Minimum Cash Requirement
Many times a 5-10 percent cushion is built into the sales price of a home to allow negotiation of a sales offer. Just remember that in a hot real estate market, the seller may not be anxious to accept a low offer and may reject the agreement on a home that you really want due to small differences. If you play the game, you must be prepared to lose and go on to the next property.
You should try to get pre-qualified by a lender prior to shopping for a home. A pre-qualification is a strong marketing tool when making an offer that may contain many a number of seller concessions. Telling a seller that you are already pre-qualified for a loan makes the acceptance of a low offer much more palatable.
How to Maximize Your Income
Most lenders will require that you disclose your income from the previous few months and use this income to qualify you for a mortgage. They will ask for tax returns, or bank statements to verify the income. The lender will then apply a formula to the income to determine your ability to repay the loan. A common requirement is that the mortgage payment cannot be greater than 30 percent of the borrower’s gross monthly income.
One way to expand your purchasing power is to obtain a low, low interest rate mortgage such as a variable rate mortgage. They may offer up to a rate of 2.5% percent under the going rates. The disadvantage to these types of loans is that the rates are subject to change as frequently as every few months. If your interest rate is linked to the JIBAR rate it will be subject to more regular changes. This type of loan can however add thousands to your purchasing power due to the low initial rate.
If you don’t have the stomach for a variable rate mortgage, explore fixed rate type loans. The rate will stay the same over a certain period, after which you can renegotiate with your lender. The only negative is that if interest rates are going down, that you will increase your borrowing cost.
Finding a Bargain Home
One of the clichés of the real estate world is the most important thing to consider when buying a home is “location, location, location.” That also applies when trying to find a bargain in a home. Generally it is better to buy a “fixer-upper” in a terrific neighborhood rather than a great but bargain-priced home in a less desirable neighborhood. There are always bargains in run down areas, but while these houses may offer a lot of house for the rand, they will be difficult to sell and may have little or no appreciation despite the time, energy, and money you have poured into them.
Forget about buying a home from the newspaper auction notices, they are difficult to purchase and better left to the pros. Instead foster a relationship with a real estate agent and remain loyal to that agent. You want to find a home that may need some cosmetic work but is basically sound. Estate sales are probably the best area you want to explore, and try to investigate listings that have been on the market for awhile. Keep in mind that the reason a property has been on the market for a long time is because it is less desirable for some reason. Remember, most every property has its price and will ultimately sell when the price/value ratio becomes attractive.
If financially able, look to buy a home during periods of high interest rates or economic recession. During those times home prices may drop or the seller will be more amenable to accepting low offers. High interest rate periods don’t last forever, and when rates come down or the economy improves you can refinance for a lower rate and even take out some excess cash from appreciation.
Credit Scores and Below Prime Loans
Prior to the early 2000s home buyers had to have a very good credit history to qualify for a loan. Those who had auctioned off properties, repossessions, or bankruptcies in their history were told to wait seven years and to walk the straight and narrow credit path in the meantime. The good news, however, is that now many more people are eligible to obtain a mortgage albeit at a higher than the prevailing rate.
During the 2000s credit scoring also came into effect. Credit scores attempt to classify a person’s credit history into one three-digit number ranging from 300 to 900. A credit score of 650 or above is deemed to be a “good” credit risk by many lenders, the higher the better. In fact, a credit score of 700 or above can allow for a 100 percent LTV loan at only a little higher interest rate. A score of 625 may be acceptable, but scores from 525 to 625 usually fit into the sub-prime loan category. A score under 500 makes it very difficult or impossible to obtain financing of any sort.
Hidden Costs in a Mortgage
Most every loan is going to have associated with it fees for insurance, valuation, etc. Most of these fees are commonly required amongst all lenders and they must give you a list of their costs associated with a mortgage. Despite the fact that the costs are disclosed, some lenders may include extraordinary “junk” fees in their costs that an unwary buyer may not recognize as an extra fee. At the time of a loan application lenders are required to give you a written closing cost estimate.
First, determine if you’re rate are being loaded. Some lenders advertise artificially low rates to attract customers but load up on fees to compensate for a lower rate. A tip off to a lender that charges hidden fees would be a lender who advertises interest rates that are appreciably lower than the competition. Interest rates are very competitive and shopping for the very best rate may in fact work to your disadvantage. Differences in rates of 1/8th or 1/4th of a percent result in very little difference in a payment and may be offset by poor service and added hidden fees.
Mortgage companies and fees. Mortgage companies often advertise that through their intervention the financial institution will subsidize the client’s bond registration fees. But, at what cost to the client? Saving R2 000 for example in bond registration fees, but ending up paying R200 000 more in interest is a great deal for the bank, but not for the client.
Mortgage companies are often owned by a bank or an estate agency. The real issue is a serious lack of independence and conflict of interest. Clients have no guarantee that their mortgage application will be channeled to the lender that offers the best interest rate instead of to the one offering the broker the highest commission. These fees will be subsidized by the banks customers in the form of higher charges and higher interest rates.
Always work with an mortgage firm that is independent from any bank and who’s services are FREE and without any premiums attached to the client.
Correcting Past Credit Problems
Contrary to what you may have heard, credit reports are for the most part accurate. Common last names and a “Jnr.” in the family does cause a few problems but credit reports identify people by their identity number, address, and name. If you have an issue with your credit report, credit-reporting agencies are required to attempt to resolve the problem. Most of the information has to be provided by the individual and they should stay in touch for as long as it takes, frustrating or not. There are two main credit repositories in South Africa: Trans Union, and Experian. These companies each hold a database of information and provide it to a more local credit-reporting agency that may actually be issuing the report. If you have a dispute, you can go direct to the two repositories to attempt to clear the issue. Their addresses are listed below.
As mentioned before, credit scores in the 500 range can cause problems when attempting to obtain new credit. You can raise your score if the original information was incorrect, or you can over time improve your payment history, but it may take a few years of diligent pay history to appreciably raise your credit score.
If worse comes to worse declaring bankruptcy may be your only answer, but despite its growing popularity, I recommend it only as a very last resort. A bankruptcy will stay on your record for years and make obtaining credit difficult. There are two methods to declare bankruptcy: Voluntary and Compulsory Insolvency (bankruptcy). If your creditors have you sequestrated, this is known as compulsory sequestration. If, however, you decide to have yourself declared insolvent, such act is referred to as voluntary sequestration.
Should you not have yourself declared insolvent, but wait for your creditors to take the necessary action, there is a possibility that they will not succeed in their application for a court order. It may no longer be in their interest, on account of the fact that your assets are worth too little to them.
In the absence of compulsory sequestration, your debt simply increases further (as a result of interest), and your financial suffering is aggravated and endures for longer. The descriptions above are overly simple and general, but the bankruptcy option is a poor one and you should explore your options with an attorney before making a decision. After a period of time a rehabilitated insolvent may apply for credit, but this will depend on numerous factors. Most lenders state that at least a year must pass after a person’s been rehabilitated and a new good credit history must be established. A difficult chore, but it can be done. Make sure that rent or mortgage payments have no late payments for at least the previous 12 months. Avoid paying in cash; make all payments by check or credit card where your payment history can later be verified. It will also help to explain to your lender that the situation that originally caused the problem, a job loss, illness, etc., has now been resolved.
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