Question About Appraisals on Rural Development Loans

Reader question:

I am in the middle of buying a house and just hit a snag. House I am looking to buy is a foreclosure owned by a bank. This bank is selling home "As Is". Had home inspected and all seemed to go well. Got a call today from my realtor (who I am not impressed with) saying that house was appraised today and that some things had to be taken care of before I could get an finalized appraisal.

-One bathroom needed an GFI (?) receptacle
-Missing smoke alarms needed replaced - Smoke alarms are type that are wired into the houses electric.
- Door knob to basement needs replaced, as it won't turn
- Broken (bent in half) Garage door needs replaced

I was told since owner/bank was selling house "As Is" it would be my responsibility to have these repairs done before I could get appraisal. This came from guy doing appraisal, not the home inspector. I was told it had something to do with regulations or stipulations on the RD loan.

I am new at this whole house buying thing... But why would I have to pay for things to be done to the house before I own it? I could spend $20-$30 each on replacing 3-4 smoke detectors and I haven't priced them yet, but at least $500-$1,000+ on a garage door, and then have the sell fall through. I would be out a bunch of $. Not to mention but from what I can tell it is my lending bank that wants these things done. What if the bank that owns the house has a problem with me doing things to the house before I have ownership.

Brandon's response:

This has to do with the type of financing you are using, the Rural Development loan. Since your loan is insured by the federal government, there all kinds of rules you wouldn't encounter with a regular loan. Government-insured loans come with big benefits, but they also come with certain drawbacks -- as you have discovered.

It still might be worth your while to verify this through the RD service center for your area, to see what they have to say about it. I noticed that they are all safety items on the list (GFCI outlets, smoke alarms, etc.). In a normal home buying situation, the owner / seller would have to fix those items. But since the bank is the owner in this case, they are deferring the maintenance burden to you.

Here's some good reading material for you:
http://www.rurdev.usda.gov/ma/502Dwelling.htm

I recommend that you continue to research it, but I wouldn't let it derail the deal. Just my two cents. I hope that helps.

The First 3 Steps to Purchasing a Home

Countless articles have been written about the steps to purchasing a home, and many of them do a good job explaining the process. So I don't plan on reinventing the wheel with this article. Instead, I'd like to focus on the first few steps you should go through when purchasing your first home.

Why this focus on preliminary steps? Because that's where first-time home buyers make most of their mistakes, in the early stages of the process. For example, many people skip step #2 entirely, which sets them up for failure later on. So I want to focus your attention on the first (and most important) steps to purchasing a home, so you can have a greater chance of success.

The First Steps to Buying a Home

If you go through the three steps I've outlined below, you will be ahead of most first-time buyers. You will be much more likely to succeed in the purchase of a home. Lastly, you will be in a better position financially, because you will have purchased a home within your means. In other words, you'll be less likely to face a future foreclosure. So without further ado, here are the first three steps to purchasing a house that I recommend taking:

1. Research and Education

The first phase of the process requires plenty of research. First, I want you to read our expanded article on the steps to buying a home. You don't have to memorize it or anything (there's a lot of information in that article). Just read through the various steps listed in the article to get an idea of how the purchasing process works.

Next, you should spend some time learning the terminology or lingo associated with the home buying process. In particular, you should learn the mortgage terms, since that is where first-time buyers often get confused.

The third step in your research process should be the various types of mortgages available to you. This overlaps with the terminology research mentioned above, but it goes beyond that. Instead of just learning the names of the various mortgages, you should find out how they work. In particular, I recommend that you study the difference between adjustable and fixed-rate mortgage loans. This is another area where first-time buyers often wander astray, choosing an ARM loan when they should have chosen a fixed mortgage instead.

So, to sum up this section, your initial research should cover three key areas:

• The basic process of purchasing a home
• The lingo associated with mortgages and home buying
• The types of home loans available, and how they work

Trust me. Taking some time to learn the process and the terminology early on will make things much easier for you. It is the most important step to purchasing a home for the first time.

2. Establishing Your Budget

The next thing you should do is establish a home-buying budget for yourself. This is a separate step from the mortgage application process, and it should happen before you start talking to lenders. This is one of the steps to purchasing a home that many first-time buyers skip altogether -- and usually at their own financial peril.

Here's what you need to take away from this section. It's possible to get approved for a mortgage loan that's too big for you. In fact, it happens all the time. The primary cause of mortgage foreclosure is when people spend too much money on their home purchase, and it usually happens because they've skipped this all-important step to purchasing a house.

Here's an article that will help you establish a budget for yourself:
How Much House Can I Afford to Buy?

3. Getting Pre-Approved for a Mortgage Loan

Let's start by defining what this means. Within the context of mortgages and home buying, pre-approval is a process where the lender reviews your finances and tells you how much you can borrow. Just remember what we said earlier, about getting approved for a mortgage that's too big for you. Start with your own budget first, and then get pre-approved by a lender. Do not exceed your monthly spending budget, regardless of the pre-approval amount.

This is another key step to purchasing a home, because it will help you narrow your house-hunting process to the homes you can afford. Some real estate agents won't even work with buyers until they've been pre-approved, for this very reason. After all, the last thing you (or they) want to do is spend weeks looking at houses that are outside your price range.

Related Articles

I hope this article helps you understand the steps to purchasing a house, and I wish you well in your home buying process. Here are some related articles you might want to read:

10 Basic Steps to Buying a Home
House Hunting Checklist

Found a Vacation Home Online - Do I Need an Agent to Buy It?

Reader Question: "I found a vacation/retirement home I'm considering buying. I saw the listing online and it is about 3 hours from my current home. The house is listed through an agent. Do I need an agent also, because I'm aware the agent that listed the house is working for the seller? We are driving up to look at the house with the Agent that has the property listed on Saturday. Please help - it has been so long since I purchased my home and that was way before internet shopping."

The agent listing the house represents the seller, and only the seller. He or she is contractually obligated to represent the seller's best interest. In other words, the listing agent is not looking out for you at all. The listing agent's job is to (A) get an offer on the property, and (B) get the buyer to pay the full asking price ... or more.

As long as you understand this dynamic, there's nothing wrong with at least looking at the place. But I would not say very much to the listing agent, aside from pleasantries. He or she will probably try to schmooze a lot of information out of you -- such as how much you're willing to pay, how close you are to making an offer, etc. I would avoid answering these questions, because the agent will simply use it to give the seller more leverage.

The Internet helps people find and evaluate homes, but the rest of the the real estate process is the same as it has always been. Once you make an offer on a home, it's mostly a paperwork process -- not an Internet process.

If it has been a while since you purchased a home, you might want to hire a buyer's agent (the kind of agent that represents you, and only you). Good luck!

The Home Insurance Claims Process - How to File a Claim

Filing a home insurance claim is not something the average homeowner thinks about a lot. After all, your house is generally your most important asset, so it's not pleasant to think about worst-case scenarios that could lead to a home insurance claim.

But if you're reading this article right now, I can safely assume you're either in the process of filing a claim, or you soon will be. So let's talk about how to file a homeowners insurance claim, and some of the key points you should keep in mind along the way.

9 Helpful Tips for Filing Insurance Claims

1. The claims process actually begins before disaster strikes. You should make a list of all your possessions kept within the house. It's a good idea to take pictures as well. You will need to store this inventory somewhere other than in your house. The last thing you want is to lose your inventory and photos along with your home.
2. After the event the damages your home, you should try to salvage whatever you can. For example, you can use tarps and other protective materials to shield belongings if you've lost part or all of your roof. If the home has been flooded, you can increase ventilation with fans to prevent mold from building up.
3. I recommend creating a home insurance claims journal. This can simply be a notebook or notepad in which you document all of your dealings and correspondence with the insurance company. Any time you talk to somebody, make note of the date and time as well as the nature of the discussion. This kind of information can be useful later on, in the event you have to take legal action against your home insurance company.
4. Some insurance companies will make an initial payment when a claim is filed. But be careful signing any documents related to such payments. This technique is often used to circumvent future claims made by the homeowner. If you sign any documents to acknowledge that the payment was in fact the final payment, then you've basically surrendered your rights to additional coverage under your policy. It's a dirty trick, but a common one.
   
5. Eventually, an insurance adjuster will come out to visit your home and assess the damage. This may be a public adjuster that you have hired, or an adjuster who works for the insurance company. Whatever the case, you should be present when this person comes out to view the home. Make sure he or she sees the full extent of the damage and doesn't miss anything. This will help ensure that your home insurance claim covers as much of the loss as possible.
6. The adjuster we just talked about will write up a report detailing the damages to the home. You should get a copy of this report and check it for accuracy. You should also ask your insurance company for a copy of the entire claims file, which you are entitled to by law.
7. Home insurance companies are notorious for giving homeowners the runaround and trying to avoid paying claims. Don't let them treat you this way. If they tell you that a particular item is not covered in your policy, ask them to point it out to you in the policy. Don't just take their word for it.
   
8. It's a long-standing mindset within the insurance industry that if you make the claims process difficult, people will be less likely to follow through with their claim. Don't prove them right. Stick to your guns and get what you are entitled to, no matter how difficult they make it.
9. If you file a home insurance claim and have all or part of the claim denied, you may want to seek legal help. There are attorneys who specialize in insurance claims (which is an indication of how common these problems are). There is also a long history of judges and courts deciding in favor of homeowners, as opposed to home insurance companies. So don't be afraid to take legal action if you feel you are truly been wronged.

Hopefully you won't have to go through all of these steps to file a home insurance claim against your loss. In a perfect world, you would simply file the claim, and the insurance company would then cover your losses. But it doesn't always work this way, so I've outlined all of the steps you may have to go through ... just in case.

Related articles:

• Understanding Your Homeowners Insurance Deductible
• Getting Home Insurance Quotes Online

I hope this article makes your claims process a smooth one (or as smooth as possible, at least). Good luck!

$8,000 Home Buyer Tax Credit as Down Payment

We have been receiving a lot of questions from first-time buyers about the $8,000 home buyer tax credit program. So I thought it would be helpful to address them here on the blog.

Without a doubt, the most common question we receive has to do with using the $8,000 tax credit as a down payment when buying a home. Here's the latest on this subject.

Please note: This program has evolved in the past, and this may continue going forward. The answers provided below are based on information available as of August 2009. I recommend checking the IRS website for the most recent information on the $8,000 home buyer tax credit (since it is an IRS program).

Latest Information on the Tax Credit

With that disclaimer out of the way, here is the most common question we receive about the $8,000 credit.

Question: I will be buying a home this year. Can I claim the $8,000 credit now and put it toward the down payment on my house?

This has been the subject of much confusion. The answer is -- it depends. The IRS website currently says no. They explain that the home must be purchased before you can claim the tax credit, so it's not possible to put it toward the down payment.

With that said, certain buyers may be able to get the credit up front and put it toward their down payment, but only if they use the FHA home loan program. Additionally, the buyers must pay 3.5% of the down payment out of pocket, and may use the tax credit for any amount that exceeds 3.5% of the loan. So you still have to bring something to the table.

You can learn more here:

Let's clarify what we've covered so far:

• Home buyers who get approved for FHA-insured mortgage loans may be able to put the $8,000 tax credit toward their down payment. But the buyers must put 3.5% down. The credit only covers amounts in excess of 3.5%.
• Home buyers who use traditional (non-FHA) loans will not have this option. But I have heard of certain lenders making bridge loans in the amount of the tax credit, to be paid back later when the buyer receives the credit. I don't know how common this is.

For what it's worth, I personally feel the $8,000 home buyer tax credit is a bad idea. From where I'm sitting, it looks a lot like the government-stimulus programs that drove us into a housing crisis to begin with. But our readers want to know about it, so I have a duty to share what I know.

Related articles:

• FHA Home Loan Requirements
• How to Qualify for an FHA Mortgage in 2009

Home Loan Modification Programs - A New DVD

If you've been watching the news over the last few months, you probably know about home loan modification programs and how popular they have become. Basically, these programs are designed to modify a person's home loan in order to prevent a foreclosure scenario. They are reserved for certain "at risk" homeowners who meet a predetermined set of criteria and guidelines.

In this article, I'll explain a new product you can use to learn about home loan modification programs and how they work. But first, a bit of background:

The Expansion of Modification Programs

The federal government is actually encouraging mortgage lenders and loans servicers to participate in home loan modification programs, as a way of reducing the number of future foreclosures. In fact, the government has launched a program of its own, known as Making Home Affordable. There are two parts to the government program -- home loan modifications and mortgage refinancing.

It's unfortunate that so many predatory companies spring up in times of economic and financial turmoil. Such is the case with home loan modification programs and related services. A whole slew of companies now offer services related to loan mods, and many of them charge a hefty fee for these services.

In truth, however, you don't need to pay to participate in home loan modification programs -- you simply need to know how they work. And that brings me to the point of today's lesson.

Home Loan Modification Help - A New DVD

The folks at Credit.com have recently introduced a new educational product that explains the loan modification process in great detail. It's a DVD kit that comes with various forms related to loan mods, step-by-step instructions on getting a modification, and even some customer support. I've seen other products in the past relating to home loan modification programs, but this is the first one I've seen that offered so much.

Here's the bottom line. A home loan modification could save you tens of thousands of dollars, and possibly even prevent a foreclosure situation. That is, if you meet the criteria and guidelines set forth by the federal government and the lending industry.

But you have to know how these modification programs work in order to pursue them correctly. And that is the purpose of this product. It gives you a do-it-yourself approach to home loan modification. When you consider the amount of money and financial distress that could possibly be avoided, you'll probably agree that the DVD cost is a very small price to pay.

If nothing else, I recommend that you visit the website for this product to learn more about what it offers. You have nothing to lose just by considering the DVD, and you have a lot to gain from it. It could be your gateway to success with home loan modification programs, so it's worth a look.

Here's an article that goes into more depth on how a modification works.

How Big of a Mortgage Loan Can I Afford to Get?

Reader Question: "What's the best way to determine a maximum mortgage amount when buying a home? How big of a mortgage loan can I afford to take on?"

I cannot answer the "how big" question, but I can explain how to answer it for yourself. The first thing you should do is revise the question you are asking. Instead of asking how big of a mortgage you can handle, ask how much you can afford to pay on a monthly basis toward your housing costs.

When homeowners run into affordability problems with their mortgage loans, it generally happens at the monthly level. In short, the size of their monthly mortgage payment exceeds their net monthly income (i.e., take-home pay).

This can happen for a variety of reasons. Sometimes, the homeowners start out with an affordable loan, but circumstances change later on down the road. We are seeing a lot of this right now as so many people are losing their jobs.

In other cases, the mortgage was too big for the homeowners to afford right out of the gates. You might ask how this could happen. Don't the lenders review people up front to prevent this kind of thing? Sometimes they do, and sometimes they don't. Mortgage lenders know they can sell loans into the secondary mortgage market, which essentially removes those loans from the lender's books entirely. So if the homeowner defaults at a later date, it's no longer a concern for them.

How Big of a Mortgage - Two Important Points

When you ask how big of a mortgage loan you can afford, you need to understand two important concepts. We have touched on both of them above, but I want to restate them for clarity:

• Point #1 -- You should never let a lender tell you how big of a mortgage you can take on. All they can tell you is what they're willing to lend you -- but that's it. They are not your financial advisor. They are looking out for their own interests, not yours. And they can always sell mortgages into the secondary market to avoid long-term risk.
• Point #2 -- You must determine your home-buying budget before you start shopping for a house or a mortgage. You must do this by establishing a monthly budget, taking into account your monthly income versus expenses. This article explains how.

If you keep these two points in mind when shopping for a home loan, you'll be less inclined to take on a mortgage that's too big for you. Do the budgeting math to figure out how much you can afford each month, and then stick to that number. That's your cap. Don't let a lender talk you into anything about that amount.

House Poor vs. Mortgage Foreclosure

To reinforce the lesson, let's talk about the two common scenarios that can occur if you do take on a mortgage that's too big. Most people who go down this road end up "house poor" or in foreclosure -- or both.

House poor means that you spend so much on your mortgage payment each month (relative to your income) that you cannot afford to do any of the things you used to do ... or the things you want to do. Your friends call and invite you out to dinner, but you have to decline because you have no money. Your mortgage payment gobbles up your entire paycheck every month. Remember, buying a home is supposed to improve your quality of life, not take away from it.

Foreclosure is another common scenario when people take on mortgage loans that are too big for them. I probably don't need to tell you how serious this problem is right now, because you hear about it every time you turn on the news. The foreclosure crisis is one of the primary catalysts that drove our economy into a recession through 2008 and 2009.

This article answers the question: How big of a mortgage can I afford to take on? If you would like to learn more about this important topic (and I suggest that you do), be sure to review the articles listed below.

Related articles:

• How much house can I afford to buy?
• How much of a mortgage can I borrow from a lender?

I hope this answers your question, and I wish you well in your home buying process. Good luck.