20 Days of Real Estate: Days 1 to 5 in Review

Here's a breakdown of the first five parts of April's 20-part real estate series.
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Editor's note: As a bonus to TheStreet.com's special 20-part series on real estate, TheStreet.com University will publish reviews of each set of stories in the series. This review covers the first set in the series, parts 1 to 5.

Part 1. Mortgage-Backed Securities 101

What happens to all those subprime loans that you've been hearing so much about? Many of them end up being held by a mortgage-backed security, or MBS. Tracy Byrnes kicked off the real estate series with a Booyah Breakdown on how mortgage-based securities work and who the key players are in this bondlike market.

Key Points

:

  • When a small bank runs out of money to originate mortgages, it can free up some cash by selling its mortgages to a government-supported organization (such as Fannie Mae) or to an investment bank (such as Bear Stearns).
  • When one of these new debt holders wants to free up cash so it can continue to relieve the small bank's debt and raise new money, it can create a "mortgage-backed" security (essentially a group of mortgages organized by any number of investment characteristics).
  • Unlike a bond that pays investors a fixed coupon and principle, an MBS pays out principle and interest payments from its pool of mortgages.
  • The risks of investing in an MBS include the original borrowers' missing monthly payments or paying off their mortgages early.
  • Individual investors generally can't (and really shouldn't) directly invest in an MBS. However, as an indivudual investor, you can invest in an MBS via a mutual fund.

Action Steps

:

  • If you're interested in buying an MBS, contact any fund family, such as Fidelity or Pimco, and get information on mutual funds that hold this type of security.
  • Review each MBS fund prospectus carefully against your personal investment criteria.

To learn more,

click here to read the full story.

Part 2. Clean Up Your Credit

What a difference a year makes. The once-ubiquitous "no money, no problem" lender is now practically extinct. So if you need a loan to buy a house, be prepared. These days, lenders actually want to know whether you'll be able to make your mortgage payments before they give you the mortgage.

Key Points

:

  • Lenders have tightened their standards for mortgage approval.
  • The clearer (and more positive) your financial picture is, the more likely a lender will be to offer you a favorable mortgage.
  • If you meet the requirements of certain federal loan programs, you could receive low-cost finance terms.

Action Steps

:

  • Carefully analyze your credit report. Eliminate old debts and unused credit, and correct any mistakes you find in the report.
  • Work on increasing the amount of your down payment as much as possible.
  • Diligently document your income and assets.

To learn more,

click here to read the full story.

Part 3. Consider an FHA Loan

As subprime lenders disappear or enforce stricter lending criteria, the Federal Housing Administration is becoming a more competitive financing resource for credit-impaired homebuyers.

Key Points

:

  • The FHA insures loans for subprime borrowers.
  • FHA-insured loans have no prepayment penalties and no "teaser" rates.
  • One of the drawbacks of the FHA is that it can't insure loans over $363,000.

Action Steps

:

  • Take a close look at your current financial situation, especially your credit.
  • Survey the finance terms that you would likely receive from a typical subprime lender.
  • To qualify for an FHA mortgage, comprehensively document how much you earn.
  • To find a qualified FHA lender, start your search at the FHA Web site.

To learn more,

click here to read the full story.

Part 4. How to Avoid Foreclosure

Foreclosures are on the rise, and the negative repercussions are more long-term than most realize. Financially stretched homeowners need to communicate and work with their lenders as soon as payment problems arise.

Key Points

:

  • Lenders don't want to be in the business of owning real estate.
  • Financially distressed homeowners can avoid losing their property and damaging their credit by taking action before the foreclosure process begins.
  • Preventative solutions can include temporary payment postponement, refinancing and modifying existing terms.

Action Steps

:

  • Contact your lender as soon as you feel that you won't be able to make your payments on time.
  • Determine whether you would be better off with a loan "workout" or a sale of the property.
  • To get in better financial shape, consider working with a credit counselor certified by the Department of Housing and Urban Development. Find a HUD-certified counselor at the official HUD Web site.

To learn more,

click here to read the full story.

Part 5. Tap Into Equity With a Reverse Mortgage

A growing number of people entering retirement are discovering the borrowing power of reverse mortgages.

Key Points

:

  • With a reverse mortgage, the bank gives you money in exchange for a stake in your personal residential property (which you own). Unlike a traditional home equity loan, the borrowed money is not due to the bank until you die (payable by your estate) or decide to sell your home.
  • You must be at least 62 years old and have a significant amount of equity in your home to qualify for a reverse mortgage.
  • Since the exact amount that you can borrow varies and the related fees can be considerable, the federal government requires that you meet with an independent counselor before you take on a reverse mortgage.

To learn more,

click here to read the full story.

You can also learn a lot from

the TheStreet.com TV interview with David Peskin, the CEO of The Senior Lending Network, one of the biggest education sources for reverse mortages.

Next: 20 Days of Real Estate: Days 6 to 10 in Review.