If hard times has you renting out that empty room for some fast cash, you could be opening the door to a lot more cost, not less.

The Insurance Information Network of California (IINC) says financially strapped homeowners renting out rooms to help pay the mortgage or other costs may be overlooking key issues that could lead to greater financial hardship.

Community, rental rules

Like opportunistic homeowners renting space to visitors in town for special events or even like charitable homeowners housing temporary disaster victims down on their luck, struggling homeowners looking for a fast buck should check for community, legal and insurance repercussions.

Renters who sublet, owners who live in communities governed by homeowners associations, zoning violators and others living under certain community rules or regulations could lose their home through either eviction or foreclosure if they violate terms of the contract, community edicts or local law.

That’s also true in some single-family detached housing communities.

Homeowner’s insurance, taxes

When it comes to homeowners insurance, the rental of rooms may be considered a business. However, limits could be placed on insurance coverage, including coverage for contents, personal liability, medical payments and identity fraud.

Policy add-ons or endorsements similar to those offered for home-based businesses are available to help cover a homeowner’s assets in case of a landlord-tenant dispute or suit.

When part of a home becomes a business certain tax laws could be triggered. For example to help foot the bill for the “Housing and Economic Recovery Act of 2008″ the act eliminates a capital gains exclusion for the portion of gain (during a sale) that comes while a home serves as a vacation or rental property.

“The last thing struggling homeowners need are more ways to lose money,” said Candysse Miller, IINC executive director.

She says homeowners should carefully review their insurance policies with their agent or company before taking on renters. Likewise, they should know the local rules and not try to surreptitiously circumvent them.

Renting concerns

Renters should also be aware that the landlord’s policy may not cover their possessions or provide liability protection in case they are sued.

On the other hand there’s always the possibility of the tenant from hell will wreak havoc and then fall back on legal renters’ rights law to over stay their welcome.

Instead of jumping at the prospect of a windfall, first-time landlords should spend ample time researching city and state landlord/tenant laws, tax rules and other related information.

A detailed background check on the prospective tenant can help identify any potential problems that may arise during the tenancy.

Many cities and municipalities as well as apartment and landlord associations also offer landlord/tenant services departments to help with questions and to avert disputes.

B. Perkins

Loan modification is a no-brainer for lenders. They essentially have the following choices:

• Loan modification
• Foreclosure
• Forbearance
• Deed in lieu
• Short sale

All things being equal, offering a loan modification to borrowers is usually the best option for lenders, because they avoid the high cost of foreclosure (by some estimates $50,000 to $100,000 per foreclosure) and they continue to collect interest on the loan – at a lower rate of return, but still enough to earn a profit.

Unfortunately, in many cases, another factor comes into play – mortgage insurance. If a loan is FHA- or VA-secured or the owners are paying PMI (private mortgage insurance), the lender stands to lose much less from foreclosure, because the insurance will make up a portion of the difference. In other words, the lender’s motivation to work out a reasonable deal with the homeowner/borrower is undermined by mortgage insurance – often mortgage insurance that the homeowner is paying for! When foreclosure numbers spiked, so did mortgage insurance claims. This is what contributed to the need for insurance giant AIG to receive bailout money from the government. Without it they could not have paid all the claims being made and still remain in business. AIG going out of business would have jeopardized the stability of millions of loans and caused even greater market insecurity.

If you are wondering why the federal government is willing to subsidize lenders for modifying mortgages and subsidize homeowners for making their monthly mortgage payments, wonder no more. One reason the government wants to bail out homeowners is because it has to. The government stands to lose more if homeowners with government-secured mortgages default on their loans than by paying ten thousand dollars or so to subsidize mortgage modifications for at-risk loans.You can also stop wondering why mortgage lenders approved all of those risky mortgage loans in the first place. Risks to the lenders were often reduced by the fact that the loans were insured. They could afford to gamble, because someone else would be there to pick up the tab on any losses.

Having insurance when disaster strikes is usually a good thing, but in the case of the foreclosure crisis, having mortgage insurance can work against you. It’s not like homeowner’s insurance that protects your investment in the case of a natural disaster. It only protects the lender’s investment – leaving you and your family without a roof over your heads. In addition, as a recent visitor to KeepMyHouse.com pointed out, eliminating PMI for loans that require it could make house payments more affordable, put more money in people’s pockets, and help stimulate the economy.

I am not entirely against having the government secure loans or requiring homeowners to pay PMI on certain mortgage loans. Up to this point, these programs have helped more people achieve the American Dream of Homeownership. However, when these same programs are working against homeowners during an unprecedented economic crisis, I think it is time to review the real purpose of these programs. Lenders need to start relying less on mortgage insurance and more on loan modification to mitigate their losses and help more Americans keep their homes.

R. Roberts

When home builders, the most depressed segment of the real estate industry, begin expressing optimism about a modest turnaround in the marketplace, maybe it’s time for even the most dour doomsayers to listen.

Last week’s home builders sentiment survey released by Wells Fargo and the National Association of Home Builders produced the single biggest monthly jump since 2003.

The survey focused on builders’ perceptions of traffic at sales sites and expectations of sales in the coming six months, both were up sharply from the previous month.

Builders cited low prices, low interest rates, and the $8,000 federal home purchase tax credit as key reasons for their positive outlook.

Mortgage rates continued their decline into the upper 4 percent range last week — averaging just 4.7 percent for 30-year fixed rate loans and 4.5 percent for 15 year money.

Some large builders have been sweetening those rates even more by “buying down” interest costs for purchasers to 3 percent or less, fixed for 30 years.

Of course, big improvements in traffic and sales projections do not necessarily mean that builders – or the real estate market as a whole — are out of the woods.

To put the builders’ sentiment survey into perspective: It’s still far below the point where the builders themselves rate market conditions as “good.” Most builders still rate their situations as “fair” to “poor.” But they do see movement toward much better conditions ahead.

In that sense, home builders may be tuned into a much larger public perception change underway about the national economy. The Gallup polling organization’s latest “Consumer Mood Index” rose sharply last week, and is now higher than it was at the same time last year.

Federal Reserve chairman Ben Bernanke expressed a similar, mildly optimistic view last week in public comments, as did President Obama.

Meanwhile, there’s fresh evidence that, despite all the moaning and groaning about real estate being in the doldrums, there’s a rising amount of business getting done. Wells Fargo reported a three billion dollar first quarter profit, much of it because of record results from its home mortgage operations.

Home sales in a number of hard-hit local areas continue to soar. In Orlando, Florida, for example, March sales were nearly 50 percent higher than March 2008.

And listing prices in major markets defied expectations by showing small monthly increases, according to a new report from Altos Research and Real IQ. In sixteen of the largest U.S. housing markets, according to the survey, listing prices were up by an average 1.1 percent.

Bottom line here: Think positive — at least a little.

K. Harney

Competition in some rental markets is pushing landlords to offer increasingly creative concessions to tenants, such as free rent for a month or two, and even job-loss protection that guarantees the rent will be paid if tenants lose their jobs.

A new survey by a real estate research company confirms that landlords nationwide are being forced to lower what they charge their customers, whether through direct rent reductions or freebies and breaks on lease terms that have the same net result.

New York-based REIS, Inc. reports that half of all apartment buildings in the U.S. reduced rents in the fourth quarter of 2008 and the first quarter of this year, according to Business Week.

Rents quoted by landlords dropped by six tenths of a percent in the first three months of 2009, and effective rents — netting out all the concessions offered by landlords — fell by 1.1 percent.

Effective rents were down in four out of five of the 79 metropolitan markets surveyed by REIS. So if you are a landlord who lowered your rents in the past couple of months, you’ve got lots of company.

In San Francisco, average effective rents were down by nearly 3 percent in the first quarter. In New York City, they were down by 2. 6 percent, 2.5 percent in San Jose, by 1.3 percent in Charlotte, and by 1.2 percent in Chicago.

Only the big Texas markets — Dallas and Houston — saw average effective rents move up.

Landlords are cutting rents primarily because of rising job layoffs, cutbacks in working hours, and higher unemployment filings.

According to James Lewis, president of Maitland, Florida-based Charles Wayne Consulting, “more and more tenants (are) doubling up or moving back with family to better deal with the bad economy.”

Cole Whitaker, a partner in Hendricks & Partners, an apartment consulting firm in Orlando, says building owners’ expenses – like property taxes and insurance – continue to rise, but landlords can’t pass those increases onto tenants and keep their buildings full.

“Our boys are eating (the differences)” for the time being, Whitaker told the Orlando Sentinel.

In some tough markets, landlords are adopting sales techniques used by car manufacturers. They are guaranteeing prospective tenants up to two months of free rent, even if they lose their jobs.

Cleveland-based Goldberg Co., an apartment investment firm with projects in Florida, Texas, North Carolina and Ohio, is advertising “layoff-proof” leases. After two months of unemployment and free rent, the company allows tenants who can’t find a job the right to break the lease — without paying a penalty.

K. Harney

For many people, buying their own home is still the American dream. Yet, it remains out of reach for a lot of people, even though the housing affordability index in many areas of the country is as good as it’s ever been. But if you’re not prepared to buy a house, then the index doesn’t mean a thing to you—except, perhaps, to create a painful sting and a constant reminder that you’re missing out on a good opportunity to buy real estate at lower prices. For more on affordability, see my column, Housing Most Affordable: May be Time to Move from Renting to Owning.

That’s advice that many experts are giving to those who are planning to stay in the same house for a few years. The cost of buying and relocating in a short period (a couple years) can make the concept of buying not appealing or cost effective. But if it’s for the long term, owning can make perfect sense. But what if you’re a first-time buyer or you haven’t owned a home in a while, how do you prepare for what is often the largest purchase you’ll ever make? Buying a home isn’t that difficult but it does require you to make sure that you’re in the right financial (and emotional) position to do it. How do you get there when so many other expenses often take precedence? Simple but not necessarily easy steps can help you position to transition from renter to home owner. It starts with getting familiar with your financial picture. If you are aware of what lenders are looking for before you apply for a loan, you’ll have a greater chance of getting it and it’ll be helpful when you meet with your real estate agent. No time will be wasted looking at homes that aren’t in your price range. You will have a clear-cut idea of what you can afford and then you can confidently look for the most suitable home.

Take a keen look at your budget. This presumes that you have a budget. If not, develop one. You can use numerous software programs to create a budget; many are free, or you can even use a basic spreadsheet. If you’re self-employed, take a look at free online bookkeeping software offered by Outright.com. It can help you track your income and expenses for your business allowing you to create a better recording system to help you save time and money. Review credit history. If you have no idea how your credit looks, then it’s time to give it a review. When you take a look at your credit report, you will be able to see if there are errors or dings from late payments that are negatively affecting your credit score. This gives you a chance to dispute errors or work to clean up your credit before you apply for a home loan. When I reviewed my credit cards, I found a few hundred dollars that had been automatically billed to my credit card in erroneous subscription fees. Your credit card can file a dispute with the companies and credit the funds back to your account. It pays to double check; you just never know what you’ll find.

Redistribute your money. Don’t think of it as cutting back, but rather as moving your money from one place to another. For example, if you’re spending $3 on a specialty coffee five days a week, think about making your java at home and putting that $15 a week into an account that is going to be used to purchase your home. It all adds up and most of the time, we don’t realize how much money a dollar spent here or there can accumulate.

Another way to redistribute money is to examine your insurance policies and consider raising the deductibles. A lot of people want low deductibles in case of a loss or an accident, but you can actually save money and redistribute that money into an account that is set aside for purchasing your home. But some statistics show that the average person files a claim only once every 13 years, according to insurance broker, Michael Rice of Thomas Ward Insurance Group. So raising your deductible from, say, $500 to $1,000 can give you an annual premium savings of 10 to 15 percent. Rice also recommends paying your premium in full if the insurance company offers you a discount to do so; some offer a five percent or more deduction and you won’t be charged administrative fees for periodic billing.

Keep your eye on the goal. Staying focused on the goal of buying a home will help you to remember that cutting costs now will allow you to have what you want in the long run. Our society is accustomed to instantaneous gratification so delaying the reward can be very challenging but well worth it. Owning your own home and, being able to purchase it while in a down market, is an exciting win-win.

P. Chongchua