Q. DEAR BOB: My wife and I are having trouble qualifying for a home loan. Following your frequent advice, we have tried to get pre-approved for a mortgage before looking for a house. Although we both have excellent jobs, bringing in a total of more than $70,000 in 1998, our problem is bad credit because of illness, unemployment and stupidity.
We fell behind several months on our credit-card and auto-loan payments. Our bank turned us down cold for a home loan. Then I saw some "We finance anybody" newspaper and Internet ads, which all want 12 percent interest or higher. We never filed for bankruptcy protection and are gradually paying off all our creditors. Why is our bad credit, which happened more than a year ago, so important to mortgage lenders?--Norman V.
A. DEAR NORMAN: Mortgage lenders believe that past credit history is likely to be repeated. You and your wife are high-risk borrowers with bad credit. As you probably know, most mortgage lenders use a computerized credit-scoring system designed by Fair, Isaac and Co., known as FICO. The major secondary-mortgage market buyers, Fannie Mae and Freddie Mac, believe this system can predict whether borrowers will make their mortgage payments on time each month.
Presuming your FICO score was low, the mortgage lenders either rejected your application or approved your home loan at a high interest rate. If you can afford the monthly payments on a 12 percent mortgage, it may be smart to accept it and refinance in a year or two at a lower interest rate.
DEAR BOB: I own a rental house that needs major repairs. A friend recommended a handyman. He estimates $1,400 for the repairs. Do you think I need something in writing?--Amy H.
DEAR AMY: Yes. Is the "handyman" licensed? If not, view it as a warning signal.
Ask if the repairman will be hiring any helpers. If so, be sure he carries workers' compensation insurance. If a contractor doesn't carry the insurance and his worker is injured on the job, you could be held liable for huge payments. Be sure you or he carries the right insurance. Your insurance agent can assist you.
After more than 30 years of experience hiring contractors, I've learned it's best to insist on a written contract from licensed or unlicensed contractors, no matter how small the job. Thankfully, I've never had any lawsuits filed against me by contractors or their workers.
But I always say to the contractor, "Let's put this in writing so there is no misunderstanding." Then I ask for copies of their license, if required, and proof of workers' compensation coverage if they plan to hire help.
DEAR BOB: We recently bought our first house. Our insurance agent suggested a $250 deductible homeowner's policy. But last week I heard a financial talk show host suggest a higher deductible. Who is right?--Angie W.
DEAR ANGIE: You are paying the highest homeowner's insurance premium, and your insurance agent is maximizing his sales commission. The higher your insurance policy deductible is, the lower your annual premium--and the lower your agent's commission. Raising your deductible to $500 or $1,000 per claim will save you huge amounts over the years you own your residence.
If you can afford to pay the first $500 or $1,000 of any loss claim, you will avoid filing insurance claims and save your insurer substantial costs. In return, most insurers offer policy savings of 10 percent to 20 percent annually, sometimes more. Raise your policy deductible as high as you can afford to save on annual premiums and to improve your status with your insurer.
DEAR BOB: Some time ago I read an article about a California home builder who refused to sell to a lawyer, and the court said that was perfectly legal. What about renting?
My wife and I own several rental houses. Recently, a lawyer and his wife applied to rent one of our houses. They returned the rental application form with a $500 deposit check. However, when I ran a credit report on them, I found out their credit was awful. I returned their deposit check uncashed. But I'm wondering, if they had good credit, could we have refused to rent to them because the husband is a lawyer?--Rege C.
DEAR REGE: If it's not illegal, it's legal. Although I don't recommend that you advertise, "We do not rent to lawyers," as far as I am aware there is no anti-discrimination law in any state governing residential rentals or sales on the basis of occupation.
Thankfully, you had a sound basis for not renting to that lawyer--poor credit. The obvious problem is that we lawyers are notorious for causing trouble over minor problems, so landlords and builders don't like us.
For example, I once almost sold a lease-option house to a lawyer and his wife. But he was so obnoxious and asked so many stupid questions, I was glad when they left. The next day he phoned to ask more dumb questions. Thankfully, by then I had lease-optioned the house to another couple who, several years later, bought it and enjoy living there today.
DEAR BOB: A run-down house in our neighborhood recently sprouted a handwritten "For Sale by Owner" sign. On a Saturday afternoon walk, my wife and I knocked on the door. We thought the house had been abandoned. An elderly woman answered. She had lived there more than 30 years.
To make a long story short, we paid her full asking price after obtaining a bank mortgage. She was thrilled that she could move into a retirement home. We spent about $15,000 fixing up the three-bedroom house, which was a dump. Now we are undecided whether to keep the house or take a quick profit, after real estate commission, of about $40,000. What should we do?
DEAR NED: You can't lose with either choice. As a long-term real estate investor, I suggest you hold the house as a rental property if you think the neighborhood has potential. If it is declining, I suggest you "flip" the house and take a quick profit.
DEAR BOB: I recently completed several real estate college courses and obtained my real estate license, but I decided I don't want to sell real estate. Is there anything else I can do with my license?--Nurella R.
DEAR NURELLA: Yes. You have so many opportunities open I can't list them all. If I ever were to give up my present job writing about real estate and if I didn't want to go back to real estate sales, I would become a professional property manager.
Although it is often difficult for property managers to satisfy property owners, who want maximum net income, and tenants, who want low rents and great service, property managers have unlimited profit opportunities. To learn about them, take the property management course at your local community college.
DEAR BOB: When you bid at a real estate auction and are the successful high bidder, what are the possibilities of unpaid property tax, judgment and mechanics liens still on the property? At the time of auction, will clear title be offered? How can a bidder be sure of clear title?--Mr. T.N.
DEAR MR. T.N.: The answer depends on the type of real estate auction. If the property is being offered at a mortgage foreclosure sale, bidders take title subject to any prior recorded liens. For this reason, be sure to check the title before bidding. But be aware that any junior liens recorded after the mortgage are wiped out at the foreclosure sale.
If the foreclosing lender obtained title to the property and if it is being sold at a lender's auction, the title status is usually stated before the auction starts. When bidding at this type of private auction, you should be able to get a title insurance policy if you are the successful bidder.
Such a title policy is your best assurance that there will be no surprise liens. If the insurer fails to discover a lien or if another title risk, such as a forged signature, causes a loss, the title insurer must pay you up to the policy limit.
DEAR BOB: My husband and I are debating the merits and demerits of buying a mobile home. The ones we have inspected on the dealers' lots are nice. However, the used, resale mobile homes that we've seen aren't so good. Of course, they are older and cheaper. What do you think about mobile homes as investments?--Connie S.
DEAR CONNIE: Mobile homes are not the great investments that most single-family detached houses are. Mobile homes usually depreciate in market value as they age, just the way your car depreciates. There are exceptions for mobile homes located in top-quality mobile home parks or rent-controlled parks, especially in towns with a shortage of park spaces available, but mobile homes generally are not great investments.
DEAR BOB: I am 65 and in a second marriage. My estate is $300,000 to $400,000. I have a will, which leaves my assets to my two daughters. Do you think I need a living trust to avoid probate costs and delays? We have a prenuptial agreement. Do we need a living trust?--Dorothy C.
DEAR DOROTHY: Consult an estate-planning lawyer. If your assets pass according to your will to your daughters, probate proceedings will be necessary. The delay and costs can be avoided with a living trust. The prenuptial agreement won't apply after you're dead.
DEAR BOB: I will be 80 next year and I don't think my wife can handle our mortgage payments if I die first. Is it true she can't be evicted if she cannot keep up with the payments?--Frank C.
DEAR FRANK: No. There is no law allowing senior citizens to remain in their homes without keeping up payments on their mortgages (except reverse mortgages, of course). If she can't afford the mortgage payments, even if she files for bankruptcy protection from creditors, eventually the mortgage lender will have the property sold to pay off the mortgage. Please consult a lawyer to clarify the situation and solve the potential problem now.
DEAR BOB: I own four rental houses and am ready to buy an apartment building and hire a resident manager so I don't have to deal directly with tenants. Several real estate brokers have shown me apartment buildings that are for sale, but all their income-expense statements assume 100 percent occupancy. I know that won't happen. How much vacancy should I estimate?--Daren W.
DEAR DAREN: Every apartment building income-expense statement should estimate a vacancy factor. Although apartment owners will disagree, I recommend including at least a 5 percent vacancy factor for any rental property. Some owners suggest a 10 percent vacancy estimate. However, unless the local rental market is very soft, a 5 percent vacancy is more realistic.
Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128.