Category Archives: Mortgage

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Don’t Waste Your Money on Mortgage Life Insurance

First of all, what is Mortgage Life Insurance?

Mortgage Life insurance is an insurance policy designed specifically to pay off your mortgage in the event that you, the mortgage borrower, die before the mortgage is completely paid off.

Don’t confuse mortgage life insurance with private mortgage insurance or PMI. They are different animal. But both are equally hurtful to your wealth accumulation plan.

Mortgage life insurance are somewhat similar to traditional life insurance, but different in very significant ways. Both traditional life insurance and mortgage life insurance can provide a means of paying off your mortgage. With either type of insurance, you pay regular premiums to keep the coverage is in force.

A traditional life policy pays out death benefit when the borrower dies. But a mortgage life insurance policy doesn’t pay out unless the borrower dies while the mortgage itself is still in existence. And the death benefit goes to the mortgage lender, not the family members as in traditional life insurance.

Why would you buy life insurance to pay money to your mortgage lender, and not your family?

With mortgage life insurance, your mortgage lender is the beneficiary of the policy instead of beneficiaries you designate. When you pass away, the death benefit pays out to your lender to pay off the balance of your mortgage, so you family does not have to worry about the mortgage.

Well, it’s true that mortgage is taken care of for your family. But wouldn’t it be better for your loved ones to receive the death benefits and decide how they want to use that money and decide whether to pay off the mortgage. There may be more pressing needs than paying off the home, such as final expenses, private school or college tuition, etc.

Related article: Why You Need Final Expense Insurance?

Let’s look at mortgage life insurance more closely.

There are two basic types of mortgage life insurance: decreasing term, where the size of the policy decreases as the balance of the mortgage is being paid down until both reach zero; and level term, where the size of the policy does not decrease.

With a level premium, your premium stay the same for the duration of the policy. This feature sounds great – until you realize that while you’re paying the same premium, your coverage is shrinking as you pay off your mortgage over the years, which also means the potential payout decreases as well.

Some insurance company offer to return your premium if you pay off your mortgage before you die. Does this make up for the fact that your coverage declines although you keep paying the same amount? Not really.

After 15 or 30 years, when your mortgage is paid off and you get your premiums back, they’ll be worth far less because inflation will have eroded their value.

You also will have lost the opportunity to invest what you saved from purchasing cheaper life insurance instead of mortgage protection insurance. That’s 15 or 30 years of potential compounding returns down the drain.

Related article: How to Make Money Work for You

Traditional life insurance is often more affordable and allows you to name your children or spouse as the beneficiaries rather than the mortgage company.

The premium of the mortgage life insurance is usually lumped into the home loan, which means you are paying finance charges on the premium, which is already expensive.

Also, a mortgage life insurance stays with the house and it is not transferable. Now you’re stuck.

Basically, a mortgage life insurance is a waste of money. Any traditional life insurance (whether term or permanent) can offer much better level of protection for considerably smaller premiums.

A traditional life insurance maintains its death benefit value throughout the lifetime of the policy, and the death benefit pays out to your family whether or not your mortgage is paid off. It gives your family option to pay off the mortgage or use the money for more urgent things. And if the mortgage is paid off when you pass, that’s even better, your family can have all the money to use for whatever is important.

Mortgage life insurance is extremely profitable for mortgage lenders and/or insurers, but totally obsolete to borrowers. Remember, there are two lifespans to consider – your lifespan and the mortgage’s.

Mortgage protection insurance companies might try to convince you that you need their product in addition to life insurance. They’ll tell you that paying off the mortgage will eat up a major portion of your life insurance proceeds, leaving much less for your survivors to meet their basic living expenses.

If you are concern you don’t have enough life insurance, you should buy more. It will likely cost less to increase that coverage than to purchase a separate mortgage protection policy.

If you cannot qualify for traditional life insurance because of health reason, you would still be better off with a no-medical-exam (also called “guaranteed issue”) term policy with level premiums and a level death benefit. These policies cost a bit more, but at least you and your family will be protected.

You should consider mortgage life insurance only as a last resort.

Related article: Protect Your Home with Life Insurance

Why Private Mortgage Insurance Sucks?

If you're a home buyer, avoid private mortgage insurance like a plague.

Private mortgage insurance is an insurance policy that protects mortgage lenders against losses that result from you defaulting on a home mortgage, dies, or is otherwise unable to meet the contractual obligation of the mortgage.

It is usually required from mortgage borrower if their down payment is less than 20 percent

That’s right, you pay the insurance to protect your bank.

Private mortgage insurance may come with a typical “pay-as-you-go” premium payment, or it may be capitalized into a lump sum payment at the time of mortgage origination.

As an alternative to private mortgage insurance, some lenders may offer a “piggyback” second mortgage, which serves as or part of the down payment to avoid private mortgage insurance.

This option may be marketed as being cheaper for the borrower, but that doesn’t necessarily is true. Always compare the total cost before making a final decision.

Another alternative is “lender-paid insurance”, which sounds so much more reasonable. With lender-paid insurance, you are required to put down at least 10 percent as down payment.

That’s still a lot better than you paying for private mortgage insurance, which can add up to a lot of money, which could have been use to pay down the principal.

Not every lenders offer lender-paid insurance, so you have to shop around and ask, especially mortgage brokers. You can always get better deals from mortgage brokers than big banks.

Once you’ve paid off some of your loan and/or your equity in your property has increased to where your loan is less than 80% of your property value, you may be eligible to cancel your mortgage insurance. Once the mortgage insurance is cancelled, you will stop paying the monthly premium, which you can now use that as additional payment to the principal and pay off your mortgage a little bit faster.

Related article: Pay Off Your Mortgage in 7 Years

The private mortgage insurance does not cancelled automatically when your loans reaches less than 80% of your property’s value. You have to initiate the cancellation. So check your mortgage and property tax assessment value at least yearly.

Related article: Don’t waste your money on mortgage life insurance

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If you’re a home buyer, avoid private mortgage insurance like a plague.

Private mortgage insurance is an insurance policy that protects mortgage lenders against losses that result from you defaulting on a home mortgage, dies, or is otherwise unable to meet the contractual obligation of the mortgage.

It is usually required from mortgage borrower if their down payment is less than 20 percent

That’s right, you pay the insurance to protect your bank.

Private mortgage insurance may come with a typical “pay-as-you-go” premium payment, or it may be capitalized into a lump sum payment at the time of mortgage origination.

As an alternative to private mortgage insurance, some lenders may offer a “piggyback” second mortgage, which serves as or part of the down payment to avoid private mortgage insurance.

This option may be marketed as being cheaper for the borrower, but that doesn’t necessarily is true. Always compare the total cost before making a final decision.

Another alternative is “lender-paid insurance”, which sounds so much more reasonable. With lender-paid insurance, you are required to put down at least 10 percent as down payment.

That’s still a lot better than you paying for private mortgage insurance, which can add up to a lot of money, which could have been use to pay down the principal.

Not every lenders offer lender-paid insurance, so you have to shop around and ask, especially mortgage brokers. You can always get better deals from mortgage brokers than big banks.

Once you’ve paid off some of your loan and/or your equity in your property has increased to where your loan is less than 80% of your property value, you may be eligible to cancel your mortgage insurance. Once the mortgage insurance is cancelled, you will stop paying the monthly premium, which you can now use that as additional payment to the principal and pay off your mortgage a little bit faster.

Related article: Pay Off Your Mortgage in 7 Years

The private mortgage insurance does not cancelled automatically when your loans reaches less than 80% of your property’s value. You have to initiate the cancellation. So check your mortgage and property tax assessment value at least yearly.

Related article: Don’t waste your money on mortgage life insurance

Gift Money or Gift Funds for Down Payment

Gift Money for Down Payment

What You Need to Know…

What You Need to Know About Using Gift Money or Gift Funds for Down Payment

Gift funds for down payment on home purchase is allowed by both FHA and Fannie Mae and Freddie Mac, however, there are rules and regulations with regards to gift funds and each loan program has their own lending guidelines on gift funds. 

Many families help each other out, especially in Hawaii. Gifting money also helps with estate tax later.

A parent may give their children gift funds to purchase a home.  A grand parent may give their grandchild gift funds to be used towards the down payment of their home purchase. A couple may get gift funds as their wedding gift from family or close relatives where they can use that as a down payment for their home purchase.

Why Are Lenders So Uptight About Gift Funds?

Mortgage lenders want to make sure that the gift funds are actual gifts and not loans. If an applicant were to borrow part of the funds required to complete the transaction, that monthly expense would need to be accounted for in their debt-to-income ratio. Mortgage lenders want you successful in making your mortgage payments.

Gift funds do not need to be repaid, so there is no additional burden on the borrower. And it is the only type of financial assistance that doesn’t change the borrower’s capacity to borrow, it has historically been one of the most abused and cheated aspects in lending.

To combat such fraud, underwriting guidelines have been put in place to ensure that the gift fund is in deed a real gift!

Before you accept gift funds for down payment on a home purchase, check with your loan officer for instructions. 

You loan officer will tell you that gift funds for down payment needs to be sourced.  The donor of gift funds for down payment on your home purchase needs to complete a gift letter which states that the gift funds is not a loan and that the gift funds does not need to be paid back. 

The donor of the gift funds needs to provide 30 days of the donor’s bank statement showing that the gift funds was seasoned in the donor’s bank account for at least 30 days. The gift funds leaving the donor’s account needs to be reflected in the bank statement of the donor. 

The recipient of the gift funds needs to provide the copy of the check, the deposit slip, and a new bank transactional history print out that is signed, dated, and stamped by the bank teller reflecting the funds in the bank account of the recipient.

The Gift Letter must contain the following information:

The donor’s name, address and phone number
The donor’s relations to the homebuyer/recipient
The dollar amount of the gift for down payment
The date that the gift fund is transferred to the homebuyer
A written statement from the gift donor’s stating that the fund is a gift and NOT a loan that needs to be repaid.
The gift fund donor’s signature
The address of the property to be purchased.

Gift funds can only be given by a close family member.

The person giving the gift will need to:
§ Sign a Gift Letter that includes their complete contact information and amount of the gift.
§ Provide a copy of the check or financial instrument used to transfer the gift.
§ Provide proof that they themselves had the ability to give the gift (the money was in their account).

The gift recipient will need to provide proof those transferred funds were deposited in an account they hold.

How Much of the Down Payment Can be from a Gift?

That depends on the type of home loans.

For conventional home loans, if you putting 20% down payment or more, then the whole amount can be gifted.

However, if you’re putting less than 20% down, only part of the down payment can be from a gift fund, and the rest has to be from your own fund.

Gift funds for down payment is only allowed on owner-occupied primary and second residences. Gift funds are not allowed for investment property purchase.

What About FHA Loans and VA Loans?

Both FHA loans and VA loans allow 100% gift funds for down payment for home purchase. Both loans are for owner-occupant only.

If you are purchasing an investment property, gift funds cannot be used at all, period.

It is VERY important to note that if gift funds are provided early enough in the process, and those funds have remained in the borrowers own accounts for more than 60 days, no gift funds supporting documentation is required.

Gifts are not restricted to only money. Gifts can also be in the form of equity in a property. If parents wish to have their child purchase a property from them, the parents can gift a portion of the equity to be used as the child’s down payment.

What Else Do You Need to Know About Gift Money…

Gift Tax, sometimes confused with Inheritance or Estate Tax, is a tax on the transfer of cash, asset, property from one person to another while receiving nothing in return, in another word, as a gift.  

In most states, the tax applies whether the donor intends the transfer to be a gift or not.  

The Gift Tax and Estate Tax are closely related.  The IRS allows you to give up to $14,000 per year to any number of people without incurring any gift taxes.

If the gift exceeds $14,000 in a given year, the person who makes the gift, not the recipient, has to file a gift tax return and pay any tax owed. However, there is $5,430,000 lifetime exemption before you have to pay gift tax.

Any gift that exceeds the annual exemption of $14,000 reduces your estate tax lifetime exemption of $5,430,000.  For example, you give your son $114,000 in 2015.   $14,000 is exempted while you have to file a gift tax return and report that you used $100,000 of your $5,430,000 lifetime exemption.

Here’s the good news…

There is NO gift tax in Hawaii.  All Gift Tax are exempt in the State of Hawaii.

If the total estate asset (property, cash, etc.) is over $5,430,000, then it is subject to the Federal Estate Tax.

Stop Foreclosure Now Before It’s Too Late…

Stop Foreclosure Now

Foreclosure is a stressful and unpleasant experience, not to mention the impact it has on your credit score, your ability to obtain a mortgage and it may even affect your employment for the years to come. No one wants to have to go through the foreclosure process.

But life happens…job loss, divorce, unforeseen illness/disability, death in family, underemployed, business loss, etc.

No matter the situation that brought you to defaulting on your mortgage payment and facing potential foreclosure, we have the solution for you.

Related article: Protect Your Home with Life Insurance

The most important thing to remember is that you always have options.

We’ll help you understand your situation and what options are available and best for you.

What options are available to avoid or stop a foreclosure?

Option #1: Selling Your Home Quickly

This is the simplest option of all if you don’t own more than the home is worth. You can easily sell your home in the conventional way with a real estate agent, listing on the MLS.

Or you can sell your home to us without any agent’s commission, as we’re not real estate agent. We’ll buy your home in “as in” condition.

You’ll get your money quickly as this would be a cash transaction. A traditional home buyer with bank loan would need a minimum of 30 days to close on the transaction.

Option #2: Short Sale

A short sale is similar to option #1, except you owe more than your home is worth. For example, your mortgage balance is $500,000, but your home is now worth only $350,000.

This option is not as easy as the first because when you took out the mortgage initially the bank created a lien on your property.
You’ll need to get the bank’s approval to sell your home for less than what you owe because the bank is losing money.

Many banks would agree to such option because the short sale is a lot easier and less expensive than a full on judiciary foreclosure.

Related article: What is a Short Sale?

Option #3: Loan Modification

If your goal is to stay in your home, a loan modification is what you need. A loan modification can help you work with your bank to modify the loan term to help you stay in your home.

Check out MakingHomeAffordable.gov. Hurry, programs expiring December 31, 2016.

See…you still have three options to stop foreclosure.

Don’t delay…contact us now or fill out the form above.

I am a real estate investor and can buy your home in "as-is" condition as an investor (not as a real estate agent).

Therefore, you pay no commission or service fees to me at all.

What is a Home Equity Line of Credit or HELOC?

What is home equity line of credit or HELOC?

If you have used a credit card, you'll easily understand the concept of the home equity line of credit or HELOC. In simple term, a HELOC is a revolving credit, like the credit limit with your credit card. The difference is that a HELOC uses your home's equity as a collateral. Basically, it's a credit card secured with your home's equity.

And what is home equity?

Home equity is the difference between what your home market value and the total home mortgage you owed. For example, your home is now worth $1 million, and you have a home mortgage of $300,000. So in this case, your home equity is $700,000.

Most banks do not let you borrow 100% of your home market value. The most I've seen are 90% and 95%.

How much home equity line of credit can you qualify for?

The qualification is very similar to qualifying for a home loan. You still have to show proof of income, good credit score, appraisal, etc. The general rule to figure out how much you qualify for is 80% of your home equity.

We'll use the same example we used earlier. So your home is worth $1 million in the current market. 80% of that $1 million is $800,000. We then subtract your current outstanding mortgage of $300,000. Therefore, you qualify for up to $500,000 in HELOC, given you meet income and credit score requirements.

What Can You Use a HELOC for?

You’ve probably hear many times radio or TV advertising HELOC to finance your dream vacation, wedding, dream car, dream wedding, etc.

You should see me roll my eyes when these advertising show up…these are the worst way use the money.

First of all, when you borrow money to buy things that do not return money, that’s bad debts. You’re digging a hole for yourself.

A better use of the HELOC is to pay of your bad debts, such as high interest credit card balance, car loans, college loans, etc.

Even though the bank generally does not want you to use the money for real estate investing (because they think any investing is risky), but that’s the way to go.

I purchased my first rental property with a HELOC from my primary residence. And my rental property is making money for me while I’m sleeping, and the equity is of course growing every day like a healthy child.

Some banks may allow you to refinance your existing home mortgage into a HELOC. This is a rare strategy that not many people know of.

You can technically use the HELOC to pay off your mortgage in 5-7 years . I’m serious, no kidding…

Many local banks and federal credit unions offer very enticing introductory rates.

American Savings Bank offers 1% APR first year and 2% APR second year.

Bank of Hawaii offers 1.75% APR for the first 24 months or 2.75% APR for the first 36 months.

Central Pacific Bank offers 1% APR for 1 year OR 1.75% APR for 2 years OR 2.75% for 3 years.

Hawaii State Federal Credit Union offers 0.99% APR for first year OR 1.99% APR for 2 years OR 2.99% APR for 3 years OR 3.99% APR for 4 years OR 4.99% APR for 5 years.

Hawaii USA Federal Credit Union offers 0.75% APR for 1 year OR 1.75% APR for 2 years OR 4.25% APR for 3 years.

HELOC vs HELoan

Hawaii Foreclosure 101

Hawaii Foreclosure Process

What is a Foreclosure?

A foreclosure is a legal process by which a homeowner’s right to the property is terminated, usually due to default. It typically involves a forced sale of the property at public auction with the proceeds applied toward the mortgage debt.

In Hawaii, mortgage lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure.

In judicial foreclosure or “foreclosure by action”, the mortgage lender files the appropriate documents with the court to rule that the homeowner is in default.

The mortgage lender then delivers the notice of default to the homeowner, or publishes the notice if they have trouble contacting the homeowner.

The homeowner has 20 days to respond. If the homeowner does not respond in 20 days, the court would find the homeowner in default and the mortgage lender can proceed with scheduling the foreclosure sale.

However, the homeowner has 30 days after the notice of default to file a notice of appeal.

A commissioner is usually appointed to sell the property at the public auction, which are usually held at the court house steps. The commissioner publishes the notice of foreclosure sale in the local paper showing the auction dates and open house dates, if any.

Any party may bid at the auction and the winning bidder is required to pay 10 percent of the bid cash or cashier’s check.
Unfortunately, the highest bidder does not automatically get the property. Additional bidding may continue at a confirmation hearing. If the court find the price fair at the confirmation hearing, then the sale is confirmed.

Non-judicial foreclosure or “foreclosure by sale”, does not involve any court action.

The mortgage promissory note usually contain a provision called a “power of sale” clause, which allows the mortgage lender to foreclose on the property upon default to satisfy the unpaid mortgage loan.

In a non-judicial foreclosure, the mortgage lender’s attorney would publish a notice of foreclosure sale once a week for three (3) consecutive weeks in a local newspaper in the county the property is located.

The last publication cannot be less than fourteen (14) days before the sale.

The copy of notice must be posted on the property and mailed or delivered to the homeowner no less than 21 days prior to the foreclosure sale.

The foreclosed property is auctioned off to the highest bidder. The auction maybe rescheduled, which happens frequently. And the notices of sale must be re-sent and re-published.

The homeowner has up to the three (3) days prior to the foreclosure sale to save the default by paying the defaulted debt along with any costs and reasonable attorney’s fee.

Hawaii offers no right of redemption for homeowners once the sale of the property is confirmed. However, homeowners in Hawaii do have up to one (1) year to redeem a tax lien foreclosure.

After the foreclosure sale, a homeowner may still face deficiency judgement if the proceeds from the foreclosure is not enough to pay off the mortgage promissory note IN FULL, meaning the property was sold SHORT.

A foreclosing mortgage lender who completed a non-judicial foreclosure of residential property is prohibited from pursuing a deficiency judgement against the homeowner unless the debt is secured by other collateral.

Read Avoid Foreclosure at All Cost.

Owner Financing Win-Win for Both Sellers & Buyers

What is Owner Financing?

Owner financing or seller financing, is as the name implies, the owner finance the deal, meaning the own is now also the bank. Instead of the buyer getting a loan from the bank, and paying monthly payment to the bank, the buyer will pay the owner a monthly payment.

Owners usually offer owner-financing to make their properties easier to sell because the seller now has a larger pool of buyers, who are unable to obtain mortgage from banks. Sellers may finance part of the purchase price - 30% or 50%. Sometimes they may even finance up to 100%.

A typical owner-financing deal looks something like this. The owner or seller has a property that he/she wants to sell for $500,000. With more stringent bank requirement, mortgage loans are hard to come by. So the seller offers owner financing to less qualified buyers. The seller finance 50% of purchase with a small down payment, which means the buyer only has to come up with the other 50% from the bank. So instead of coming with $100,000 down payment (20% of the purchase price) and getting a $400,000 conventional loan, the owner may only require a $10,000 down payment, and owner-finance the $250,000. The buyer now would need only to borrow $240,000 from the bank for this purchase.

Seller financing are usually short-terms 3-5 years long, at which time the buyer, hopefully with better income and credit score, would be able to re-finance with the bank. Most seller financing charges higher interest rates, something around 5-6% now, for 3-5 years, then balloon payment at the end of term.

Why is Seller Financing a Win-Win Strategy for Both the Sellers and Buyers?

The benefit for the seller is that he/she would earn the interest that would normally goes to the mortgage bank. The seller is acting as the bank and the money he/she is lending is secured with the property, which means if the buyer default or is not able to refinance at the end of the financing term, the property goes back to the seller.

The benefit for the buyer is that he/she can buy the property now, instead of waiting to save up enough down payment or repair their credit score, or whatever their reasons for not getting a mortgage from the bank.

Hopefully at the end of the owner-financing term, the property would have increased in value or equity either through appreciation and/or consistent monthly payment. Now with more equity in the property, the buyer should be able to refinance to a conventional mortgage easily.

Isn't it brilliant?

Owner Financing

Sell Your Home as Rent-to-Own

Rent-to-own homes

Rent-to-own, also known as lease option, is an investing strategy that can be benefit both home buyers and home sellers.
For home sellers, rent-to-own may be the perfect solution to ensure you get top dollar for your home in a buyer’s market. It may even generates some extra income for the seller before the actual sale of the home. The rent-to-own strategy also increases the number of potential buyers for your home to include those who do not qualify for the conventional mortgage from banks.
In a rent-to-own or lease option, the homeowner rents his/her property to a potential buyer (lessee) with the exclusive right to purchase the home within a certain time period, usually 3 years or longer. The homeowner cannot legally sell the property to anyone else during the period defined by the lease option. The homeowner and lessee would negotiate in the beginning of the lease the term of the lease to include the purchase price, option or earnest money, monthly payment in addition to the rent.

Decide if a rent-to-own is for you. Rent-to-own isn't for everybody. If you need all the money from the sale of your home right away, you're better off with a straight sale. In addition, the majority of rent-to-own aren't exercised, so you may have to begin the process of selling your home all over again after the lease terminates.

You might also have to consider if you want to, or aren't able to, keep up with the responsibilities of continuing to own the home. In the a rent-to-own scenario, the homeowner must continue to pay property taxes and insurance and is generally still responsible for major repairs during the lease period.

Do a background and credit check on the applicants. At this point, you have to look at potential buyers as potential tenants, and you don't want to do a rent-to-own with somebody who you wouldn't rent to. Look for someone with good references, a steady source of income, and the ability to pay the rent plus, if applicable, the additional monthly option money.

As far as the applicant's credit history, you probably don't want someone with serious credit trouble, but at the same time you may want to be somewhat lenient. Many buyers who choose rent-to-own do so because they have some blemishes on their credit and want to improve their profile before applying for a loan.

Pre-qualify your lessee. It's a good idea to contact a loan officer or mortgage broker to at least discuss the potential buyer's prospects for obtaining a mortgage at the end of the lease term. There is more uncertainty (and, hopefully, more chance of improvement) the longer the lease term, but both you and the potential buyer can get a realistic idea of whether they'll be able to buy the house.

This step is essential if it's important to you to sell the house at the end of the lease. But ethically, and perhaps legally, it's important regardless of your preference because if you take option money and above-market rent from a tenant who can't possibly buy the house at the end of the lease, you're just ripping the tenant off.

Provide the potential buyer with a seller's disclosure form. The disclosure form lists any known problems with the house. You attest, to the best of your knowledge, to the condition of the house. This form is standard for other purchase transactions but is sometimes left out in a rent-to-own. Make sure you give the buyer this form to help him or her make an informed decision and to protect the integrity of the contract and sale. The buyer should also have an independent home inspection done.

Prepare a lease agreement with option to buy and collect option money. You can get fill-in-the-blank rent-to-own forms online, but you're better off getting them from a local real estate agent or attorney. The contract is sometimes added as an addendum to a standard sales contract. Unless you really know what you're doing, get help with the details of the contract from a real estate attorney, not a or broker.

The most important thing to remember is that you've got to cover not just the money issues but also who is responsible for what types of repairs and other complications that are bound to come up.

◦ Agree on the purchase price of the home, which should be fixed on the lease contract. You'll be obligated to sell at this price, so you want to make sure it's something you can live with. Ideally, the agreed-upon price should be at least at fair market value and maybe slightly more (especially for lease terms of 1 year or more) to compensate for the convenience to the buyer and for the likely appreciation of the property over the term. You and/or the buyer may want to pay for an appraisal to validate the price. Banks and other lenders will only loan against the appraised value, regardless of the price that you agreed on with the buyer.

◦ Determine how much option money to collect. Some states and municipalities have laws specifying a maximum amount of option money that can be taken, but in general the initial option money or option fee can be almost any amount. A typical figure is 2-4% of the purchase price. You will keep this money no matter what. If the lessee decides to buy, the money will be credited toward the down payment or the purchase price, and if the lessee doesn't buy, he or she forfeits the option money to you. Keep in mind that many buyers choose lease options because they can't come up with a big down payment, so don't expect to be able to get a huge amount of initial option money.

◦ Decide how much of the lessee's monthly payment will be credited toward the option. Anywhere from 0-100% of the monthly payments can be credited toward the purchase price, although the amount is sometimes subject to state or local laws. In general, the monthly payment will be calculated at fair rental value plus a set amount that will go toward the purchase price. This, like the initial option money, will either be credited toward the down payment or the purchase price or, if the tenant doesn't buy, will be forfeited to you.

◦ Decide on the term of the lease. Lease options typically run anywhere from 6-24 months. Less than six months usually doesn't make sense for the buyer, and more than 2 years (sometimes more than 1 year) may cause tax or legal complications. Shorter lease terms generally result in sales more than longer terms, simply because there are so many variables over the long term, but the length of the lease should be adequate to ensure that the lessee has time to get his or her financial ducks in a row. Keep in mind that if housing prices appreciate quickly, you may be getting a bad deal on a long lease, since you're obligated to sell at the agreed-upon price. If housing prices decline, however, you may be getting a good deal, but if they've declined significantly, the lessee is unlikely to buy the house. You still get to keep the option money, however.

Get the right home insurance coverage. Since you will no longer be the owner-occupant of the house, you may need to update your homeowners insurance policy to a dwelling policy. Check with your insurance agent to determine what policy is necessary and what coverage you need. Your tenant should also be insured to cover his or her liability and, depending on your state, any gaps in your coverage that may result from the lease option.

Collect monthly payments. Now, all you need to do is collect the payments each month. Keep track of the payments received so you'll have a record when the time comes for the lessee to exercise the option (or, in the the worst-case scenario, when you have to go to court to settle a dispute).

Sell the home. At the end of the lease term, the lessee can exercise the option to purchase your home for the price specified on or before the date specified. The total option money paid (including the initial option money plus any credit from the monthly payments) will go toward the down payment. Thus, the buyer already has equity in the home and should find it easier to qualify for a mortgage.

Read Buy Your Perfect Home with Rent-to-Own.

Homeowners’ Guide to Avoid Foreclosure at All Cost

Short Sale vs Foreclosure

Homeowners facing economic hardships may have a foreclosure looming, but are often too proud or uninformed to do anything about it, until its too late.  Before considering bankruptcy or allowing the bank to foreclose, consider a short sale.  

Unlike a short sale, foreclosures are initiated by lenders only. The lender moves against delinquent borrowers to force the sale of a home, hoping to make good on its initial investment of the mortgage.

Also, unlike most short sales, many foreclosures take place when the homeowner has abandoned the home. If the occupants have not yet left the home, they are evicted by the lender in the foreclosure process.

Once the lender has access to the home, it orders its own appraisal and proceeds with trying to sell the home. Foreclosures do not normally take as long to complete as a short sale, because the lender is concerned with liquidating the asset quickly. Foreclosed homes may also be auctioned off at a "trustee sale," where buyers bid on homes in a public process.

In most circumstances, homeowners who experience foreclosure need to wait a minimum of five years to purchase another home. The foreclosure is kept on a person's credit report for up to seven years.

Although there is no guarantee your lender will agree to a short sale, here is a list of the benefits of participating in a short sale, versus being foreclosed upon. 

Benefits Of A Short Sale Versus Foreclosure

• Homeowner can apply for a short sale even if they're not behind in payments.

• There in ZERO COST to the homeowner in short sale. The lender pays all the selling costs and real estate commission. Meaning the homeowner has nothing to lose!

• The homeowner receives professional guidance from real estate agent when doing a short sale.

• A short sale may postpone the foreclosure action to allow enough time for house to be sold.

• Homeowner may qualify for financial or relocation incentives from the lender, and receive up to $10,000 for relocation from a government program called HAFA which provides an option for homeowners transitioning out of their mortgage.

• A short sale only affects your credit score between 50-70 points vs 200-400 points with foreclosure.

• Homeowner may qualify for another mortgage loan as soon as 2 years, as compared to 7 years with a foreclosure.

• Doing a short sale avoids foreclosure and waives the full deficiency owed by the homeowner. They can now walk away from the property free and clear.

• Possible tax relief from cancellation of any debt income.

• Short sales are not likely to affect jobs that require a security clearance.

• It is easier to recover financially and emotionally from a short sale than a foreclosure.

If you plan to simply pack up, leave and “let the bank have the property”. This is the worst idea ever for the following reasons:

• If you leave the house, you will still owe the balance on the mortgage plus penalties and late fees (which in many cases is tens of thousands of dollars). This means that by law you are responsible for paying off this balance over the next 10 to 20 years for a property you no longer own!

• If you walk away from the house, the bank will still try to recover the money. They can legally do this by garnishing your future wages and investments!

• If you let the property go into foreclosure, your credit score can be affected up to 400 points. This means that it is going to be hard to find somewhere to rent (if they do credit checks). It is going to be hard to get another mortgage for a very long time with a foreclosure on your record. It is also going to be hard to get credit (in general) with a foreclosure on your record.

• Having a foreclosure on your record can also be a hindrance in getting a job, especially ones that require security clearance.

Read What is Short Sale?.

 

Short Sale vs Foreclosure

Invest in Short Sale?

Short Sale Timeline for Buyers

Read What is Short Sale?.

A short sale can be a good deal for a cash buyer or investor. And it can help the seller avoid having a full foreclosure on his or her credit record.

Because in a short sale, the proceeds from the home sale are less than the amount the seller needs to pay off the mortgage debt and the costs of selling, so for this deal to go through, everyone who is owed money must agree to take less -- or possibly no money at all. This is one reason why short sale can be a very complex transaction that move slowly and often falls through.It is a lengthy and paperwork-intensive transaction that may take up to a whole year to process.

If approved for short sale, the buyer or investor negotiates with the homeowner first, then seeks approval on the purchase from the bank. It is important to note that no short sale may occur without the lender’s approval.

Before you rush in, consider the following issues.

1. Know what you are getting into. Buying a short sale is not a do-it-yourself project. Find a real estate professional (even attorney), who understands the short sale process in your state. Having an experienced and knowledgeable real estate agent (or fellow investor) on your side who knows how short sales work will increase the chances of closing the deal without loosing your shirt. Even under the ideal circumstances, short sales can take a long time to close and may require extra effort on the part of the buyer.

2. Be wary of the condition of the property. If the seller is in financial distress, chances are the home may not be well-preserved. The seller also may be reluctant to reveal serious maintenance issues. Proceed carefully and get the property inspected by a knowledgeable person before you commit.

3. Make sure the deal can close. If you've decided to go for it, the first step is to determine the status of the short sale. Below are items that most lenders require from a short seller. If the seller is unable or unwilling to provide this information, the short sale won't close and any buyer is wasting his or her time.

A hardship letter. The seller must explain why he/she cannot keep up with making payments. The sadder the story, the better. A seller who is simply tired of struggling probably won't be approved, but a seller with cancer, no job and an empty bank account may. The most common acceptable reasons are divorce, bankruptcy, loss of job or some kind of emergency.

Proof of income and assets. It is in the best interest of the lender to recover funds from the home owner. If the lender discovers that the home owner has other assets, including retirement funds, they may prefer to liquidate these assets for payment on the mortgage, and denies the short sale. The proof of income and assets must include income tax and bank statements, going back at least two years. Sometimes sellers are unwilling to produce these documents because they conflict with information on the original loan application, which may have been fudged. If that's the case, this deal is unlikely to close.

Comparative market analysis. This document shows that the value of the property has declined, which essentially means the home owner has no equity in the property, and it won't sell anytime soon for the amount owed. The comparative market analysis should include a list of comparable properties on the market and a list of properties that have sold in the past six months or have been on the market in that time frame and are about to close. This analysis is very similar to the Broker Price Opinion, which is less formal but often more informative than a property appraisal. The prices should support the seller's contention that the property is worth no more than the short-sale price.

A list of liens. The home owner must be at least 3 months behind on the mortgage and has been served a lis pendens from the court indicating that the lender intends to foreclose on the property if they do not receive payment in the near future. There may be more than one lender or liens on the property, and all lien holders have to agree to take less -- or possibly no money at all..

If there are first and second mortgage liens, the question becomes: What's the plan to satisfy these lien holders? If there is a third mortgage lien, reaching any deal is very iffy.

Deal killers include child support liens, state tax liens and homeowners association liens. If they exist and there are no obvious solutions, walk away, Thompson says.

Because a short sale generally doesn't cover the whole amount owed or other liens, it can trigger mortgage insurance. If the property is covered by a mortgage insurance policy that doesn't have to pay off until the home has been in foreclosure for 150 days or some similar length of time, chances are the insurer will hold up the sale because it won't want to pay any earlier than necessary and hopes the foreclosure will just disappear. Often the mortgage insurer will simply go silent. Thompson says: No response, no approval.

4. Be realistic. Short sale is a waiting game. This is not your game, if you're in a hurry.
Part of the slow down in short sale is potential buyers’ lowball offers, which are ultimately rejected.

Another factor is the increasing number of government programs aimed at keeping people in their homes. According to the Mortgage Bankers Association, about 50 percent of defaults never go as far as foreclosure. So lenders see short sales as potentially the least attractive option and aren't willing to expedite them.

To avoid getting stuck in an extended process of negotiation, start by negotiating with the seller and the seller's agent that your offer will be the only one presented to the lender. If the lender isn't flooded with offers, it will be more motivated to move forward.

5. Have your cash ready. Once you have a deal, you should have your money ready, preferably cash. If you're getting a loan, you need bank approval in advance.

As with any deals like REOs, short sales, foreclosure, or auctions -- make sure you have money lined up ready to go. Cash is always the best financing option in all these deals.

Search Hawaii Hard Money Lenders.