When you find yourself in the midst of a financial crisis due to a divorce or loss of a job or any other reason, it becomes difficult to pay off your liabilities promptly. At times like these, it is important to know what your options are as a homeowner needing to pay off the mortgage. Many people think that in cases of financial hardship, the only way to get rid of their outstanding liabilities is to move forward with foreclosure. When, in fact, foreclosure is only the last resort, and there are plenty of other options that you can consider to take a break from your monthly mortgage payments.
What is Mortgage Deferment?
Mortgage Deferment is one way of delaying the payment schedule or reducing the amount of payment owed monthly. These solutions have been designed because foreclosure can result in a great loss for the lender and it is hence in their best interest as well to avoid its possibility. Mortgage Deferment is given to people who can prove the existence of a financial crunch in their lives and this difficult period is considered to be of a temporary nature. The lenders in such cases realize that the owner will be able to pay off the payments in the future and keeping this in mind agrees to provide them with some leniency.
The Process of Mortgage Deferment
If you find yourself in a situation where you feel it will be difficult to make the due payment, it is recommended to contact loss mitigation or a housing counselor as soon as possible. At first, you might be asked to provide evidence that shows your need for a deferment. Once you have made your case in front of the lender and they agree to grant you a deferment, you will be asked to provide a period within which you feel you will be able to get back up and become financially stable enough to start paying off your loan. Usually, lenders will ask you to continue the payment cycle by paying a lump sum amount; however, if you feel that the current plan is not right for you, you should negotiate and find a solution that is convenient for both, you and the lender.
Advantages & Disadvantages
There are two ways in which you can be granted a mortgage deferment; either by suspending the payments altogether for a brief period or by reducing the amount of each mortgage payment. Either way, mortgage deferment comes with both, pros and cons; so, before you decide to request for a mortgage deferment it is important to understand how this may affect you in the future.
Advantages of Mortgage Deferment
- The first benefit of being granted a mortgage deferment is the relaxation that you get in the form of reduced monthly liabilities. When you are going through a financial crisis, it becomes difficult for you to take care of all your liabilities. By asking for a deferment, you can reduce your stress till you become financially stable to pay them off again.
- Another benefit of taking out a mortgage deferment request is the reduced interest rate that might be offered by the lender temporarily. Sometimes, the lender also chooses to lower the interest rate on a permanent basis which can benefit you significantly in the long run.
- Also, people look for such options to avoid the stressful process of foreclosure. Nobody wants to lose their house and going for a mortgage deferment makes you able to hold on to your house for a little while longer. This can provide you with the opportunity to find new ways to be able to finance your liabilities.
- Mortgage deferment can give you a sense of support that can help you focus on other liabilities and prioritize other debt payments instead of worrying about your monthly mortgage payments.
Disadvantages of Mortgage Deferment
- One of the drawbacks of getting a mortgage deferment is the increase in total cost for the homeowner. Mortgage deferment might prove to be beneficial in the short-term, but the lender might ask for a lump sum payment at the end or an increased interest rate. Depending on the kind of repayment plan decided by the lender, the borrower might end up getting hurt.
- Another disadvantage of a mortgage payment is the ability of this relaxation to hurt your credit history eventually. People who are already struggling with a low income might find it difficult to get their credit history back up.
- The temporary nature of a mortgage deferment sometimes does not seem to be lucrative for the borrower. This is because a mortgage deferment demands for a period to be set at the beginning of the process after which the payments will be scheduled regularly. However, in reality, people suffering from financial crises might not be able to solve all their troubles in a specified period. Hence, some borrowers find the option of a mortgage deferment to be useless and not helpful.
- Even though mortgage deferment provides you with significant satisfaction, nothing is guaranteed, and you might lose your house in the end regardless of what your deal was.
During the process of asking for a deferment and applying for one, it is important to keep the following things in mind:
- Have a written agreement with the lender to avoid any chances of a misunderstanding or hidden charges.
- Negotiate at the beginning of the process and come up with a repayment plan that you can follow.
- Before signing, review all the terms and understand the significance of the period given.
- In case you cannot meet the requirements even after the end of the deferment periods, you can ask for a renegotiation of the loan’s terms and conditions. However, this will be dependent on the cooperation from the lender.
Even though going through a financial crisis can be distressing and difficult, it is important to keep your priorities well defined and look for ways to save your assets in any way possible. Solutions like mortgage delays are designed to make things easier for the individuals and should be considered and planned for carefully.
How Does a Reverse Mortgage Work?
With rising healthcare costs and increase in property taxes, many retirees face difficulty in meeting their monthly expenses. Reverse Mortgage is an effective way for old age homeowners to convert their home equity into cash. Homeowners can use this cash in multiple ways such as renovating their property or paying off their monthly dues.
You can use a Reverse Mortgage to pay off a regular mortgage. This way, you can avoid monthly payments to your lender. If you can manage your property dues, such as taxes and other maintenance costs, you can apply for a Reverse Mortgage. You can pay the loan off any time before the last surviving property owner passes away or moves out.
Step By Step Guide To Securing a Reverse Mortgage
The first step towards securing a Reverse Mortgage facility is obtaining objective information about the Reverse Mortgage loan from counselors approved by Housing and Urban Development organization. Once the counseling session is complete, you will receive a certificate of completion at your home address. This certificate is part of the Reverse Mortgage loan application.
2. Submit Loan Application
To initiate the Reverse Mortgage loan, borrowers need to submit an application packet to their lender, which usually includes:
- A Valid Identification document
- Proof that the property put up as collateral is your primary residence
- Proof of income showing that you have enough money to pay for homeowner insurance and property taxes on your property
- Reverse Mortgage counseling certificate
Once you submit the loan application, the lender will appraise your property value. This is a major step in the Reverse Mortgage process as it determines the amount you are eligible to receive as a loan.
- Request for Appraisal – According to latest housing regulations, lenders cannot order appraisers of their own choice and need to contact an independent Appraisal Management Company to appraise the property’s value.
- Property Visit By An Appraiser – Once the lender makes a request for appraisal, FHA-approved property appraisers will visit your home for inspection and take necessary pictures to determine the property’s worth.
- Submission of Appraisal Report – The appraisal report is shared with the lender within 3-5 business days after the property visit. Latest regulations require that lenders share a copy of the latest appraisal report with the applicant as well.
4. Underwriting the Loan
During this stage of the loan process, underwriters review the application along with submitted documents and stipulate the terms and conditions associated with the loan. Once the application meets all the conditions, the lender will set a closing date for loan disbursal.
Cash Payment Options
- One-time Disbursal – You can receive a lump sum payment from your lender through Reverse Mortgage. However, this is only available for fixed-rate
- Term Option –Using this option borrower can receive a fixed amount of cash on a monthly basis for a pre-determined period.
- Line of Credit –This is useful for applicants who need to utilize their Reverse Mortgage facility as and when required. The interest accrues depending on how cash the borrower draws over a period of time.
- Since these loans were designed for senior citizens, Reverse Mortgage facility is available for people above 62 years of age.
- You should either own the home or have low enough mortgage to pay it off using a Reverse Mortgage loan.
- You must be living at the property and must not stay at any other place for more than 12 months.
- For multi-family homes, you should be using one of the units as your primary residence. In the case of manufactured homes, they are approved for Reverse Mortgage as long as they follow FHA requirements. An HUD-approved condominium can also be used for availing Reverse Mortgage facility.
- You must be able to pay your monthly dues during the life of the loan. These may include home insurance, property taxes, and maintenance fee such as homeowners
- Many lenders require that you must not be delinquent on any federal loan.
Fees Associated With Reverse Mortgage
1. Origination Premium
The federal government insures Reverse Mortgage loans, but the loan applicant has to bear the insurance costs. Insurance premium can range between 0.5% and 2.5% depending on the appraisal value and the amount you borrow from your initial limit in the first 12 months.
2. Processing and Closing Fee
The lender can charge you up to $6,000 for processing the loan depending on your property value. Closing costs include fees for background and credit check, property appraisal, taxes and any other fees.
Risks Associated With Reverse Mortgage
- Reducing Family Inheritance – Reverse Mortgage is a high-interest loan, which is compounded over a period of time. The upfront costs and accrued interest can considerably reduce your home equity. This means you may not be leaving behind much for your family or surviving spouse as an inheritance.
- Risk of Foreclosure Proceedings – This could be a major problem for a surviving spouse who did not co-sign the Reverse Mortgage facility with the primary applicant. In case the applicant passes away, their spouse will be forced to sell the property to pay-off the loan. Hence, it is important that borrowers talk to other house occupants about a backup plan in case they do not survive.
- Stringent Terms – Reverse Mortgage borrowers’ risk of losing equity in their home very quickly as the high-interest rates compound over a period of time. The terms for Reverse Mortgage are quite stringent as well, with lenders refusing to amend loan terms such as lowering interest rates or adding a co-borrower after loan disbursal.
Reverse Mortgage allows borrowers to use their home equity to manage their monthly expenses. However, before availing this type of loan, borrowers should spend some time in understanding the loan terms and devising a strategy to maximize the loan proceeds. Otherwise, they may end up leaving little or no inheritance to their spouse or other family members.
Financing a House Boat
If you are a water lover and wish to enjoy the nautical feel of living a relaxed life on the water, a houseboat should be one of your options. A houseboat is not only for millionaires. In fact, if you meet certain requirements, you can also own a house on the water. However, a visit to the grocery store might become more complicated than ever once you start living on the water.
The overall cost of your houseboat will vary depending on different factors such as the size of the boat and its location. However, the trend of owning a houseboat has increased over the years and there are many first-time buyers that are investing in owning a houseboat rather than a traditional home.
Understanding the Difference between a House Boat and a Floating Home
When it comes to living on the water, not all options are the same. Primarily, there are two living options, a House Boat and a Floating Home. Now, if you have thought they both refer to the same setting, this section will give clarify the differences for you. A House Boat, as the name suggests, is considered to be a house that can move around, which means that it can also be seen as a vehicle, whereas, a Floating Home is one that is attached to the dock and hence cannot move around.
Therefore, a floating home can be seen as a fixed house located on the water. The total cost of your water-based home will vary depending on the size of it. However, you should be expecting to pay a higher amount than usual owing to the peculiar nature of the lifestyle. Fortunately, you have the option to finance your lifestyle with the help of a lender.
How to Finance Living on Water
1. House Boat
The first challenge that you should be ready for when looking for financing options for your houseboat is to find the right lender. It is no surprise that there are not many lenders in the community that help to attain such loans considering the unique nature of such a living condition. However, the basic way in which the financing of both, a houseboat and a floating home will vary lies in how the lender treats them.
A House Boat, due to of its ability to move, is considered to be more of a vehicle than a home and therefore the term of the loan will be much shorter as compared to one in the case of a traditional home. Also, another reason why the lender prefers to keep the term short is that of the amount of maintenance required in owning a House Boat. When financing a House Boat, you should know that there is a massive amount of maintenance that will be needed to make sure that it can function in an ideal manner.
Therefore, you should not expect the mortgage’s term to be more than 20 years. In fact, you might also get a term that is considerably shorter than 20 years as well. The interest rate paid is also expected to be 3-4 percent higher than in the case of a traditional home. There will also be a yearly inspection that you will have to pay for and will be carried out to ensure that the House Boat can function well. The inspection costs around $300-500. The down payment will also be higher than in the case of a traditional home and hence you should be ready to pay around 35%in down payment.
2. Floating Home
In the case of a floating home, the loan terms are more similar to that of a traditional home. A floating home is connected to the utilities of the city and is therefore considered to be property rather than a vehicle. As the owner of a floating home, you will be required to pay taxes and depreciation will play an important role in determining the value of the home.
The price of a floating home, however, is higher than that of a traditional one. The interest rate that you will be paying on the loan for your floating home will be 1-2% higher than for a traditional home. The term of a loan taken on a floating home will be around 15 years and a minimum down payment of 20% will be required. Also, to be eligible for a loan on your floating home, you should have a credit score of at least 680.
Apart from the costs associated with financing the loan, there are also other costs that you will incur when you decide to choose a water-based lifestyle. Maintenance is generally costly when it comes to houses such as floating homes and houseboats. That is because when the house will be situated on the water, there will be more damages over the years. Also, you are also required to pay a monthly fee that is somewhat like a home owner’s association fee which is approximately $700.
Even though living on the water has its various advantages, the high costs associated with this kind of living can discourage people from choosing this route. Also, it is not uncommon for buyers to face difficulty in locating a lender that can help them finance their dream home. Because of their rarity in the market, the lenders have the power to charge higher rates than usual. Therefore, carefully considering all your options is a must when looking for financing options for your water-based home.
Understanding Subprime Mortgages
When seeking for financial assistance in the form of a Mortgage loan, it is imperative that the intended borrower has a good credit score to secure the ideal loan. In addition to a good credit score, a debt to income ratio of less than 35 percent is also required. Unfortunately, not all borrowers can meet such requirements because of their credit history and low income.
In such cases, borrowers can apply for a subprime mortgage which is specifically designed to offer assistance to people with low credit scores and other financial issues. In this article, we will explain what a subprime mortgage is, when you might need it and how to apply for it.
What is a Subprime Mortgage?
Many times borrowers with low income face difficulties while applying for a loan. A conventional mortgage requires the borrowers to have a good credit score and a steady income. However, a subprime mortgage is offered to people who have a credit score of 600 or below.
One would expect such a loan to be at a greater risk of default since the borrowers already have a bad history when it comes to the repayment of loans. This risk is compensated for at the beginning of the process by offering higher interest rates as compared to the conventional loans. In some cases, banks may also charge the borrowers in some other way, such as a greater down payment or a higher closing cost.
Types of Subprime Mortgage
Within the category of Subprime Mortgage, there are other subtypes to choose from. These are:
The main advantage of choosing this type of subprime mortgage is the longer term of repayment. Instead of the traditional 30 year period for the repayment, a fixed-interest mortgage allows the borrower to have a longer repayment period of 40 to 50 years.
This longer-term translates into reduced monthly payments for the buyer, however, since the lender has to compensate for the risk associated with the greater inability of the borrower to pay off the total amount, a higher interest rate is added. While choosing such a mortgage, it is important to find out the amount of interest rate that is being offered by different lenders and choose the one that offers the lowest.
2. Interest-Only Mortgage
An interest-only mortgage allows the borrower to have a period of 5, 7 or 10 years in which they are required to pay only the interest payments that are charged. Under such type of payment, the principal payment can be delayed and the borrower, if wishes, can regularly make payments towards the principal.
At the end of the term, the borrower is expected to pay off the mortgage or can refinance the mortgage. Such a mortgage is considered ideal for borrowers that are expecting to witness an increase in their income or an improvement in their financial condition over the years.
3. Dignity Mortgage
This kind of mortgage is considered to be relatively new and gives the borrower ease in paying off the principal amount. In the beginning, the borrower is required to pay about 10% of the principal amount. After this, if the borrower is found to be diligent in paying the regular interest payments for five years, the amount that has been paid in the form of a higher interest rate is compensated to pay off the principal amount by reducing the interest rate to the prime rate. This gives the borrower an opportunity to prove their ability to pay off the loan which is why the term “dignity’ is used.
4. Adjustable-Rate Mortgage
An Adjustable-Rate mortgage (ARM) uses a fixed interest rate at the beginning of the loan’s term after which the payment keeps changing and resetting according to an index. At the beginning of the repayment schedule, the borrower might be paying off a reduced amount. However, the unpredictable nature of such a mortgage does not give the borrower any guarantee about how the change might affect the payment schedule. There is a lot of unpredictability associated with such a mortgage due to its high dependence on the economic conditions and the index.
How to Get a Subprime Mortgage
When applying for a subprime mortgage, you will find the process to be extremely similar to the process that is followed when applying for a conventional mortgage. However, we have summarized the complete process of getting a subprime mortgage in the following steps:
- At the beginning of the process, it is important to consider your options by making a list of all the lenders that offer subprime mortgages. By looking at the interest rates offered by each lender, choose one that best meets your needs.
- Even though the documentation required in the case of subprime mortgage is not as complex as in the traditional mortgage, the lender will ask you for a steady proof of income, bank statements, and documents that reflect your monthly expenses.
- Read the contracts thoroughly and sign them.
- You might need to offer additional documents if the lender requires. Hence, you should not expect all the documents mentioned above to be sufficient and should be ready to gather and present any additional documents.
Pros and Cons of Subprime Mortgage
The biggest advantage of a subprime mortgage is the ability of borrowers with poor credit scores to get a loan and the less complex nature of the overall process as compared to that of a conventional one. Whereas, the disadvantages of subprime mortgage include, the higher interest rates and the requirement to show a steady income for borrowers who are presently unemployed.
Even though getting a subprime mortgage might be risky, as a borrower it allows you to have a more versatile mortgage option that you can use to buy a home for yourself without having to worry about your credit history or debt responsibilities. In case you expect your financial condition to improve shortly and are in need of temporary financial assistance getting a subprime mortgage is your best option.
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