real estate investment mistakes

Common Real Estate Investment Mistakes That Lead to Foreclosure

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U.S. foreclosure filings hit a 12 year low in 2017. Nevertheless, 676,535 homeowners lost their homes due to foreclosure: a painful experience to be sure.

But what if you could avoid going down the road towards foreclosure? Who wouldn’t want to avoid that scenario?

It’s not possible to avoid life-changing events that could alter your financial situation. But it is possible to significantly reduce the likelihood you’ll ever be faced with such dire consequences.

How do you do that?

You simply need to avoid making common real estate investment mistakes that often derail homeowners.

Read on as we examine the most important mortgage mistakes to be aware of before you buy and during your repayment period.

Steer Clear of These Home Loan Mistakes Before You Buy

The best way to avoid foreclosure is to prevent yourself from ending up in such an unenviable position.

Be careful not to commit these mistakes before signing any loan documents.

1. Buying Too Much House

One of the biggest mistakes you can make is to purchase a home you can not comfortably afford.

It is an easy mistake to make. Contrary to what you may think, most banks will lend you more than you need.

Banks determine your loan amount based on your gross income before taxes. They don’t consider your monthly expenses such as insurance and utilities.

Signing a loan for more than you can afford sets you up to be “house poor.” You’ll have no wiggle room in the event of an emergency, such as the loss of a job.

Simply put, it will be too easy to fall behind and risk foreclosure.

What to do instead:

Experts recommend spending no more than 28% of your income on your home. This figure includes the principal and interest on your loan payment plus property taxes and insurance coverage.

Create a realistic budget for life in your new home, making sure you can be comfortable even if you encounter a significant change.

2. Not Getting a Fixed Loan

With the interest rate of fixed-rate loans on the rise, the attraction to adjustable-rate mortgages (ARMs) is understandable.

An ARM may be tempting now, but it will eventually reset. And when it does, the interest rate will likely be higher and you may not be able to refinance at that time.

The new payment may be too expensive and, depending on the housing market, it could be tough to sell your home.

It’s easy to see how this situation can quickly escalate to missed payments and even foreclosure.

What to do instead:

Don’t be penny wise and pound foolish. Stick to a fixed-rate loan and sleep well at night.

The only time an ARM makes sense is if you plan on moving within 5 years or so.

There are many loan structures for real estate financing, but your best bet is almost always to seek the security of a fixed loan.

3. Underestimating Home Ownership Costs

Don’t make the mistake of only factoring your mortgage into your budget.

You’re going to incur a number of home-related expenses such as:

  • Property tax – The tax man always cometh, and home taxes can cost you thousands of dollars each year.
  • Homeowners association (HOA) – If your new neighborhood has an HOA, you’ll be required to pay dues. These monthly fees can range from $50 to several hundred dollars.
  • Insurance – You will need to purchase home insurance, and you may be required to carry mortgage insurance and even possibly hazard insurance.
  • Home costs – You won’t be renting anymore, so you will have to pay the utilities and the inherent costs of maintaining your new home.

What to do instead:

Before you sign on the dotted line, know what your mortgage payment will be, including the interest. Factor in all the costs of home ownership in your monthly budget and make sure you can be financially comfortable.

Mortgage Mistakes to Avoid During the Repayment Period

If you’re already living in the home and you still owe your lender, steer clear of these common errors to avoid foreclosure.

1. Ignoring Your Lender

If you’ve missed a payment, it’s easy to avoid communication with your lender.

But that’s the biggest mistake you can make, and it often leads to foreclosure.

What to do instead:

Remember, you have 120 days after your first missed payment before a bank can foreclose on you.

Maximize that time by contacting your lender and seeking options, such as payment arrangments or loan modification programs.

You may even be able to avoid foreclosure through a short sale of your home.

The sooner you act, the better.

2. Not Taking Advantage of Government Options

When you ignore your lender, you don’t have the option of enrolling in loan modification programs.

These programs modify the terms of your deed of trust contract, resulting in lower monthly payments.

For example, the Home Affordable Modification Program (HAMP) gives relief to struggling homeowners.

Many states have their own modification programs designed to keep you in your homes with lower monthly programs.

What to do instead:

Remember this: Your lender is prohibited by law from foreclosing on your home if you are enrolled in a government-sponsored loan modification program.

Consult a U.S. Department of Housing and Urban Development (HUD) approved counselor to examine your options and create a plan-of-action.

3. Falling Prey to Scams

Your loss can be a scammer’s gain if you’re not careful. Unfortunately, many people will line up to take advantage of you if you face the possibility of foreclosure.

Be mindful and avoid the following scams:

1. Never Sign Over Your Deed

Some scammers will state they can take care of the problem if the deed is in their name.

This is a good way to lose your home. Don’t fall for it.

Signing over the deed will not eliminate your loan debt. It simply removes your legal right to your house.

2. Beware of Exorbitant or Upfront Fees

Don’t listen to anyone who wants to charge you to explain your options.

You can always get free help from HUD-approved housing counselors.

3. Stop When You Hear the Word “Guaranteed”

No one can guarantee you they can resolve your foreclosure. Any resolution is most likely predicated on your lender’s approval.

Be very skeptical of anyone guaranteeing to get your loan modified or resolve your foreclosure.

The Bottom Line About Real Estate Investment Mistakes

You can significantly increase your odds of avoiding foreclosure simply by steering clear of common real estate investment mistakes.

Before you buy your home, make a realistic budget allowing for every expense you will incur in your new home.

And if you are facing foreclosure, seek help from qualified and legitimate sources.

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real estate investment

7 Tips For Funding Your First Real Estate Investment

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I’m not going to pretend that the average person reading this is a millionaire, or is Donald Trump himself. The reality is that real estate investment is an expensive endeavor.

There are so many different types of funding available, it can be tricky to know where to even start.

Despite the benefits that investing can have, some people are still a little cautious about taking that dive.

That’s why I’m going to give you seven useful funding tips on real estate investment financing for your first property. That way, you’ll be able to take the plunge with a little more confidence.

1) FHA Loans

Otherwise known as the Federal Housing Administration, this is a loan that is insured by the FHA and backed by the US government.

Because of this, FHA loans usually have lower interest rates and are more attractive to first-time buyers.

Not only that, but down payments are only 3.5% as opposed to 20%. This means a property that’s worth $250,000 would only require a deposit of around $8,750 (which is not a lot when you think about it).

This definitely makes FHA loans a lot more appealing.

2) Hard Money Lending

As there are different types of loans for real estate investment, I’m going to try and look at a couple of different ones.

If FHA is not what you’re looking for, then a hard money loan could be what you need.

This is a loan that is determined by the value of the property itself. They are funded by private businesses and are often used by investors looking to renovate a property.

It’s worth noting that hard money loans are usually short-term (6-36 months) and are set at a higher rate (8% minimum), so it’s wise to do a bit of research beforehand.

3) Private Investment

When it comes to real estate funding, sometimes you don’t want to go through a loan scheme or a bank. In which case, private investment may be what’s right for you.

These work similar to other lending programs in that you are still borrowing money at a specific interest rate.

The difference here is that a private investor is an individual rather than a professional lender.

They are helping you to invest in your property on the understanding that they can foreclose and seize it if the mortgage isn’t paid.

The good thing about private investment is that there are no hard and fast rules about borrowing and terms can be anywhere from six months to thirty years.

This gives you a good amount of leeway.

4) Owner Financing

You may also hear this being referred to as seller financing.

Essentially, the property owner and the investor looking to purchase (i.e. you) strike up a mutual agreement.

This is where the owner of said property agrees to help with funding. The new buyer will then make payments to the owner instead of a bank.

This is a fantastic route to go down to cut down on fees and upfront costs.

The only complication to this type of real estate investment is the owner needs to actually own the property itself and cannot already have an outstanding mortgage.

Other than that, owner financing can help speed up the overall transaction and also create a professional one-on-one relationship between seller and buyer.

5) Conventional Mortgage

This one needs to be mentioned as it’s still a useful path to real estate funding.

A conventional mortgage is probably the most obvious type of financing that most would think of.

By going down this route, first-time buyers will have to put a down payment on a property (usually 20%) before they can borrow.

It can often be the most expensive form of financing. However, because of its popularity, interest rates are usually quite low.

Buyers will also need to undergo a credit score check (with a minimum of 680) and have proof of income.

The US Bank website does have a handy mortgage calculator to help you get started.

6) Family and Friends

Of course, you don’t have to look into any type of conventional loan or private investment scheme. You can always ask friends and family for help.

This doesn’t necessarily mean badgering the people you know for money.

You can actually combine this with another financing option, such as an FHA loan.

By doing so, you can pool resources together from multiple people to help reduce the initial investment fee. This helps keep costs down at the beginning, but doesn’t pressure one family member or friend into lending a large sum of their own money.

Having said that, if you do happen to know someone who you think can lend you what you need, there’s no harm in striking up a conversation with them about it.

No one said it was an impossible route!

7) Your Own Money

Even in tough economies, you’d be surprised how many people can actually save up enough money for a real estate purchase.

In fact, in 2012, around a quarter of all investors were able to fund using their own money.

For many people, this may seem like the most difficult option as it can require years of financial saving beforehand. However, it is by far the easiest way to invest in property.

You may hear people refer to this as using ‘all cash’. The reality is – especially in this day and age – a transaction of this magnitude is unlikely to be done with real, cold, hard cash.

However, you should still consider other options if you wish. Just because you have the cash doesn’t mean you have to use it.

Final Thoughts on Real Estate Investment

I’ve shown you various real estate investment paths that I think are the best. But there are probably more that you can explore yourself.

The best piece of advice I can give is to make sure you do a lot of homework before you decide.

This is a huge commitment, especially if you’re a first-time buyer. One thing you should have on your side is knowledge; knowledge of which method is going to be the best for you.

If you would like more information on real estate investor funding, you can check out more blog posts here.