How to Evaluate the Seller's Asking Price

Reader Question: We are about to buy a home soon, and we already have our eye on a particular house, but we're not sure how to evaluate the seller's asking price. How do we make sure we're not paying too much for the home?

This is an excellent question, and the answer will depend heavily upon whether you are using a real estate agent or going through the home buying process by yourself. If you're using a real estate agent, he or she will evaluate recent sales in the area to justify the seller's asking price. If you're buying a house by yourself, you'll have handled this process on your own.

Using Comps to Justify the Asking Price

This brings up some common real estate terminology known as comps -- which is short for comparable sales. A real estate agent will look at sales that have three specific qualities. They will evaluate home sales that are recent, those that occurred close to the home you are considering, and those that involve houses similar to the one you want to buy. Recent, close and similar -- these are the three ingredients that make up a good comp.

Using Home Value Websites

These days, you can also use a wide variety of websites to evaluate home prices. These websites perform much the same role of a real estate agent, in the sense that they present recent sales for a particular area. You can get this kind of information from websites like Zillow.com and HouseValues.com (plus a few other sites).

It's Called an Asking Price for a Reason

I'd also like to stress the importance and significance of the phrase "asking price." It's called the asking price for a very good reason. It's simply the amount the seller is asking to receive for the home. But that doesn't necessarily mean that's what the seller is actually going to get for the property.

In fact, it's very common for a seller to price the home above current market values. Sellers often have an inflated sense of their home's value in the current economy, and this is often reflected in the asking price they set up. So it's up to you, as the buyer, to do the research needed to validate (or invalidate) the price. Good luck.

How Does an 80-10-10 Mortgage Loan Work?

Reader Question: What is an 80-10-10 mortgage loan, and how does it work?

It's a fairly common way to buy a home these days, especially when the buyer does not have a full 20% down payment. Basically, these three numbers represent percentages of a whole. The first number, 80%, represents the primary loan the home buyer gets to pay for the home. The second number, 10%, represents a second loan -- often referred to as a piggyback loan -- that is also used to pay for the home. The last number, another 10%, represents a down payment the home buyer makes when purchasing a home.

This is a way to buy a home without having to pay for private mortgage insurance, or PMI. When you take out a home loan for more than 80% of the home's value, you have to pay for private mortgage insurance or PMI. This can increase the size of your monthly payment, which is obviously something you want to avoid.

Another common financing option is the 80-15-5 mortgage loan. This works in much the same way, except the home buyer is only putting down 5% on the purchase price of the home.

Typically, the second or "piggyback" loan will have a higher interest rate than the primary mortgage loan. This is why people often try to roll the second into the first as soon as they have enough equity built up in the home.

So you can think of and 80-10-10 mortgage loan as a financing tool that allows home buyers to pay less than 20% down, while avoiding private mortgage insurance in the process.

Adjustable-Rate Mortgage for First-Time Buyers

Reader Question: Is an adjustable rate mortgage a bad idea for first-time home buyers?

This is one of those questions we cannot answer one way or the other, because it really depends on the situation. In some cases, an adjustable-rate mortgage (ARM) loan can be used wisely to save the home buyer money. In other cases, the risk outweighs the rewards. So the best thing I can do is explain how adjustable-rate mortgages work, and what situations might justify using one.

Actually, most of the ARM loans these days are hybrid loans. That is, they have certain qualities of a fixed and adjustable mortgages, combined. For example, the loan starts with a fixed rate for an introductory period of time. This initial period may last anywhere from 3-7 years. After this initial fixed phase, the ARM loan will adjust -- meaning the interest rate will reset to a different rate. The caveat, of course, is that you don't really know whether the rate will go up or down at the adjustment. In most cases, the interest rate will increase, which means the size of the mortgage payment will also increase.

The Adjustable Mortgage Refinancing Crunch

This is why most home buyers who use adjustable-rate mortgages try to refinance the loan before the adjustment comes. Most ARMs will start off with a pretty low interest rate during the initial phase, which is something that's used to lure in borrowers. But after those first few years, the loan is going to start adjusting to a new interest rate on a periodic basis.

If you can use an adjustable-rate mortgage and refinance it later on before it resets, you are in good shape. But the problem a lot of people are having right now is that they cannot refinance or sell their homes (for a variety of reasons), so they're stuck with their adjustable mortgages and the uncertainty of the adjustment period.

How to Use ARM Loans Wisely

So let's get back to your original question. There are certain occasions when it does make sense to use an adjustable-rate mortgage instead of a fixed loan. One example would be when you're living in a house for only a few years, after which you will sell the home and move. In this kind of scenario, you can use an ARM loan to save money during the initial phase, and you can sell the home before you reach the adjustment phase. So this is a smart strategy that can save you money while avoiding risk at the same time.

I used this kind of financing strategy when I bought my first home, because I was in the military at the time. I knew I'd only be at a particular duty station for three years or so. We had a pretty good idea we would be moving after that, so we used an adjustable mortgage to secure a lower interest rate and save money over the three years that we lived in the home. We sold the home and moved long before the loan adjusted or "reset" for the first time.

What to Look for When House Hunting for the First Time

Reader Question: My husband and I are planning to buy a home in the near future. This will be our first time going through the process, and we're wondering what we should look for when house hunting for the first time.

We actually create a new house hunting checklist recently, so that's a great place to start. It covers most of the things you should do to prepare for the process. So with this article, I'll just talk about some of the things you should look for when house hunting for the first time.

What Do You Need in a House?

Before you go out looking at homes, it's a good idea to write down a list of wants versus needs. These items should be placed in separate columns on a piece of paper. A want is something you can't live without, such as the number of bedrooms in the home. A need is something that would be nice to have, but isn't an absolute necessity, such as a great view. This will help you a lot when you actually begin the house hunting process. It will serve as a constant reminder of what's most important to you.

One of the biggest mistakes first-time home buyers make when house hunting is to become too emotional about the process. Sure, it's a very exciting time in your life, and anybody who's ever bought a home can understand that. But it's also a financial investment, and like any other financial investment you need to look at it with an analytical eye. So my best advice in this regard is to enjoy the process, but stay calm enough to view each property with an objective eye. Does that make sense?

Consider the Neighborhood

So what else should you look for when house hunting for the first time? Well, you want to consider the neighborhood as well as the home. This is another thing first-time buyers often forget to do. They fall so in love with a house when they first see it that they forget to consider the neighborhood, the geographical location, the distance from work or school, etc. Remember, when you buy a home you also buy into the neighborhood around it. This is a quality-of-life issue, so it's a very important consideration to keep in mind during the house hunting stage.

House Hunting and Inspections are Different

Now let's talk about some the things you should look at when house hunting and actually touring homes. Keep in mind that you're going to have a home inspector come out and examine the house from top to bottom after you make an offer on it. At least, you should hire a home inspector. So you don't necessarily need to look at the roof and the foundation and other structural elements of the home. Sure, you want to make sure the home appears to be in good condition overall. But more importantly, you should focus on that list of wants and needs you created at the beginning of the house hunting process.

You also want to make sure the home is laid out in such a way that's conducive to your lifestyle. Does it have enough bedrooms and bathrooms? Is the master bedroom upstairs or downstairs? Does it have a fenced-in lot, if that's important to you? Is it located near work or school? What is the neighborhood like? Do people in the area seem to take pride in their homes, or is it a neighborhood in decline?

Entire books have been written on the house hunting process and what you should look for along the way. So I obviously can't cover everything here in this article. But these are some of the most important things you should look for when shopping for house.

Here are some other articles you might want to peruse. These will give you a better idea of what to look for when house hunting for the first time. I hope that helps. Good luck!

What Happens When a Bank Forecloses on a Mortgage Loan?

What happens when a bank forecloses on a mortgage loan? This question was sent in by a reader of the home buying blog. I think we've covered this topic before, but it does come up a lot so I figured I could cover it again.

Here's what happens when a bank forecloses on a home. The process will vary from one state to another, because foreclosure laws vary between states. But the basic process is the same regardless of where you live.

Most banks will actually try to work with the homeowner before they file foreclosure paperwork. They understand that times are tough right now, and that many people are facing unemployment and other problems that prevent them from making their mortgage payments. It's also important to realize that banks don't want to foreclose on a mortgage loan. The process is time-consuming for them, and it's also expensive. Banks are in the process of lending money, but they're not in the process of maintaining properties and trying to sell them. So if a foreclosure can be avoided in any way, the bank will generally work with the homeowner to pursue that goal.

Let's say the bank contacts a homeowner about the missed payments, but the homeowner is simply unable to get caught up on their mortgage payments. What happens next is generally a foreclosure filing. This is a paperwork step the bank must go through in order to move the process forward. It usually involves filing a foreclosure notice with the county courthouse, in the county where the home is located. After this, the process will vary quite a bit from one state to another. In some states, the foreclosure process is pretty swift. In other states, it takes many months for the bank to actually repossess the home.

Working With the Bank to Avoid Foreclosure

We're talking about what happens when a bank foreclose on the mortgage loan. But it's just as important to understand that you, as a homeowner, have options to avoid foreclosure. As I mentioned earlier, banks are willing to work with homeowners who are falling behind on their payments. If your financial problems are temporary, and you feel that you can get back on track with your mortgage payments, your bank can probably work out some type of repayment plan. If your financial problems are more permanent in nature, you still might be able to avoid foreclosure. In the latter case, a real estate short sale might be in order.

If the foreclosure process continues, and the homeowner is unable to sell the home or get back on track with the mortgage payments, then the bank will eventually foreclose on the property. The homeowner will be served papers from a sheriff's deputy or some other local authority. This is a notice of foreclosure, and also of the forthcoming eviction. Eventually, the bank will take ownership of the property and try to sell it through a real estate auction or some other means.

So that's what happens when a bank forecloses on a mortgage loan. Remember, if you're in a situation where you feel you might be foreclosed on, it's important to explore your options to avoid it. We have a lot of information on this website to help you do that, and you can find it by using the search bar at the top of the website.

Getting Another Home Loan After Foreclosure

Are there home loans available for people after a foreclosure process? In a word, yes. But it may take time to rebuild your credit score and reach the point of "forgiveness" where a lender is willing to approve you. Here is a recent question we received by email that covers the topic of home loans after a foreclosure situation.

Reader Question:

My question is about buying a home after foreclosure. The home that was foreclosed on was not my principal residence. It was a shared flip. My business partner and I bought a fixer-upper in 2005, started to flip it and he bailed on the deal. I had to finish the job myself along with paying the mortgage to. I put it up for sale about the time the local market tanked. Reduced the price to rock bottom, nothing. So I listed it for rental. A renter moved in, paid a few months, then stopped paying. Got them out after three months and got another renter. Same deal. Tried a deed n lieu, short sale, you name it. Had no choice but to let it go. So it finally foreclosed in Nov 2008.

During this time I was living in another state for three years living in a nice home doing a lease to purchase. After all this, my question is: Can I still buy a home after this foreclosure, even though it was not my principal residence?

Our Response:

This is a question only a mortgage lender can answer for you. But I can tell you that they'll frown on the foreclosure situation, even though it wasn't your primary residence. A defaulted mortgage is a defaulted mortgage, in their eyes. Of course, if you're current on another mortgage, like your current resident, then that might mitigate the effects of the foreclosure. Likewise, if this was isolated event and you have an otherwise flawless credit history, it will be more easily "forgiven" by a lender.

I would say that yes, you'll be able to get another home loan after this foreclosure situation. But I cannot answer the "how soon" part of the equation.

Related article: Buying a House After Foreclosure

How to Compare Mortgage Lenders - Plus a Dose of Reality

I recently provided some input for an article in the Dallas Morning News that explained how to shop for a mortgage loan. The interviewer asked me if home buyers should compare mortgage lenders during the process, or simply compare the rates offered by the lenders. I explained that the interest rate and terms of the loan are the most important factors a borrower should consider, and that the lender was secondary to this.

After the interview, I thought about all the articles I've read on how to compare mortgage lenders when buying a home. Many of these articles talk about finding a lender you're comfortable with, one that will look out for your interests, etc. Then I flipped through my copy of All About Mortgages by Julie Garton-Good, and I came across this little gem: "A good lender will set the stage for a positive win-win loan experience."

This is a good time for some brutal honesty.

There's only one "win" that mortgage lenders are concerned with, and that is their own financial gain. Your long-term financial success is not even on the radar. You are a piece of data on their profit-and-loss statements, and nothing more. So you need to bear this in mind when you compare mortgage lenders and apply for a home loan. During this process, you are your best and only advocate. The lender is not your advocate ... or your friend ... or even your financial advisor. The lender is out to make money off interest payments while minimizing risk. That is the core motivation for every mortgage lender in this country, despite the touchy-feely commercials they often run on television.

Of course, if you've been watching the news over the last year or so, none of this will come as a surprise. You've seen the dark side of the lending industry first hand, so you know (or should know) what you're dealing with. I am not being cynical or jaded here. I'm just fed up with all of the nonsense that is still being written about lenders "partnering" with borrowers, looking out for their best interests, and creating "win-win" situations. It's just not truthful. You have to ask yourself, if mortgage lenders are so inclined to protect their customers' financial interests, then why are they one of the most heavily regulated industries in the country?

How to Compare Mortgage Lenders - In the Real World

In fantasy land, you could compare mortgage lenders based on the level of care and attention they paid to your cause. You would find a lender that worked hard to understand your long-term goals and plans, and did everything possible to help you achieve those goals. In short, you would choose a lender you could trust.

In the real world, however, you cannot trust a mortgage company any more than you can trust a politician's campaign promises. In the real world, you must realize that lenders are looking out for their own interest. You must understand the inner workings of the secondary mortgage market, and how it removes the burden of responsible lending from the primary mortgage market. You must realize that a lender cannot tell you how much house you can afford, and that allowing them to do so is a recipe for failure. In fact, before you even start to compare mortgage rates and offers, you need to have a home-buying budget firmly established. Don't ever let a lending institution tell you what you can afford to pay each month -- it's simply not their job.

If you want to compare mortgage lenders and loans the right way, I recommend the following steps.

1. Start local and leverage existing relationships.

I usually recommend starting at the local level. Locally owned banks (those that operate within certain cities or states) are less likely to make risky loans, when compared to the big national banks. On top of this, you may get a better interest rate and more personal treatment from a bank where you have an existing relationship. So if you currently have a relationship with a local bank or credit union, talk to them about their mortgage loan options.

2. Focus on the interest rate and other terms of the loan.

I would argue that it's more important to compare rates and terms offered by lender, rather than comparing the lenders themselves. I've already explained the relationship dynamic you are dealing with. Sure, you should do some homework to learn about the lender's reputation, but beyond that you should focus on the numbers.

What interest rate is the lender willing to give you, based on your credit score? How much of a down payment do they require? Are there any prepayment penalties if you refinance or sell before the term is up? These are the mortgage factors you need to compare most closely.

3. Establish a budget before talking to lenders.

This is where a lot of first-time home buyers make mistakes. I often hear people say things like this: "We don't know how much we can afford, so we're going to get pre-approved for a loan to find out." But this is a false notion, because it's possible to get approved for a bigger mortgage loan than you can truly afford. Just look at the foreclosure rates in this country, and you'll see what I mean. To safeguard your financial future, you need to determine your home-buying budget before you start shopping for a loan. This article will show you how.

I hope this article helps you compare mortgage lenders and loans, and I wish you all the best with your real estate endeavors. Good luck.

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