Plummeting home values are attracting cash buyers who outcompete mortgages with lower offers. Image: Flickr/Show Appeal Realty CC-BY-SA

The depressed housing market is attracting more people who buy homes with cash. In turn, home buyers who need a mortgage are finding it tough to compete with cash buyers. Yet mortgage buyers can match up better against cash by being better prepared when they make an offer.

Cold, hard cash is king

Deals made for cash comprised more than a third of home sales in February, an all-time high according to the National Association of Realtors. Cash buyers have become formidable opponents for many home buyers financing their deal with a mortgage loan. More home buyers are paying with cash because plummeting home values have made real estate a more attractive investment than the volatile stock market. People are also pulling their money out of the market and investing in rentals that net a greater long-term return than stocks.

In 2010, 59 percent of home buyers purchasing as an investment paid cash. Cash has an advantage over a mortgage because the seller knows a closing is unlikely to be derailed by contingencies. That convenience is often enough for the seller to accept a lower offer than one a financing buyer would make. Cash usually wins when the bank is the seller. Eager to get foreclosures off the books, banks will go with the safest option.

How to compete with cash

Foreclosures accounted for 25 percent of all home sales in 2010. Fannie Mae saw a 128 percent increase in short sales last year as well. But financing buyers have a more even chance over cash with sellers who have equity. Equity holders aren’t under pressure to take whatever they can get and will wait for the best offer. Financing buyers can also compete with cash by getting pre-approved for a mortgage. Being prepared with a high down payment also evens the odds. Listen to what the seller wants and be willing to do whatever it takes. Treat them with respect and have a detailed contract ready that makes the deal clear. When the time comes, act quickly. If none of these strategies work, financing buyers need not give up hope. Sometimes cash deals fall apart, too.

Cash deals versus mortgage financing

In addition to getting a better deal, paying cash to buy a home has several advantages. When mortgage rates are higher than available returns on other investments, the money saved on interest puts a buyer ahead of the game. Plus, with no leverage, if the value of the house falls, the buyer only loses what they put in. For a mortgage with 20 percent down, if the value goes down 10 percent, the home buyer loses 50 percent of the down payment.

But mortgages also have advantages over cash. Buying a home with cash leaves less liquidity for other investments. And leverage works both ways. If the value of the home goes up, the mortgage holder gains a higher percentage than the cash buyer. Plus, mortgage interest is tax deductible, which lowers the cost of the loan.

Sources

MarektWatch

WiseBread

Short Sale Daily News

Put into perspective, consumer spending is being canceled out by inflation, and the housing market could be bottoming out. Image: CC Mr. T in DC/Flickr

An increase in pending home sales in February was not enough to offset the big slide in contract signings reported in January. A February gain in consumer spending was also neutralized after being adjusted for inflation driven by rising food and energy prices. But the minutely positive data on pending home sales and consumer spending boosted stocks Monday, and some real estate experts think the housing market may have bottomed out.

Inflation and consumer spending

Consumer spending in February increased 0.7 percent compared to the month before, according to the Commerce Department. Consumer spending has risen eight months in a row, but February’s increase, adjusted for inflation, is just 0.3 percent, matching the increase reported in January. Rising food and energy prices pushed up inflation in February. After rising 0.3 percent in January, the Commerce Department said the personal consumption expenditures price index rose 0.4 percent, the fastest rate recorded since June 2009. The increase in the consumption expenditures price index effectively canceled out February’s 0.3 percent increase in personal income. Households have also been dipping into savings to cover rising food and energy prices. Savings dropped from $710.5 billion in January to $676.7 billion in February.

Pending home sales as an economic indicator

Pending home resales increased 2.1 percent in February after dropping 2.8 percent in January, according to the National Association of Realtors. Compared with February 2010, pending home sales fell 9.3 percent. Because they represent signed contracts, pending home sales are considered a leading economic indicator. The number affects existing home sales data a month or two later, when the contracts close. As for February, existing home sales — 95 percent of today’s housing market — dropped 9.6 percent from the month before. The median price for existing homes dropped 5.2 percent from February 2010, erasing all increases in home values since February 2002. New home sales plunged 17 percent in February to the lowest rate ever recorded. The median price for new homes dropped 8.9 percent from February 2010.

Has the housing market bottomed out?

Because home prices continue to fall, the National Association of Realtors expects existing home sales to eventually rise 5 to 10 percent overall in 2011. Very few people are buying despite the fact that housing has become so affordable it should be one of the most attractive investments in the U.S. According to Deutche Bank, it’s now cheaper to pay a mortgage and other major homeownership costs than to rent the same house in 28 out of 54 major markets. Optimistic real estate analysts are betting that this affordability will eventually entice potential homeowners into pulling the trigger. The re-emergence of homebuyers could start raising housing prices in many markets, which could get even more homebuyers off the fence.

Sources

Bloomberg

New York Times

Fortune

A tax credit extension giving home buyers until Sept. 30 to close their deals was in doubt because it is tied in with an unemployment extension being contested in Congress. Flickr photo.

Another tax credit extension to keep the moribund U.S. housing market from getting even worse was being considered by Congress. The deadline for real estate closings to qualify for a federal home buyer tax credit worth up to $8,000 is 11:59 p.m. Wednesday. The House voted Tuesday to extend the tax credit closing deadline to Sept. 30 for buyers who met the April 30 deadline to have a signed contract. But in the Senate the measure is part of a larger bill that also would extend unemployment insurance — a much harder sell. If the tax credit extension is not approved, thousands of potential home buyers will be left in the lurch.

Tax credit extension affects 180,000 deals

Stakes are high for the real estate industry as Congress fiddles with the tax credit extension. To be eligible, home buyers needed to have a contract in place by April 30. The tax credit closing deadline was originally June 30. But MarketWatch reports that the National Association of Realtors estimated about 180,000 buyers could kiss $8,000 goodbye if the original tax credit closing deadline is upheld. A big problem for buyers has been getting the mortgage approval on time as mortgage lenders work through a pipeline clogged with thousands of applications.

Home buyer tax credit bottleneck

When the contract signing deadline expired April 30, the last-minute home-buying rush overwhelmed the companies responsible for handling the sales, including mortgage lenders, appraisers, title insurers and real-estate brokers. The Wall Street Journal reports that the bottleneck has especially effected short sales, where a lender allows a home to sell for less than the amount owed. Unlike normal sales, where only two parties negotiate the price, short sales, resulting from the epidemic of foreclosures, are more time-consuming because they require all note-holders to agree on price. Realtors say the short sale bottleneck is even putting normal sales at risk.

Unemployment extension critical

Nearly 3 million taxpayers successfully claimed the home buyer tax credit through May 22 — totaling more than $21 billion — according to the Treasury Department. The Associated Press reports that Senate Democrats have combined the tax credit extension with an unemployment extension for laid-off workers whose benefits are being phased out to the tune of more than 200,000 a week. Democrats have been trying for weeks to pass the unemployment extension as part of a larger tax and spending package, but the bill died in the Senate last week. Republicans opposing the measure want to pay for the unemployment extension with unspent money from last year’s massive economic recovery package.

Extension won’t help U.S. housing market

The tax credit extension may help homebuyers waiting to close their deals, but it will have little to no effect on a U.S. housing market that appears to be withering on the vine. The home buyer tax credit was the catalyst that boosted existing home sales in April by 23 percent from a year earlier. New-home sales saw a 47.8 percent increase. But when the homebuyer tax credit expired at the end of April, home sales in May fell to the lowest levels since the Commerce Department began tracking home sales statistics in 1963.

Banks use the prepayment penalty for protection

The way they work is that banks would allow the borrower to get lower rates, but in return the buyer would sign a paper stating they must pay a prepayment penalty if their mortgage was paid off between three to five years. Ilyce Glink, publisher of ThinkGlink.com, (see http://www.bankrate.com/finance/mortgages/6-steps-to-a-lower-prepayment-penalty-1.aspx) said, “These contracts were structured to guarantee banks a certain amount of profit. The banks would do a risk calculation or a profit calculation, and the penalty itself was generally set between 2 percent and 4 percent of the loan.”

The sad truth about prepayment penalties is that homebuyers need to sign them, but often times they don’t notice them. Glink added, “The stacks of paperwork homebuyers are required to go through usually disorient them and the cost of prepayment penalties are often ignored.” The problem comes in when the borrower wants to pay off or refinance the loan and the penalty is a reality they have to face.

Ways to handle a prepayment penalty

Clarky David, Debt Diva at CareOne Debt Relief Services, said, “With a mortgage, you’ve entered into a legal contract, and most of the time, the bank is not going to want to go to the effort to renegotiate it.” Although there is now a way to get around a prepayment penalty, there are ways to minimize it. Here are five tips to follow:

1. Find the paperwork. The first step consumers need to take is to make sure that they have a prepayment clause. Glink said, “It usually says ‘prepayment disclosure’ or ‘prepayment penalty disclosure’ at the top. There are usually three or four documents you had to initial to indicate that you read them.”
2. Read the contract. Most of prepayment penalties have a single fee and others have a sliding scale to watch for. The sliding scale ones will decrease the longer a borrower holds the loan. For example, during the first year of the mortgage a homeowner may have a prepayment penalty of 4%, whereas during the third year it may fall to just 1%. For consumers who are in the time span where a rate is set to decrease, this is a great time to wait for a month to save some emergency money.
3. Crunch the numbers. The next thing to do is pull out a calculator and do the math. Sometimes the prepayment penalty is worth the chance to move to a less risky lower-interest loan. Best case scenario, the prepayment penalty is eaten up by overall savings on a new mortgage loan. On the other hand, consumers may have to lower the penalty before they move. Again, it’s best to compare the options mathematically and make a decision based on savings.
4. Talk to the loan officer. The next step is to start negotiating the penalty with the loan officer. Glink said, “The first point of contact should be the loan officer. But if you don’t have any luck there, escalate to a manager. They generally have more pull and decision-making power.” Most likely the penalty won’t be ignored altogether, but there is a chance they may cut back the penalty if a homeowner has some track record of consistent payments for a good amount of time.
5. Get any changes or amendments in writing. Document all discussions and negotiations with everything from the loan officer’s name to the time the discussion was had. Consumers should always request that the deal is sent in writing. A verbal offer is worth nothing and without proper documentation consumers may be starting from square one.

Banks willing to negotiate

Banks are suffering as a result of the recession and aren’t eager to let go of valuable prepayment penalty fees. Despite the contract, they still may be willing to negotiate. For any consumer looking for emergency money, it can be a good option to try to at least shave a few thousands off of a penalty. It may not sound like much, but it can add up to substantial savings in the end.

Need emergency money now? Apply HERE!

Potential homebuyers are looking for ways to find quick cash, and having a good real estate agent is the number one way to save. It’s a great time to buy a home, but every first-time homebuyer needs the careful direction of a good real estate professional. They can not only sort through homes quickly, but they can also make the financial transaction go smoother.

The best real estate agent

For any homebuyer there are things to look for when it comes to hiring a real estate agent. The entire buy can be harrowing, and having a knowledgeable agent in their corner can make any buyer more at ease. When it comes to finding a good agent, buyers should first look for an agent who listens. Buyers should want an agent who asks the following questions:

• Is the buyer prequalified?
• How much do they want to spend?
• What is most important in terms of amenities?
• What is most important in terms of the neighborhood?
• What is the buyer’s timeframe?

An agent who is pointedly listening can be a great asset to any new homebuyer. They will bring up important things to consider and help the buyer make good decisions.

Next, there are cues an agent will have that include being ethical and honest. An agent that tries to push homes on a buyer that are well out of their price range, or lack the attributes they want is not a good agent. Most likely, they are looking more at maximizing their commission than they are at the buyer’s needs. It’s important to understand an agent’s motivation. Any good agent should want to give a homebuyer the perfect match in terms of a home, but stay strictly within their price range, or lower.

Finally, an eager agent is a good agent. Agents who are hard to contact most likely aren’t focused on what the buyer wants. They could be spread too thin in terms of clients or, if it’s a part-time job for them, it may not be a priority. They could be an agent who looks at real estate as a way to earn quick cash, rather than offer a viable service. Any homebuyer should search for agents who are easy to find and do plenty of communication on their own.

The novice real estate agent

Finding a good agent is a great way to save money and time because he or she will:

• Come armed with a market analysis
• Help buyers with preapproval
• Explain the sales contract
• Give details on the transaction like homeowners associations, restrictions and costs

State licensing

Working with a licensed agent is also key to a good transaction. They should have state certification and potential homebuyers can check their certification at Arello.com. There should be some type of training involved, such as the Accredited Buyer’s Representative certification or Real Estate Institute graduation. The key is for agents to be knowledgeable and experienced.

The value of a good agent

When buying a home, finding quick cash is always welcomed. It’s a difficult time for homebuyers to manage and having a good agent is the number one way to create a successful transaction. Sorting through agents can be difficult, but the right one will prove his or her worth in the end.

Need quick cash? Apply HERE!

Today, there are home loans for all kinds of home buyers

Home loans were once the exclusive business of banks. Just a few short years ago credit unions joined the fray and banks were no longer the only option when it came to borrowing money for a home purchase. Together, banks and credit unions offered competitive options when it came to mortgage funding and served millions of homeowners nationwide. In today’s lending market, however, there are new players. The number of home-finance providers is steadily growing and offering consumers more options than ever before.

Mortgage banks

A mortgage bank is a direct lender, which means that bank employees review applications and make lending decisions. Mortgage banks, in turn, sell loans on the secondary market. The biggest benefit of the mortgage bank is its trustworthiness. These institutions are regulated by the state and federal governments and usually have ties to their local communities. It can be advantageous to deal directly with the loan-source business, rather than dealing with an outsourced customer-service agency. The downside of dealing with mortgage banks, however, is that each one offers its own programs and making comparisons can be complicated and time-consuming.

Mortgage brokers

A mortgage broker is a middleman in the world of mortgages. A single broker can represent a number of different lenders. A mortgage broker’s specializes in matching the right loan product with the right customer. The biggest benefit of working with a mortgage broker is that he or she has a wide range of products to offer, and the necessary expertise to compare them and choose the best one for a borrower’s particular needs and qualifications. Another advantage is that a mortgage broker knows which lenders are most likely to approve a particular application.

After an initial assessment, the broker can steer a borrower to the right company for the loan. The downsides are that mortgage brokers often include additional fees in their contracts and they are not regulated in all states. To protect themselves, people borrowing money through a home-loan brokerage should do their own comparison research, which defeats one of the primary reasons for using a broker in the first place.

Home builders and real estate agencies

Other new entrants to the world of mortgage lending are home builders and real estate agencies. Many now offer their own in-house mortgage lenders to help sell their properties. Competition in the lending world is fierce, and too many builders and real estate companies who suffered losses in the recession have taken matters into their own hands by creating lending worlds of their own. These lenders can be useful to borrowers because, like mortgage brokers, they work with individual applicants to find the best option. Additionally, most of these lenders have strong ties to traditional lending institutions, so that if they can’t find the right product for a borrower, they can refer them to a bank can make the loan.

Find the right mortgage lender before you buy

When it comes to borrowing money to buy a home, there are more options than ever available. Home buyers should research the options and choose the one best suited to their needs and requirements. It may take some time to figure out which way to proceed, but getting the right mortgage product when you buy your home can mean a stress-free future.

If you’re thinking of borrowing money, apply here!