Buying your first home is an exercise in faith. You don’t really know what you’re getting into, you’re awash in unfamiliar terminology and everyone you meet seems to have strong (and utterly contradictory) ideas about which way the housing market is headed.

You may not be able to avoid every home-purchase mistake, but you can keep your regrets to a minimum by avoiding the following traps:

Blindly using your agent’s inspector

Your agent may recommend a home inspector because he does a good job — or because he keeps his mouth shut about problems that could torpedo the sale.Yes, it’s terrible to have to be so suspicious, but this is a big investment you’re making. A good home inspection can keep you from buying a money pit. You can ask your agent for a recommendation, but get referrals from other recent buyers and try to interview at least three potential candidates before making your choice.

Few states regulate home inspectors closely, so real-estate columnist Ilyce Glink recommends you choose someone who belongs to the American Society of Home Inspectors, which requires its members to complete at least 250 inspections (or 750 if they don’t have other licenses and experience). Ask about fees (which typically range from $300 to $700) and whether the inspector is licensed, bonded and insured, said Glink, author of “100 Questions Every First-Time Home Buyer Should Ask.” Make sure you get a detailed, written report and, if at all possible, accompany the inspector so you can discuss the findings while they’re still fresh.

Taking advice about what you can afford

Your agent, your broker and your lender don’t know what you can afford. At best, they know the underwriting guidelines for various loans, which are designed to minimize the lenders’ losses, not ensure that you’ll maintain your financial health.As I wrote in “8 big mortgage mistakes and how to avoid them,” lenders know that you’ll do whatever it takes to pay your mortgage, even if that means shortchanging your retirement, forgoing vacations and piling on credit card debt. You need to be the one to set limits on how much you want to borrow and how you borrow it. In general, limiting your housing costs — including mortgage, property taxes and homeowner’s insurance — to 25% of your gross income will ensure you have enough money left over to cover other goals, like retirement savings.

Getting a ‘temporary’ loan

I’m hearing this potentially dangerous advice more often now that so many markets are spiraling out of the reach of first-time home-buyers: Get a mortgage with a low payment now, then refinance in a few years when your income is higher. This is the way some brokers and lenders are hawking adjustable-rate mortgages as well as their more exotic cousins, interest-only and flexible-payment loans.There are a couple of problems with this advice. The first and most obvious is that no one can predict where interest rates will be five years from now. If they’re substantially higher, you will have just passed up the opportunity to lock in rates when they were near generational lows. If your payment has been rising with those rates, you may not be able to afford your home even if your income is higher.

The other problem if you opt for one of the exotic mortgages is that you may not be building any equity in your home. If prices drop, you may owe more on your house than it’s worth, which is going to make refinancing pretty tough unless you can come up with a ton of extra cash.

More experienced homeowners who are disciplined about money might be able to handle a trickier mortgage.

The better advice for first-time home-buyers may be to opt for a loan that will remain fixed at least as long as you plan to be in the home. If you plan to move after five years, for example, a good choice might be hybrid loan that remains fixed for five years before becoming an adjustable-rate mortgage. If you’ll be in the home for a decade or more, or aren’t sure how long you’ll be there, you might want to opt for the security of a 30-year fixed-rate loan.

“You’re locking in your housing costs for the next 30 years,” said real-estate investor Gary W. Eldred, author of “The 106 Common Mistakes Homebuyers Make (and How to Avoid Them).” “If interest rates go up, your payment stays the same, and if they go down, you can refinance.” Before you decide on a mortgage, spend some time in MSN Money’s Home Financing Decision Center and educate yourself about the options.

Opening or closing credit accounts

Both can hurt your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. That can result in your getting stuck with a higher interest rate or losing the loan you want all together. (Read more about credit scores at MSN Money’s credit rating Decision Center.)

Real-estate columnist Tom Kelly knows how important credit scores are, but didn’t think much about the ramifications when he applied for a new credit card while in the process of applying for a home-equity line of credit. That, plus his wife’s closure of a few other accounts, shaved more than 30 points off the couple’s credit score.

It was “really bad timing,” Kelley said. “The lender for our proposed line of credit basically said, ‘What have you guys been doing?’ after our application had been filed and the new FICO scores had arrived.”

Failing to investigate the neighborhood

“One common mistake is not looking at the property and the neighborhood at various times,” said Dick LePre, senior loan consultant for RPM Mortgage in San Francisco and author of the RateWatch newsletter. “Look at it during the day, the late afternoon when kids tend to cluster, at night and on both weekdays and weekends.”This ongoing inspection can reveal good news, bad news or both. You may find your home is on a popular shortcut for commuters or near the gathering place for local kids, but only for a few hours a day.

“Something which you construe as a problem might only happen one day a week or at a certain time of the day,” LePre said.

He also recommends quizzing a few neighbors about what they like and don’t like, and about which direction the neighborhood seems to be going.

“Find out if there are any ‘crazies’ on the block,” he said. “If there is empty space nearby, ascertain what the zoning is for that empty space. Is the next block over … zoned commercial? Do you want a McDonald’s as a neighbor?”

Buying when you’re not ready

Buying a home is a great way for the average person to build wealth over the long run, but it’s not for everyone in all circumstances.If your finances are uncertain or your job prospects are up in the air, you might want to wait. Renting is also a better option if you’re planning to move in a year or two.

Not buying when you are ready

All that said, you shouldn’t let fear or uncertainty keep you on the sidelines if you’re otherwise ready to buy a home.Eldred notes in his book that the media have been decrying the high cost of housing and predicting price peaks at least since the 1940s. Although prices have fallen in various cities at various times, the overall trend has been upward.

Eldred recommends being cautious if your market is showing signs of weakening, such as:

• Properties staying on the market longer.
• A widening gap between the costs of owning and the costs of renting.

Even then, don’t put off a purchase if you’re able to stay put for several years — long enough to ride out any downswings.

“In five or 10 years, prices will be higher than they are today,” Eldred predicted.

MSN Money

Tags: American Society Of Home Inspectors, Big Mortgage, Columnist, Contradictory Ideas, Financial Health, First Time Home, First Time Home Buyer, Good Job, Home Buying, Home Inspection, Home Inspector, Housing Market, Lenders, Losses, Money Pit, Mortgage Mistakes, Referrals, Regrets, Time Home Buyer, Traps

The Federal Reserve will issue new rules next week aimed at protecting future homebuyers from dubious lending practices, its most sweeping response to a housing crisis that has propelled foreclosures to record highs. Fed Chairman Ben Bernanke spoke of the much-awaited rules in a broader speech Tuesday about the challenges confronting policymakers in trying to stabilize a shaky U.S. financial system. To that end, Bernanke said the Fed may give squeezed Wall Street firms more time to tap the central bank’s emergency loan program.

To prevent a repeat of the current mortgage mess, Bernanke said the Fed will adopt rules cracking down on a range of shady lending practices that have burned many of the nation’s riskiest “subprime” borrowers — those with spotty credit or low incomes — who were hardest hit by the housing and credit debacles.

The plan, which will be voted on at a Fed board meeting on Monday, would apply to new loans made by thousands of lenders of all types, including banks and brokers.

Under the proposal unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower’s income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value.

“These new rules … will address some of the problems that have surfaced in recent years in mortgage lending, especially high-cost mortgage lending,” Bernanke said.

Consumer groups have complained that the proposed rules aren’t strong enough, while mortgage lenders worry that they are too tough and could crimp customers’ choices.

The Mortgage Bankers Association urged the Fed to “take a balanced approach in devising final regulations so that the credit crisis is not worsened.”

Meanwhile, the Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, warned the Fed that weak regulation and oversight has led to the “worst credit crunch in generations.”

The Fed — under former chairman Alan Greenspan — came under attack for not acting early on to crack down on dubious lending. Some critics complained that Greenspan, who ran the Fed for 18 1/2 years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, when easy credit spurred lots of subprime home loans and many exotic types of mortgages.

Meanwhile, signs emerged Tuesday that the housing market’s slump is likely to persist through the summer, and the real estate market may not recover for at least another year.

The National Association of Realtors’ pending home sales index slipped by 4.7 percent in May to the third-lowest reading on record. The decline “suggests we are not out of the woods by any means,” said the group’s chief economist, Lawrence Yun.

In an extraordinary action aimed at averting a financial catastrophe, the Fed in March agreed to let investment houses go to the Fed — on a temporary basis — for a quick, overnight source of cash. Those loan privileges, which are supposed to last through mid-September, are similar to those permanently afforded to commercial banks for years.

“We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end should the current unusual and exigent circumstances continue to prevail in dealer funding markets,” Bernanke said in prepared remarks to a mortgage-lending forum in Arlington, Va.

The Fed’s decision to act — temporarily at least — as a lender of last resort for Wall Street firms was made after a run on Bear Stearns pushed the investment bank to the brink of bankruptcy and raised fears that others might be in jeopardy. It was the broadest use of the Fed’s lending powers since the 1930s.

Bear Stearns was eventually taken over by JPMorgan Chase & Co., with the Fed providing $28.82 billion in financial backing.

Those controversial decisions have drawn criticism from Democrats in Congress and elsewhere that the Fed is bailing out Wall Street and putting billions of taxpayer dollars at risk.

Bernanke, in appearances on Capitol Hill has said he doesn’t believe taxpayers will suffer any losses.

In his speech Tuesday, the Fed chief defended those actions anew. If the Fed didn’t intervene, he said, problems in financial markets would have snowballed, imperiling the country.

“Allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy,” Bernanke said to the mortgage forum, organized by the Federal Deposit Insurance Corp.

Dodd, meanwhile, praised the Fed’s actions in a statement Tuesday, saying, “I am pleased that the Federal Reserve is now taking steps to issue new rules for mortgage lending and to improve oversight of our financial system. As documented by the Senate Banking Committee, it was the lack of regulatory will, not lack of regulatory authority, that contributed to the current credit crisis.”

The Fed’s consideration of giving Wall Street firms more time to tap the Fed’s emergency loan program is part of an ongoing effort by the central bank to bring back stability to fragile financial markets and help to bolster shaky confidence on the part of investors.

Policymakers — in the White House, in Congress and other federal agencies — will need to work together to come up with ways to make the U.S. financial system more resilient and stable and to prevent a repeat of the types of problems that brought about the end of Bear Stearns, an 85-year-old institution, Bernanke said.

Although those efforts are already under way and will be the focus of a House Financial Services Committee hearing Thursday, it will fall to the next president and next Congress to settle them. Both Bernanke and Treasury Secretary Henry Paulson are scheduled to testify at Thursday’s hearing.

The Bush administration has proposed revamping the nation’s financial regulatory structure. That plan would make the Fed an ubercop in charge of financial market stability. But the Fed would lose daily supervision of big banks. Bernanke said the Fed must maintain this power if it is to be an effective overseer of financial stability.

The Fed, which regulates banks, and the Securities and Exchange Commission, which oversees investment firms, announced an information-sharing agreement on Monday aimed at better detecting potential risks to the financial system.

Over the longer term, though, Congress may need to adopt legislation to bolster supervision of investment banks and other large securities dealers, Bernanke said.

Bernanke recommended that Congress give a regulator the authority to set standards for capital, liquidity holdings and risk management practices for the holding companies of the major investment banks. Currently, the SEC’s oversight of these holding companies is based on a voluntary agreement between the SEC and those firms.

AP

Tags: Balanced Approach, Ben Bernanke, Board Meeting, Consumer Groups, Credit Crisis, Current Mortgage, Emergency Loan Program, Fed Board, Fed Chairman, Federal Reserve, Foreclosures, Home Loan, Homebuyers, Incomes, Mortgage Bankers Association, Mortgage Lenders, Mortgage Lending, Policymakers, Record Highs, Subprime Borrowers

A broad housing rescue package aimed at preventing foreclosures would have the government step in to insure up to $300 billion in new mortgages for struggling homeowners. The plan, designed to stabilize a key sector of the shaky economy, is set for a House vote Wednesday. It would let the Federal Housing Administration insure more affordable fixed-rate loans for borrowers currently too financially strapped to qualify.

The White House says President Bush would veto the measure, calling it a burdensome bailout that would open taxpayers to too much risk. That’s despite Democrats’ attempts to attract Republican support by including a grab-bag of measures Bush has called for.

They include legislation to overhaul the Federal Housing Administration, the Depression-era mortgage insurer, and to more tightly regulate Fannie Mae and Freddie Mac, the government-sponsored companies that finance home loans. Also part of the plan is a measure, which Bush has repeatedly requested, allowing state and local housing finance agencies to use tax-exempt bonds to refinance distressed subprime mortgages.

Its main element, written by Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, is designed to help roughly 500,000 borrowers at a cost of $2.7 billion over the next five years. Under Frank’s bill, the FHA would relax its standards to let debt-ridden homeowners refinance into more affordable, fixed-rate mortgages if their lenders agreed to take substantial losses on the original loans.

Borrowers would have to show they could afford to make payments on the new mortgages. They would have to share with FHA at least half of their proceeds if they profited from selling or refinancing again.

Frank, working closely on his plan with Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben Bernanke, has picked up some Republican support, especially among lawmakers representing areas hit hardest by the housing crisis.

But GOP leaders strongly oppose the bill, which they say would help reckless borrowers who overextended themselves, unscrupulous lenders, and investors who tried to game the market at the expense of renters and homeowners who made wiser choices.

The plan is to be combined with $11 billion in housing tax breaks, including a $7,500 credit for first-time home-buyers that would function like a zero-interest government loan, to be paid off over 15 years.

As part of the package, the House is scheduled to vote on an amendment — bitterly opposed by the financial services industry but championed by governors — that would ensure that neither the FHA plan nor other banking laws pre-empt state foreclosure laws. It’s aimed at letting states that have recently moved to make it harder to evict homeowners continue those efforts.

The House also plans a vote on a separate bill — also facing a veto threat — to send $15 billion to states for the purchase and rehabilitation of foreclosed properties in the hardest-hit areas.

Critics say it would reward lenders, many of whom are in part to blame for the housing chaos, and act as an incentive for them to foreclose rather than find ways to help struggling borrowers stay in their homes.

AP

Tags: Barney Frank, Fannie Mae, Fannie Mae And Freddie Mac, Federal Housing Administration, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Finance Agencies, Financial Services Committee, Fixed Rate Loans, Fixed Rate Mortgages, Gop Leaders, Government Step, Henry M Paulson, Local Housing Finance, Mortgage Insurer, Republican Support, Subprime Mortgages, Substantial Losses, Tax Exempt Bonds, Treasury Secretary

Two New 2007 Tax Breaks Help Homeowners Struggling With Mortgage Payments

In a year of bad mortgage news, there’s a bright spot or two for homeowners: Foreclosure comes with a tax break, and 2007 mortgage insurance payments may be tax-deductible.Congress acted on both provisions late last year, extending the mortgage insurance deduction for three more years and creating a new tax break for homeowners facing foreclosure.

The mortgage insurance deduction will help certain low and moderate income homeowners, especially first-time homebuyers and those struggling with higher house payments as adjustable rate mortgages reset.

By the way: This type of insurance should not be confused with the homeowners’ insurance you take out on your home and its contents in case of fire or other disaster. It’s also not the same thing as mortgage protection insurance, which is a form of life insurance some people buy to pay off a mortgage when they die.

Mortgage insurance is required by government and private lenders on home purchases in which the buyer makes a down payment of less than 20 percent. Often, these are first-time buyers or people with lower incomes. The insurance protects the lender if the borrower defaults on the loan — a very real prospect last year for homeowners who took out adjustable mortgages with low teaser rates that have since risen.

For the first nine months of 2007, about 16.7 percent of the estimated $1.98 trillion in new mortgages originating during that period had private or government mortgage insurance, according to Inside Mortgage Finance Publications, which researches and tracks the residential mortgage business.

Typically, homeowners pay an average of $50 to $100 a month in mortgage insurance on a median single family home price of $217,600, according to the Mortgage Insurance Companies of America, a trade association.

The new tax deduction could save taxpayers who itemize as much as $300 to $350 in federal taxes, MICA estimates.

There are restrictions. Only taxpayers with adjusted gross incomes of $100,000 or less can take the full deduction, which gradually decreases for incomes above that and is eliminated altogether for those with AGIs over $109,000.

And only insurance on mortgages taken out in 2007 — new or refinanced — qualifies for the deduction. If you simply continued paying mortgage insurance in 2007 on a loan taken out in an earlier year, you cannot deduct those payments.

To be deductible, the insurance must have been paid on “home acquisition debt” — debt incurred to buy, build or substantially improve a principal residence or second home.

Most tax experts interpret this provision as meaning that if in 2007 you refinanced your home to take out extra cash from your equity — then used that cash toward building a home addition or making a substantial home improvement — insurance on that added mortgage debt is deductible along with insurance on the old mortgage amount.

But if you simply refinanced your home to take out extra cash for other purposes, the portion of a mortgage insurance premium that covers that additional amount isn’t deductible, only the amount that covers the original mortgage debt.

The 1098 form from your mortgage lender should specify the amount you paid in 2007 in mortgage interest and mortgage insurance. Claim the mortgage insurance deduction on Schedule A, Line 13. Further details are in IRS Publication 936, “Home Mortgage Interest Deduction.”

Late last year, Congress approved a measure to help homeowners fighting foreclosure as the mortgage crisis took its toll. Taxpayers who were granted forgiveness of mortgage debt in 2007 don’t have to pay taxes on the amount of that forgiveness, up to $2 million ($1 million for a married person filing a separate return). Only debt forgiveness on a principal residence is eligible.

The provision applies to restructured mortgage agreements entered into after Jan. 1, 2007. Previously, such loan forgiveness was often taxed as income.

Several other common tax benefits are in effect for homeowners who itemize. They include:

–Mortgage interest deduction: interest you paid to the lender in 2007 on mortgages for your principal home and a second home for your personal use, providing the mortgages are secured by the home.

–Points: certain fees, computed as a percentage of the loan amount, that you paid to obtain your mortgage; for second homes, these must be amortized over the life of the loan. For your principal home, points are fully deductible in 2007 if you took out the mortgage that year and certain conditions were met. (There are nine tests, spelled out in Publication 936.)

–Refinancings: points paid for refinancing are usually not deductible in full during the year you refinance, but are instead amortized over the life of the loan. But if you refinanced in 2007 and used part of the refinancing proceeds to substantially improve your home, you can deduct in full the points on that part of the loan; the remaining points are amortized.

AP

Tags: Adjustable Mortgages, Adjustable Rate Mortgages, Borrower Defaults, First Nine Months, First Time Buyers, First Time Homebuyers, Government Mortgage, Homeowners Insurance, Insurance Payments, Moderate Income Homeowners, Mortgage Finance Publications, Mortgage Insurance Companies, Mortgage News, Mortgage Payments, Mortgage Protection Insurance, New Mortgage, New Tax Break, Private Lenders, Residential Mortgage Business, Teaser Rates