Can I Buy a Home With an IRS Tax Lien On It?

Reader Question: Is it possible for one to buy a home if they have a lien on them from the IRS?

The typical path to buying a tax lien property is through an auction, after the lien holder forecloses on the home. I would not recommend this for a first-time home buyer. It's a technique that seasoned real estate investors use to get properties on the cheap, but you have to know what you're doing.

A tax lien is a form of ownership on the property. In the case of an IRS lien, it means the homeowner has failed to pay taxes in the past -- most likely their property taxes. So the IRS put a lien on the house. If and when the home is sold (through a real estate auction or any other process), the IRS gets their money back from the lien they put on the house.

If you're seriously considering buying a house with a tax lien on it, you've got some more homework to do. Here's an article on the Wall Street Journal website that explains how the overall process works. The article is dated though, so you'll need to find some current research materials.

Can I Add Credit Card Debt Into My Home Mortgage Loan?

Reader Question: Can I add my credit card debt in with the home mortgage loan I am applying for?

In most cases, the answer would be no. You could roll other debt into a home refinance or an equity loan, because you're using your existing equity to pay off the credit card debt. But you can't roll it into a regular purchase mortgage -- at least not that I've heard of.

If I were about to buy a home, and I also wanted to eliminate my credit card debt, I would do the following:

If I got approved for a mortgage and I could easily afford the payments on top of my other debt, I would go ahead with the home purchase. Then I would get comfortable making my mortgage payment for a few months, to see how much money I had left over each month. Next, I would create a payment plan that allowed me to pay down my credit card debt. In order to do this, you have to pay more than the minimum balance due each month -- because the minimum balance is mathematically designed to keep you paying for life!

If I got turned down for a mortgage because of my credit score, then there's a good chance I'm using too much of available credit limit. Maxing out your cards, or even pushing the limits on the cards, can hurt your overall credit score. This in turn can hurt your chances of getting a mortgage loan. So in this scenario, I would focus on paying down my cards and doing other things to improve my score.

Clearly these aren't the only options for the above scenarios. It's just what I would do.

Related Q&A sessions:

• Paying Off My Credit Cards - Where Should I Start?
• How to Set Up a Debt Payment Plan

Home is Worth Less Than I Paid - What Happens When I Sell?

Reader Question: I purchased my home in Sept. 2008. I bought it for $162,000.00 and put down $14,000. I still owe $148,000 on the loan. If I sell it for $155,000 (which is less than I paid), do I have to pay the entire $7,500 back?

In this situation, you started out with equity in your home by putting down a down payment. What you started out with as a mortgage was, in your case, $14,000 less than what the home was valued at. The difference between those figures (loan -vs- value) is called equity.

As a home's value increases, so does the amount of equity the homeowner has in the property. In your case it seems the value of the home has dropped, which has resulted in a drop in your equity. The good news is you did put money down on the home so you may not find yourself in a negative position during a sell.

If you only owe $148,000 but need to sell for $155,000, you still have $7,000 worth of equity in your home. Yes -- you will lose that additional $7,000 put down when you purchased the home a few months ago. And you may stand to lose some of the remaining $7,000 of equity if you need to pay a real estate agent(s) commission at closing, or if you are required to pay some of your buyers closing costs.

Can the Tax Credit Be Used as a Down Payment?

Reader Question: Can you get the tax credit and use it for your down payment?

No, not at this time. It doesn't come in the form of a cash payment, or any kind of payment for that matter. It comes in the form of a credit that you can write off when you file your taxes.

In fact, it's more like a 15-year no-interest loan than a tax credit, because you have to pay it back. Starting the second year after your closing date, you must begin to pay back the tax credit in regular installments over a 15-year period.

Here's the IRS page that explains the tax side of this program, and here's a previous blog post I did that explains more about how the first-time home buyer tax credit works.

It's possible that the requirements and qualification criteria for this program could change in the coming months. I know that the National Association of Realtors is lobbying the government to extend the program beyond its current expiration date of July 2009. The NAR is also trying to get the payback requirement removed. Wouldn't that be nice? Time will tell.

According to a Wall Street Journal article on this subject: "To entice more first-time buyers, the industry group [NAR] is lobbying lawmakers to tweak the tax credit, removing the repayment aspect. They also want all home buyers to be eligible -- not only those who haven't been homeowners for the past few years."

Hope that helps.

Is a Foreclosed Home a Good Investment for First-Time Buyers?

Reader Question: Is a foreclosed home a good investment for a first time home buyer? Will the buyer gain much equity in such a home?

Foreclosed homes are sometimes a good investment for buyers, because you can often get them for less than market value. But I'm not sure I would recommend foreclosure buying to a first-time home buyer. The process of purchasing a foreclosed home can be complicated and time-consuming. If you decide to pursue this, I would recommend hiring a real estate agent who is familiar with foreclosures.

Another thing to consider is where and how the home is going to be sold. Many foreclosure homes are sold through a real estate auction, because the lender wants to sell the property as quickly as possible. In such cases, you would need to pay for the home on the spot, during the auction. So you would need to have your financing taken care of going into the auction.

If the home does not sell through an auction, and the bank is essentially playing homeowner, you can make an offer directly to the bank for the purchase of the home. I know somebody who did this for a high-end custom home valued at around 600K. He offered around 400K, and the bank took it.

This ties into the second part of your question: "Will the buyer gain much equity in such a home?" In some cases yes, and in other cases no. It depends on (A) the current value of the home and (B) what you pay for the home. In the extreme example I mentioned above, the buyer walked into the house with instant equity -- and plenty of it. In other scenarios, buyers gain only a marginal amount of equity when buying a foreclosed home.

Related articles and tools:

• Tips for Buying a Foreclosed Home
• Find Foreclosure Listings in Your Area

Mortgage Cannot be Given When a Credit Score is Lower than 380

Reader Question: I am trying to refinance my home. My credit score is 640 and my husband's is 530. We were told that some law just passed 12/16/08 that a mortgage cannot be given to someone with a credit score lower that 380. Is this true?

I have not heard of that particular law. But even if it does exist, it would seem to be irrelevant to you since your credit scores are above 380.

Regardless of what the law says, I can't see somebody with a credit score below 380 getting approved for a mortgage loan today. No mortgage lender in their right mind would lend money to somebody who is that bad off financially. In fact, I would go so far as saying that anyone with a score below 600 is going to have trouble getting a home loan in this economy.

There are many state laws that prohibit lenders from giving out refinance loans when it doesn't benefit the homeowner. Such laws are designed to protect homeowners. If the refinance loan will cost the borrower more than they end up saving in the long run, the lender cannot proceed.

Again, this varies from state to state. So you'll have to do some research and find out where your state stands on the issue of mortgage refinance laws. You can probably find some pertinent information by doing a Google search by "mortgage refinance laws" followed by your state name.

Grants to Help First-Time Home Buyers With Closing Costs

Reader Question: Is there any money to assist first-time home buyers with closing, such as grants?

There aren't as many grants available these days, as a result of the economic crisis we are in. Many of the organization that provided grant money to first-time buyers are feeling the effects of the recession, just like the rest of us. So the grants are harder to come by.

That doesn't mean they're not out there to be found. It just means you'll have to do more homework in order to find them. This blog post from September 2008 offers some tips on finding home buying grants. The best place to start is with your state. Different states offer different types of programs for first-time buyers, so that's where you should start.

The federal government is focusing most of its effort and funding on homeowners who are at risk of foreclosure. They're not as focused on first-time buyers right now -- they're trying to stem the tide of home foreclosures that has reached record levels. But there is a tax credit for first-time buyers that extends through July 2009. Here's an overview of the tax credit program, and here's some information on who is eligible for it.

It should be noted, however, that the tax credit is more like an interest-free loan than a grant, because it must be paid back in installments starting the second year after the home purchase. The National Association of Realtors is currently lobbying to eliminate the payback requirement, and also to extend the tax credit program beyond July '09.

Hope that helps. Good luck.

How Long Will It Take to Build Up a Good Credit Score?

Reader Question: "I arrived in the U.S. last march and got my first credit card in June. I have a bank account in the U.S. and I am working full time. I pay all my bills on time. My wife has a decent credit score of about 670. I guess my main question is how long will it take for me to build up a good credit score to the point I can look at buying a house under a first-time buyer deal?"

First of all, welcome to the states!

Secondly, I have a question for you. Have you obtained your Social Security Number yet? You'll need an SSN in order to have a credit score in the U.S. The entire data system is based on the name and Social Security Number of each consumer.

If you already have your SSN, and you've been paying your bills on time and all, then you're well on your way to establishing a credit history ... and probably a good score as well.

If you don't yet have your SSN, then that's your next step. The good news is, it's fairly simple to obtain one. You can download the necessary forms from the Social Security Administration's website. They offer instructions for the rest of the process.

Here's a related Q&A session you might want to peruse.

How to Build a Credit History
This article is from our other Q&A blog, the one that deals mainly with credit questions. It reinforces some of what we've talked about here, but it goes into more detail on the the process of building a credit score.

You'll also find a wealth of information in the credit section of our main website, along with advice on other parts of the home buying process. Hope that helps. Good luck.