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Posted On: 04/08/2009

Q: My husband (age 27) and myself (age 24) are trying to buy our first house. We don't have any credit and we have tried and done everything our bank has asked us to do. The house that we are trying to buy we are getting for only $13,000. We tried to borrow the money from our credit union and we were denied. They told us to come up with the 5 percent down and closing costs and try again which we did, and again were denied. We tried having a family member co-sign and were denied. We even applied for a rural development loan, and were again denied. In this economy is there anything we can do or is there something we are not doing that can help get us approved for this home loan?

A: I suspect readers will be amazed that a home anywhere in the U.S. can be bought for $13,000.

I also suspect that you don't have a credit problem. You were able to get several loans and you have a co-signer. The issue I see is different. Lenders have certain costs to originate a mortgage. Fees traditionally have related to loan size, thus the bigger the loan the larger the fee - and profits.

In the case of a $13,000 mortgage there is no profit for a lender. The work required is no less than the work required for a $100,000 mortgage or a $500,000 mortgage, and those loans make money.

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Let me suggest that you not deal with a traditional lender. Instead, see if you can get a loan from local individuals. Maybe a local religious congregation, community group, employer, doctor or attorney can introduce you to someone who could help.

Q: Our nephew bought a condominium about four years ago and recently lost his job. The property is going to be foreclosed. We co-signed the note, so what is our obligation in this situation?

A: When you co-sign a note you agree to pay the entire debt if the other party does not make good - not part of the debt, all of the debt. In effect, you agree to stand in the place of your nephew.

How much you will actually owe in this matter is unclear. When a home is foreclosed there is an effort to sell the property to the highest bidder. If the sale price at foreclosure is equal to the debt plus all fees and charges it's actually possible that you will owe nothing.

However, in most communities at this time there is now a significant "foreclosure discount," meaning that the property will likely sell for substantially less than the outstanding mortgage debt. If that is the case with your nephew's condo you could potentially owe any unpaid balance and fees.

But will you? That's not certain. For instance, was the property used as a residence and not as an investment? Was the financing a "purchase money mortgage" used to acquire the property and not a replacement loan? In some jurisdictions where a prime residence with the original loan is foreclosed the borrower is not responsible for anything beyond the sale price of the property. For specifics see a real-estate attorney where the property is located.

Or, has your nephew negotiated with the lender? For instance, if instead of a foreclosure and all the costs and hassles of such an event the lender will agree to accept a deed in lieu of foreclosure then there may be no further cash cost to you. Rather than simply allowing the lender to foreclose, your nephew - and you - should have a real-estate attorney negotiate on your behalf with the lender.

A related issue is this: What about your credit? Not making good on a mortgage is a huge red flag on a credit report, meaning that even if you owe nothing in this situation your costs to borrow will go up.

Lastly, see if there are any alternatives. Can the unit be rented? Sold? Can you help the nephew for a few months until he gets a new job? By any chance, does your state have laws that might protect co-signers? What about a loan modification under the new programs that the federal government established in February to save borrowers from foreclosure?

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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