Thus it makes considerable sense to buy property at the lowest possible price and that brings us to RealtyTrac’s foreclosure report for the second quarter:

“The average sales price for homes in foreclosure or bank owned was 32 percent below the average sales price of homes not in foreclosure,” said RealyTrac.

A year ago, in the second quarter of 2010, the company reported that the foreclosure discount was 26 percent.

You can also see something else: The percent of all sales which are distressed has risen from 24 percent last year to 31 percent in the second quarter of 2011.

These numbers are hard to ignore. They tell us that massive numbers of homes facing foreclosure or which have been foreclosed remain available at discount.

National Association of Realtors

The National Association of Realtors reported for July that by its measure “distressed homes — foreclosures and short sales typically sold at deep discounts — accounted for 29 percent of sales in July, compared with 30 percent in June and 32 percent in July 2010.”

Okay, so how much is a “deep discount.” According to NAR spokesman Walter Molony a typical distressed sale price is roughly 20 percent lower than the price for a home which is not facing foreclosure or was not lender-owned.

The enormous gulf between distressed homes and the rest of the housing stock raises several questions:

First, why buy a home at a retail price when discounts are widely and plainly available? The answer may well be that it’s often difficult and time-consuming to deal with lenders. That said, a 32-percent discount is quite a reward for patience and persistence.

Second, where is the mortgage money? Rates have recently been at a 50-year low, something which should encourage borrowing and yet large numbers of distressed homes are bought for cash — NAR says cash purchases in July accounted for 29 percent of all existing home sales.

It’s obvious that lenders are awash in both cash and real estate — otherwise rates would be higher and distressed sales would be a smaller percent of the market. If lenders want to get rid of the shadow inventory which threatens their stability and holds down home prices nationwide it’s clear that they need to readily finance the purchase of distressed homes to investors and home buyers with 10 percent down, a verified income and an ongoing pulse.

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“The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments are listed at $820,000 to $3 million,” says Bloomberg. (See: Manhattan Luxury Condos Try FHA Backing in `Game Changer’, August 13, 2010)

Alas, the Bloomberg report seems to have set off some concern.

“Yes, ladies and gentlemen,” says Tyler Durden at ZeroHedge.com, “the FHA is now insuring purchases of ultra luxury appartment by the ultra rich, affording what is essentially a no money down ‘NINJA/subprime-like’ creep up into the most expensive properties in the world, entirely on the backs of the US middle class. If that ‘uber-wealthy’ don’t blow up the FHA, and the $7 trillion in GSE debt, nothing will.” (See: Rick Santelli Goes Nuts In A “Top 3″ Rant Protesting (What Else) Endless Subsidies And Fed Meddling, August 13, 2010)

The New York Post tells us “the development features an outdoor movie theater, panoramic city views, apartments valued between $820,000 and $3 million — and, thanks to the government, the ability to land a mortgage with less than a $100,000 deposit.” (See: Luxury ‘$uite’ deals, Feds back condo mortgages for wealthy, August 14, 2010)

Golly, FHA loans for the super-rich sure sound like a horrid bit of financing. Unless, after all, you consider the entire story.

Cash Up Front

It turns out that for 2010 the FHA higher cost loan limit in the continental United States is $729,750. That means if you have property in what is defined as a “higher cost” area of the contiguous 48 states you can get an FHA mortgage for the aforementioned $729,750.

For most of us $729,750 is a big number. For a property that sold for $729,750 a purchaser would need $25,541.25 at closing just for the 3.5 percent FHA down payment. Closing costs are extra.

But, you’ll notice that Bloomberg did not say any of the luxury units actually sell for $729,750. They sell for more, from $820,000 to $3 million.

This is where the FHA gets sticky. You see the FHA has a thing about real estate purchases which are above the loan limit. The deal is this: when you buy with FHA financing you’re not allowed to have a simultaneous second loan unless it comes from a governmental agency. You have to pay any additional value above the mortgage in cash.

One of the caveats here is that after the property has been settled the FHA buyer/borrower can then get a second loan such as a home equity line of credit (HELOC). This is usually not a consideration with a property where someone put down 3.5%, but it’s a real possibility when the cash down is significant. Of course, when there’s a second loan the FHA mortgage remains in first place which means if there’s a foreclosure the proceeds from the sale of the property must be used to completely satisfy the first loan holder before the second lender gets a dime.

Bundles of Money Down

So, let’s take a look at those luxury units in Manhattan — or anywhere else. Buy one for $820,000 with 3.5 percent down and you’ll need $28,700 at settlement plus closing costs. Oh, but wait, the FHA loan limit is $729,750 so you’ll actually need $90,250 in cash for the closing down payment. That’s 11 percent down — more than three times the usual FHA down payment requirement.

As to the $3,000,000 unit the math looks like this: $729,750 in financing means the buyer will need an additional $2,270,250 in cash at settlement — plus closing costs. That’s a deal with 76 percent down and virtually no risk for the lender.

Or the FHA.

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At first it might seem that a purchase money mortgage was the same as any other financing but that’s not entirely true. For instance, in California a homeowner with a purchase money mortgage who is foreclosed cannot be sued by the lender to make up any losses on the loan. However, if the property has been refinanced there’s no longer a purchase money mortgage and so the protection for homeowners against deficiency judgments disappears. Notice that in our example the purchase money protection does not apply to investors and that the rules in other states are different.

Foreclosure Purchase

With foreclosures the rules to finance are simply the same — if not exactly the same — as one would find with any residential property. After all, the fact that the property was once foreclosed has nothing to do with bricks and mortar, it has very much to do with the financial capacity of the last owner — or the lack thereof.

Is the buyer an owner-occupant or an investor? If an investor you may be required to put down more and to pay a somewhat higher rate.

What’s the value of the property?

Does the purchaser have good credit?

Can the purchaser document his or her income and employment?

Cash, of course, solves all foreclosure financing problems while loans from hard money lenders with stiff rates, huge down payments and lots of points up front are not worth considering.

Lastly, if you’re buying a foreclosure from a lender see if the lender will provide financing as part of the transaction. In this situation the seller and the lender are the same, so such financing can be seen as a formal and institutional owner take-back of sorts.

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The original HUD-1 was developed as a by-product of the Real Estate Settlement and Procedures Act of 1974 — or, as it’s usually called, RESPA. Prior to 1974 settlement forms could be different, meaning that it was very difficult to compare costs or to know what was deductible for tax purposes in the year of the transaction.

So what do we get after 36 years? The new HUD-1 is a vast improvement over the old model. It’s three letter-sized pages long rather than two legal pages, but there’s much more information in the new HUD-1. Buried in the form is an accounting of closing costs and perhaps even some write-offs. Buyers will find the full and complete cost of buying real estate while sellers will see how much cash (if any) they’re getting from the transaction.

Page One

The first page of the form is a summary of the transaction. In effect, it translates the sales contract between buyers and sellers into hard numbers.

At the top of the form we first have administrative data such as:

• The type of loan (conventional, VA, FHA, etc.).
• The place and date of settlement (the date can be very important for tax purposes).
• The mortgage insurance case number (important if you’re ever facing foreclosure).
• The street address of the property. This is a concern because for great clarity and assurance the form would be better if it also included the legal address of the property.
• The name of the settlement (or closing) agent. The party that conducts the settlement is typically regarded as an agent of the settlement process. In other words, they do not represent you.

Page One, Buyer’s Side

The HUD-1 shows transaction costs for both buyers and sellers — you get to see what the other person’s information. More important you get to see your own.

On the right side of the first page we have buyer costs grouped by sections.

Section 100 — This is where buyers see the cost of the property and the cost of settlement (the figure found on line 1400). Combine the two and you get the gross amount — but not the final amount — due from the purchaser.

Notice that there can be some adjustments in this section. For instance, it may be that the seller has paid local property taxes in advance — those payments would be a credit to the seller and a cost at closing to the buyer.

Section 200 — As a buyer you may have certain credits to offset your gross costs. Credits include such things as your deposit, your new loan (for closing purposes the mortgage is a credit to the borrower because it represents money brought into closing) and any additional financing.

In the 200 section you can also see adjustments which are a credit to the buyer. For instance, maybe the seller still owes some property taxes.

Section 300 — This is a re-cap of all costs and credits. If you take the gross amount due from borrower (line 120) and subtract the buyer’s credits and cash you then get the total cash due to — or from — the borrower.

Most buyers, of course, will need to bring “cash” to settlement. By “cash” what most settlement agents really want is a certified check or a cashier’s check. Also, it may be possible to wire funds to the closing agent. Always ask the settlement provider well in advance of closing how payment can be made.

Gifts: To assure lenders that you are not somehow getting a secret loan from someone, it’s best to have closing funds in your name and on deposit for at least 90 days. If you are getting a gift to close, ask your lender how the gift is to be documented and precisely follow the lender’s instructions.

Page One, Seller’s Side

Settlement is a moment of truth for owners, the time when you find out exactly how much or how little you’re getting from your sale.

Section 400 — The sale price of the house, plus the cash paid for any personal items, are shown here as credits to the owner.

Also in this section are adjustments — credits for property taxes and other costs paid in advance.

Section 500 — If any mortgage debt remains unpaid it shows up here as a cost to the seller. Also, the costs of closing (line 1400) are here as a deduction as well as any adjustments for such costs as unpaid property taxes.

Section 600 — If we take the gross amount due to seller (line 420) and subtract the seller’s closing costs (line 520) we can then see how much cash the owner will get from closing (or, how much cash is needed to close if the seller is upside-down).

Practices around the country regarding cash to owners at closing vary. In some areas there are “wet” settlements where the owner gets a check at closing, in other areas there are “dry” closings where it takes a few days to get a check because it takes time for the lender to fund the transaction and paperwork to be recorded. In some jurisdictions there are rules requiring the disbursement of cash with a few days. For specifics, speak with your settlement agent.

Page Two

On the second page of the new HUD-1 we have a series of sections which show costs that may be paid by either buyers or sellers — or split between them. In other words, these are costs which can be negotiated when a sale offer is made. For instance, in a slow market a seller might agree to pay all transfer taxes. In a hot market, the buyer might pay.

Section 700 — If one or more real estate brokers are involved in the transaction, this section will show the compensation to each broker and the cost, if any, to buyers and sellers.

Section 800 — Getting a mortgage is hardly free. When the buyer applied for financing the lender provided a Good Faith Estimate of Closing Costs (GFE) on the new form developed by HUD. This section shows such costs as points, origination charges, appraisal fee, credit report and tax service. Borrowers should check the numbers at closing with the estimates provided in the GFE. The costs shown on lines 801 (origination charge), 802 (points), and 803 (adjusted origination fee) must be the same as the GFE.

Please see our guide to the new Good Faith Estimate form to see how it’s coordinated with the equally-new HUD-1.

Section 900 — Closing is scheduled at a time which is mutually-agreeable to the buyer and seller. That time, however, will mean that for such items as interest, mortgage insurance premiums and homeowner’s insurance there will likely be a need to make some payments for daily costs in advance until the next billing period.

Section 1000 — If you purchase a home with less that 20 percent down the lender will likely require that you pay additional amounts each month for property taxes and insurance. This money is held in an escrow or trust account and then paid out as the bills come due.

If you will have an escrow account then the lender will typically collect money in advance from borrowers to assure that the escrow account is properly funded.

Section 1100 — As part of the buying process, sellers typically promise to deliver good, marketable and insurable title — and buyers should want nothing less. This section shows the costs for title insurance — both lender’s and owner’s coverage.

Lender’s cover — which is required by lenders if you finance the purchase — protects you up to the remaining loan balance in the event of a title claim. In other words, it protects the lender.

Owner’s coverage protects you if there is a title claim up to the purchase price of the property — in other words the loan amount plus your equity. Be aware that some title insurance policies have an inflation rider so that the value of the coverage can actually increase over time. For specifics, speak with your title agent.

Also, take a look at line 1107. This shows the commission paid to the settlement agent for providing title insurance.

Section 1200 — This is where you can see how much state and local governments are getting from the transaction. Governments are elated when homes are sold because such transactions are a major source of revenue. Government taxes can includes such things as deeds, releases, transfer taxes, state taxes, stamps, etc. Call it what you will, a tax is a tax.

Section 1300 — This is where you can find additional settlement costs.

Section 1400 — The total costs to close — this number also appears on lines 103 and 502 on the first page.

Page Three

The third page of the new HUD-1 is partially a confirmation that the costs outlined in the Good Faith Estimate are what you’re actually paying — or pretty close.

Some quoted costs on the GFE cannot be changed, some can be changed as much as 10 percent and some can simply change with the winds.

Also shown on page three is a recap of your loan including the mortgage amount, interest rate, loan term, ARM-related terms (if any), prepayment penalties (if any), balloon payments built into the loan (if any) and related matters.

IMPORTANT: Always keep your closing papers in a safe place for tax reasons and to assure that your loan terms are actually the same as disclosed on the HUD-1. For questions regarding closing issues, speak with your real estate broker, mortgage lender and closing agent. Be aware that some costs found on a HUD-1 may be tax deductible — for specifics speak with a tax professional.

How To Read The HUD-1 is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Answer: In the usual case mortgage lenders might measure your credit standing by looking at utility bills, car payments, savings and rental information. However, your situation calls for a different approach: You need to build a credit history. Here’s how.

Apply for basic credit cards with a gasoline company and a department store. Make purchases each month. Pay your bills in full and on time. Then apply for a general credit card with Visa or MasterCard. Same deal. Make small purchases each month and pay your bills in full and on time. In six months or so, speak with local mortgage lenders and real estate brokers. Explain your interests and ask about entry-level mortgage programs. Be sure to have a lender review your credit report.

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Syndicated originally by Content That Works and posted with permission.

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The decision to pay cash or not pay cash includes both economic considerations and personal choices. Many people simply prefer a home which is free and clear of all debt.

There are several advantages the can be obtained by paying all cash. There is no mortgage application and no need for private mortgage insurance. There is also no mortgage interest to write off.

However, if you elect to pay all cash, be sure to insist on the purchase protections that any lender would want — a title inspection, title insurance, survey, termite inspection, appraisal, etc.

It may be worthwhile to sit down with a tax professional or a fee-only financial planner to review the consequences of paying all cash or financing. Be aware that if you pay cash for a residence then your ability to deduct interest if you later refinance may be limited.

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For example, a home will be “sold” for $100,000. The deal will be financing with a 95 percent loan-to-value mortgage. However, the seller will provide a $15,000 certificate of deposit to the buyer at closing.

On the surface, we have a deal with a $100,000 purchase price, $5,000 down, $95,000 in financing, and a $15,000 CD.

Alas, $100,000 was never paid for the house.

There was a “sales price” of $100,000, but then as part of the deal the seller provided a $15,000 rebate in the form of a CD. Since a CD is a certificate of deposit which presumably is worth $15,000 in this example, this property was sold at discount — the real price is $85,000.

This is a classic “cash plus” deal where the amount financed is greater than the price paid to the owner. The surplus is returned to the buyer at closing, if there was a closing.

Lenders will decline this transaction because the amount of financing sought is greater than the discounted value of the property. Even if this property appraises at $100,000, lenders will value the deal at the appraised value or the true sale price ($85,000), whichever is less.

Worse, if the lender is not told, in writing, in the loan application and in the sale agreement about the CD, there may well be grounds to consider charges involving fraud.

Bottom line: Should someone propose a cash-plus deal, sign nothing until you have spoken with an attorney.

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Traditionally, lenders have refused to accept mattress money from home buyers. However, Freddie Mac has said that in some cases it would allow buyers to use cash kept at home providing they do not have a savings or checking account.

The new rule makes sense because 13 percent of all U.S. households to not have such accounts, according to one study by the Federal Reserve.

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Example: If you have a home worth $600,000 and a $225,000 mortgage, the equity is $375,000.

However, some lenders may see this differently. They may say that the cost of selling a home is equal to, say, 8 percent of the fair market price. Now the equity would be $600,000, less a $225,000 mortgage, less selling costs of $48,000. Total equity by this calculation: $327,000.

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In a rising market the strategy is easy: Use leverage and get as much property as you can, either in the form of a more expensive house or by purchasing vacation homes and investment real estate.

A mortgage, of course, means leverage, a joy to much of the late-night infomercial crowd. But when the market turns less certain, the same strategy can be a loser. The leverage that maximizes investment results when values rise can also create huge losses and liabilities when values fall.

The marketplace in many communities is now in flux. Home values are no longer rising at rates seen in the past few years — and in some markets asking prices are in decline. In effect we may be on the verge of a new marketplace incentive: Instead of buying property primarily with the hope of appreciation, why not buy property because it produces income?

It’s sometimes forgotten that real estate is a serious source of recurring income. Own a good investment property and its associated monthly checks can be a very pleasant addition to income.

About 30 percent of all homes are now mortgage-free and you can bet that a growing number of investment properties are held with only a small mortgage or no mortgage at all.

But why do people buy with all cash?

Imagine that you buy an investment property for $450,000. You pay all cash, money obtained from the sale of other property or through a 1031 exchange. Now ask how much income you would have to earn on the factory floor or in front of a computer to equal the property’s return.

First there is rent, say $2,000 a month.

Second, there is depreciation, say $1,000 a month. Let’s agree that depreciation has a cash equivalence equal to about $350 a month for our purposes. It may be higher or lower depending on your tax bracket and the jurisdiction where you live.

Third, rental income is generally not subject to certain payroll taxes associated with wage income. For the employed, figure a savings of 7.65 percent or $153 a month in this example. (For the self-employed that’s a savings of 15.3 percent, the cash equivalent of $306 a month that investors do not pay.)

Thus our model $450,000 investment produces an equivalent income of at least $2,503 a month or $30,036 annually. That’s a gross return of 6.6 percent, a stream of income that can be used to support a mortgage if one is desired in the future.

In practice, of course, there are vacancies, property taxes, insurance and repairs. But at a time when the economy is uncertain — remember the stock market fell modestly last year — rental income is not to be ignored.

An attraction of real estate investing is that while prices are established at the time of purchase, rental rates can rise. In effect, a home purchase is a kind of hedge — the economics that make sense today may be better in the future. A $2,000 rental rate may grow over time, but a purchase price will never change.

There are pitfalls and hazards with all investments, including real estate. One concern is the large number of investor condos now available in certain markets. Another is that renting is less attractive than ownership for many people — and ownership has become easier in recent years with historically-liberal financing. Both factors can push down local rents and increase vacancies.

Also, of course, with no mortgage there is no mortgage interest to deduct, meaning the taxable income on the property will be larger.

While not for everyone or for every market, the ability to own a mortgage-free property brings with it certain joys. When option loans and interest-only financing evolve into self-amortizing loans with far-higher monthly payments, the owner of a debt-free property can still sleep at night. If it happens that a property has a vacancy, the situation is managed more easily when hefty mortgage payments do not loom ahead. As to rental payments, when there’s no mortgage cost to subtract it’s easy to appreciate the value of a free-and-clear property.

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Published originally by Realty Times on February 7, 2006 and posted with permission.

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