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What is the first step when looking
for a home loan?
Most experts recommend that you should get pre-qualified for a loan first.
By being pre-qualified, you will know exactly how much house you can afford.
Almost all mortgage lenders now pre-qualify and pre-approve customers, and
many of them can even do it on the Internet. You also can do your own affordability
calculations; most recent consumer books on home buying include steps to doing
so, as do various real estate Internet sites.
How do you qualify as a first-time
buyer?
In general, lenders define a first-time home buyer as someone who has not
owned any real estate -- whether a personal residence, vacation home or investment
property -- during the past three years. Lenders verify an applicant's status
by examining their income tax returns, checking to see that the individual
did not take any deductions for mortgage interest or property taxes.
How is a home's value determined?
You have several ways to determine the value of a home.
An appraisal is a professional estimate of a property's market value, based on recent sales of comparable properties, location, square footage and construction quality. This service varies in cost depending on the price of the home. On average, an appraisal costs about $300 for a $250,000 house and usually increases according to value.
A comparative market analysis is an informal estimate of market value performed by a real estate agent based on similar sales and property attributes. Most agents offer free analyses in the hopes of winning your business.
You also can get a comparable sales report for a fee from private companies that specialize in real estate data or find comparable sales information available on various real estate Internet sites.
What are closing costs?
Closing costs are the fees for services, taxes or special interest charges
that surround the purchase of a home. They include upfront loan points, title
insurance, escrow or closing day charges, document fees, prepaid interest
and property taxes. Unless, these charges are rolled into the loan, they must
be paid when the home is closed.
Who pays the closing costs?
Closing costs are either paid by the home seller or home buyer. It often depends
on local custom and what the buyer or seller negotiates.
How can I save on closing costs?
Studies show that the closing costs, which can average 2 to 3 percent of a
total home purchase price, are often more costly than many buyers expect.
But there are some ways to save:
* Negotiate with the seller to pay all or part of the closing costs. The lender must agree to this as well as the seller.
* Get a no-point loan. The trade-off is a higher interest rate on the loan and many of these loans have prepayment penalties. But buyers who are short on cash and can qualify for a higher interest rate may find a no-point loan will significantly cut their closing costs.
* Get a no-fee loan. Usually, though, these fees are wrapped into a higher interest rate though it will save you on the amount of cash you need upfront.
* Get seller financing. This kind of arrangement usually does not entail traditional loan fees or charges.
* Rent the property in which you are interested with an option to buy. That will give you more time to save for the upfront cash needed for the actual purchase.
* Shop around for the best loan deal. Each direct lender and each mortgage brokerage has their own fee structure. Call around before submitting your final loan application.
Where do I get information about
closing costs?
For more on closing costs, ask for the "Consumer's Guide to Mortgage Settlement
Costs," Federal Reserve Bank of San Francisco, Public Information Department,
P.O. Box 7702, San Francisco, CA 94120 or call (415) 974-2163
Explanations of buyer closing costs are listed below. At escrow, the closer will give you a settlement sheet that will account for every cent involved in the transaction .
Click here for HUD-1 Settlement Closing Cost Statement.
What is the down payment?
Some 100% loans are available. Call lender for particulars. Others are from
3% down on up. If 20% of the sales price, or higher, is put down on a home,
no mortgage insurance is normally charged. The "Earnest Money Deposit" that
you submitted with your offer to purchase is credited towards down payment/closing
costs in escrow.
What is the cost of a credit
report?
You probably paid for this at the time you applied for the loan. It is usually
anywhere from $25 to $75. Can be more if you're from out of state.
What is the Loan Origination
Fee?
This fee is usually 1% of the loan amount and is paid to the lender. Some
lenders waive the fee, however, usually the interest rate is a fraction of
a percent higher. Check with your lender.
What is the title insurance fee?
A title company charge for insuring clear title to your property. The seller
pays for a policy to protect the buyer, and the buyer purchases a policy to
protect the lender.
What is PMI or MIP?
If your down payment is less than 20%, the lender usually requires mortgage
insurance to protect the lender against loss due to foreclosure. The insurance
is paid monthly and at closing, the lender usually charges two months in advance.
At any time you can establish that you have 20% equity in your home, you may
apply to have this fee canceled. Don't forget to do that!
What are loan discount points?
1 point equals 1% of the loan amount and this is paid to the lender. Points
may be negotiated between the buyer and seller but the buyer usually pays
for them.
What is interest prorate?
Interest is calculated on a 30 day month. If you close on the first day of
the month, you will be charged 30 days interest. If you close on the last
day of the month, you'll be charged interest for one day, for instance.
What are tax impounds?
Property taxes will be prorated to the day of closing and adjustments will
be made at escrow. If less than 20% downpayment is made, the lender will want
to handle the tax payment and normally, 3 to 6 months taxes are collected
at closing.
What are insurance impounds?
You may choose your own home insurance company but the lender will want to
handle the payments and normally asks for 14 months payment at close of escrow.
What is Tax Service Fee?
A one time fee charged the lender for setting up tax payments. Usually under
$100.00.
What is the Appraisal Fee?
The seller customarily pays for the appraisal on a resale, the buyer pays
for the appraisal on new home construction. Appraisal fees vary according
to the value of the property.
What is the Brokerage Fee?
This is the fee that the seller contracted to pay to the agents when home
was listed. The agents and their companies have formulas for splitting this
amount.
What is Existing Mortgage Prepayment
Penalty?
Paid by the seller to his mortgage company. There is no fee on FHA and VA
loans but the penalty on some other types can be quite large. Check with lender
when you apply for your loan to be sure there is no prepayment penalty on
the loan you are securing.
What is the Reconveyance Fee?
Paid by the seller to reconvey the existing deed of trust back to the seller
and clear title of that lien at close of escrow.
What is the Assumption Fee?
If you are assuming the seller's existing loan, the lender will charge this
fee. On VA or FHA no-qualifying loans the fee is generally $125, on qualifying,
$500-700. Other types are generally up to 1%.
What is the Home Warranty?
Seller may choose to offer a 1 year home warranty, usually $300 for the basic
plan. Buyer may pay for plan if seller does not.
What is Form 1099?
IRS requires the closing agent to complete a 1099 form reporting the sale
and purchase of the property.
What are the Set-Up and Collection
Fees?
If the seller will be carrying a first or second trust deed, there will be
a charge for setting up a collection account. Usually around $100 set up fee,
and about $10 per month - usually split between buyer and seller.
What are Homeowner Association
and Transfer Fees?
If the home is in a homeowner association, the management company charges
up to $200 for transfer fees to set up account in buyer's name, and buyer
usually is required to pay 4 months dues to the "kitty". This varies from
HOA to HOA.
What are possible ways to lower closing costs?
Why do I need a title report?
As much as you as a buyer may want to believe that the home you have found
is perfect, a clear title report ensures there are no liens placed against
the prior owners or any documents that will restrict your use of the property.
A preliminary title report provides you with an opportunity to review any impediment that would prevent clear title from passing to you.
When reading a preliminary report, it is important to check the extent of your ownership rights or interest. The most common form of interest is "fee simple" or "fee," which is the highest type of interest an owner can have in land.
Liens, restrictions and interests of others excluded from title coverage will be listed numerically as exceptions in the report.
You also may have to consider interests of any third parties, such as easements granted by prior owners that limit use of the property. Some buyers attempt to clear these unwanted items prior to purchase.
A list of standard exceptions and exclusions not covered by the title insurance policy may be attached. This section includes items the buyer may want to investigate further, such as any laws governing building and zoning.
CREDIT
How do I find out what my credit
report says?
For a copy of your own credit report, call one of the three main national
credit reporting agencies: Equifax, (800) 685-1111; Experian, (800) 311-4769
or Trans Union, (312) 408-1050.
Where do I get a copy of my credit
report?
For a copy of your own credit report, call one of the three main national
credit reporting agencies: Equifax, (800) 685-1111; Experian, (800) 311-4769
or Trans Union, (312) 408-1050. The bureaus also should provide instructions
on how to read their report and dispute any inaccuracies it contains.
Where do I get information on
consumer credit laws?
For information on consumer credit laws, contact the National Foundation for
Consumer Credit, 8701 Georgia Ave., Suite 507, Silver Springs, MD 20910; call
(301) 589-5600.
What do I do if I get turned
down for a loan?
Increasing numbers of loan applicants are finding ways to buy their own home
despite past credit problems, a lack of a credit history or debt-to-income
ratios that fall outside of traditionally acceptable ranges. Ask the lender
for a full explanation, then appeal the decision in writing.
Can someone who is unemployed
get a loan?
Generally, lenders will not make loans to unemployed persons because someone
without an income would seemingly have no way of making monthly mortgage payments.
However, there are home loans for which lenders require very little loan documentation as long as the borrower puts down a sizable down payment, generally 25 percent or more. These "no-doc" loans are common among self-employed people who say they earn a certain amount of money but whose income tax returns show that their earnings are much lower.
Borrowers should check directly with lenders when seeking a no-doc loan. If specific lenders do not offer them, ask for a referral.
Resources:
* "How to Shop for a Mortgage," Mortgage Bankers Association of America, 1125 15th St., N.W., Washington, DC 20005; call (202) 861-6500.
BAD CREDIT
What can I do if I have bad credit?
While some people have rebounded from a foreclosure to buy another home within
several years, credit problems stemming from a foreclosure can continue much
longer for others.
Real estate experts say you should be candid with your lender in discussing these issues. If your bankruptcy resulted from losing your job due to your employer's financial difficulties, a lender probably will look upon your situation more favorably than if your bankruptcy was caused by overextended credit cards.
Resources:
*"Rebuild Your Credit: Law Form Kit," Nolo Press, Berkeley, Calif.; 1993.
How bad is a previous foreclosure
on credit?
A property foreclosure is one of the most damaging events in a borrower's
credit history. In terms of the effect on credit history, a deed in lieu of
foreclosure or a short sale is not as adverse an event as is a forced foreclosure.
What if there is a credit reporting
mistake on my report?
There is no fast and easy way to repair damaged credit that took months or
years to occur. The law allows negative information to appear on an individual's
credit record from seven to 10 years.
Credit problems are the main reason would-be home buyers are denied a loan. The first step to clearing up your credit is to get a copy of your credit report to make sure that the negative credit information is indeed accurate. Some states now have mandatory timelines to respond to your inquiry or remove the blemish. For a copy of your report, contact one of the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1050.
The bureaus should provide instructions on how to read the report and how to dispute any inaccuracies it contains.
If your credit report is correct, take care of any outstanding delinquent obligations first. Lenders usually won't consider any borrower who has had a delinquent payment in the past year.
Will bad credit prevent someone
from getting a home?
There are numerous types of credit report problems (which may or may not be
your fault) that would cause a lender to reject your application for a loan.
Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years or not paying your taxes. Other black marks on a credit report include a judgment filed against you (perhaps for non-payment of spousal or child support) or any collection activity.
If you feel that your credit report is wrong, experts say it's best to take it up with the organization or company claiming you owe them money.
But if you've been late paying your bills, regroup by paying in full and on time for six months to a year to prove to the lender that the late payments were an aberration.
You can order a copy of your own credit report by calling the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1050.
How do you clear up bad credit?
There is no fast and easy way to repair damaged credit that took months or
years to occur. The law allows negative information to appear on an individual's
credit record from 7 to 10 years. Now, many states have specific timeframes
if you challenge a credit blemish.
The first step is to check your existing credit record. Anyone can obtain copies of their own credit report free of charge if they have been turned down for credit recently. For a fee, people can request copies of their own credit report from the three major credit reporting agencies: Experian at (800) 311-4769, Equifax at (800) 685-1111 and Trans Union at (312) 408-1050. The bureau also should provide instructions on how to read the report and how to dispute any inaccuracies it contains.
If the credit report is correct, take care of any outstanding delinquent obligations first.
Resources:
* "Rebuild Your Credit: Law Form Kit," Nolo Press, Berkeley, Calif.; 1993.
BANKRUPTCY
What options are there after
Chapter 11?
A previous bankruptcy can
remain in a credit file for seven to 10 years.
Depending on when the bankruptcy was discharged and what kind of credit a borrower has reestablished since then, it needn't be an obstacle to obtaining loan approval. The longer ago the discharge occurred, the better off a loan applicant will be.
Many lenders also will take into account the circumstances surrounding a bankruptcy. For example, they may look more favorably upon you as a borrower if your bankruptcy was due to financial reverses you suffered due to your employer's own financial difficulties. On the other hand, if you declared bankruptcy because you overextended your personal credit lines and lived beyond your means, a lender probably won't be as forgiving.
If you are in the latter category, you may want to contact a mortgage broker who may qualify them for a "b" or "c" loan, which usually comes at a higher interest rate.
Resources:
* "Rebuild Your Credit: Law Form Kit," Nolo Press, Berkeley, Calif.; 1993.
Can I refinance after bankruptcy?
Refinancing may be prudent but could be difficult after a bankruptcy. If you're
considering bankruptcy, you may want to go to your current lender first and
explain the situation. If you have been current on your payments, the lender
may be accommodating and refinance your loan, easing your financial situation.
How long do bankruptcies and
foreclosures stay on a credit report?
Bankruptcies and foreclosures can remain on a credit report for seven to 10
years.
Some lenders will consider an borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.
TYPES OF LOANS
Click here for information on the following types of loans.
INTEREST RATES
Click here for information on the interest rates.
LEASE OPTIONS
What is a lease option?
When a renter signs a lease with an option to purchase a property for a specific
price within a certain time frame, that is called a lease option. In most
lease-option situations, a portion of the rent is applied to a future down
payment.
Lease options are most popular among buyers who don't have enough funds for a down payment and closing costs.
Where do I get information on
lease options?
Contact your real estate agent (some even specialize in such transactions)
or read up on lease options at the public library. If you have a real estate
attorney, ask if he or she has any prepared information you can review. Most
bookstores have a fairly hefty real estate book section these days. Many current
real estate books have at least a section on lease options.
If you are considering a lease option, be sure you do your homework first. And have an attorney or financial advisor on hand to review any paperwork before you sign.
How do lease options work and
what are the benefits?
A lease option is an arrangement with you and a seller to exercise the option
to buy a house after you have rented it for a specific period. A portion of
your rent would applied toward the purchase if the option is exercised. This
is referred to as rent credit, which most institutional lenders will accept
as part of the down payment if rental payments exceed the market rent and
if a valid lease-purchase agreement is in effect, a copy of which must be
attached to the loan application.
If you are a seller, lease options can give you several advantages, especially in a slow market. These include a monthly rent higher than market rent, top-market value for the property and tax-free use of the option consideration until the option expires or is exercised. Also, the renter is more likely to treat the property like an owner, tax-free use of option consideration until the option expires or is exercised.
Read any lease-option arrangement carefully for details on transferring the option and other important concerns.
For more information, get a copy of "How Lease- Options Benefit Realty Buyers, Sellers, Agents and Investors," available for $4 from Tribune Media Services, 64 E. Concord St., Orlando, FL 32801
FAQ
Is there such a thing as a no-cost
or no-fee loan?
Not really. While some lenders occasionally promote "no-cost" loans, banking
regulators have cracked down on these misrepresentations. Advertised "no-fee"
loans may actually cost the borrower more over the long term because these
costs are often rolled into the new note through higher interest or more principal.
A typical no-fee loan is one where the points charged and all fees are included in the loan principal, meaning that the borrower does not pay these expenses at the close of escrow, but instead ends up paying on them over the life of the loan. The loan is called a no-fee loan because the borrower is not charged any fees up front.
Can I get a HUD home for as little
as $100 down?
If you are strapped for cash and looking for a bargain, you may be able to
buy a foreclosure property acquired by the U.S. Department of Housing and
Urban Development for as little as $100 down.
With HUD foreclosures, down payments vary depending on whether the property is eligible for FHA insurance. If not, payments range from 5 to 20 percent. But when the property is FHA-insured, the down payment can go much lower.
Each offer must be accompanied by an "earnest money" deposit equal to 5 percent of the bid price, not to exceed $2,000 but not less than $500.
The U.S. Department of Veterans Affairs also offers foreclosure properties which can be purchased directly from the VA often well below market value and with a down payment amount as low as 2 percent for owner-occupants. Investors may be required to pay up to 10 percent of the purchase price as a down payment. This is because the VA guarantees home loans and often ends up owning the property if the veteran defaults.
If you are interested in purchasing a VA foreclosure, call 1-800-827-1000 to request a current listing. About 100 new properties are listed every two weeks.
You should be aware that foreclosure properties are sold "as is," meaning limited repairs have been made but no structural or mechanical warranties are implied.
Do states offer help to home
buyers?
Most states have a housing finance agency, usually located in the state capital,
which offers help for first-time home buyers.
Is PMI always required on low-down
home loans?
A growing number of private lenders are loosening up their requirements for
low-down-payment loans. But private mortgage insurance, or PMI, usually is
required on loans with less than a 20 percent down payment. The Homeowners
Protection Act states PMI must be dropped on any loan originated after July
29, 1999 IF it has a 78 percent loan-to-value ratio.
PARENT'S GIFTS & LOANS
Do I have to disclose a parent's
gift?
Having generous parents is nothing to hide. An estimated one-third of first-time
buyers purchase their home with a loan or a money gift from their parents.
Lenders will ask for a gift letter stating that no repayment of the "gift" is expected. In addition to the letter, a lender can ask for two or three months' worth of statements for the account where the down payment funds are located. If the money was recently placed into that account, the lender may ask where it came from and request verification of that source as well.
Resources:
* "The Homebuyer's Survival Guide," Kenneth W. Edwards, Dearborn Financial
Publishing, Chicago; 1994.
What is a gift letter?
If someone is willing to make a gift of funds in order for you to purchase
a home, lenders will ask for a gift letter stating that no repayment of the
"gift" is expected. The amount of the gift and the date funds were transferred
should be spelled out in the letter, along with the donor's name, address,
telephone number and relationship to the borrower.
In addition to the letter, a lender can ask for two or three months' worth of statements for the account where the down payment funds are located. If the money was recently placed into that account, the lender may ask where it came from and request verification of that source as well.
Gifts -- with the proper documentation -- can be from relatives, friends, an employer, church, municipality, or nonprofit organization. Lenders often have stricter restrictions on gifts from friends and relatives other than parents.
Also, if you put less than 20 percent down, some lenders may require that a portion of the down payment be your own cash, not a gift. If you want to use a gift as part of your down payment, check with individual lenders to learn the restrictions of specific private or government-insured mortgage programs.
LOW OR NO MONEY DOWN LOANS
Click here for information on the low or no money down loans.
MORTGAGE CREDIT CERTIFICATES
What is the Mortgage Credit Certificate
program?
The Mortgage Credit Certificate program allows first-time home buyers to take
advantage of a special federal income tax credit. This program allows buyers
credit in qualifying for the tax advantage they'll receive after they purchase
the home.
The amount of the credit is tied to a local formula that every city with an MCC program must follow. A MCC credit, which can total $2,000 or more, reduces the borrower's federal tax liability by an amount tied to how much one pays in annual mortgage interest. Both the borrower's income and the purchase price of the home must fall within established guidelines.
To see if your community has an MCC program, call your local housing or redevelopment agency. You also may inquire with your real estate broker or the local association of Realtors.
What are the rules for mortgage
credit certificates?
To qualify for a mortgage credit certificate, both your income and the purchase
price of the home must fall within established city guidelines. These guidelines
vary by city but generally only permit people who earn an average income or
slightly higher than average income. A limited number of cities have authorized
the MCC program. Contact your municipal housing department for more information
e
Are there tax credits for first-time
home buyers?
Many city and county governments offer Mortgage Credit Certificate programs,
which allow first-time home buyers to take advantage of a special federal
income tax write-off, which makes qualifying for a mortgage loan easier.
Requirements vary from program to program. People wanting to apply should contact their local housing or community development office.
Here is a list of four general requirements to keep in mind:
* Some credit may be claimed only on your owner-occupied principal residence.
* There are maximum income limits, which vary by locality and family size.
* You must be a first-time home buyer, which means you must not have had any kind of ownership interest in a principal residence during the past three years. This restriction may be waived, however, if you are buying property within certain target areas.
* Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
NEGATIVE AMORTIZATION
What is negative amortization?
Negative amortization occurs when the monthly payments on a loan are insufficient
to pay the interest accruing on the principal balance. The unpaid interest
is added to the remaining principal due.
When home prices are appreciating rapidly, negative amortization is less of a possibility than when prices are stable or dropping, particularly for the borrower who made a small cash down payment to begin with. The combination of negative amortization and depreciation in home prices can result in a loan balance that is higher than the market value of the home.
Adjustable rate mortgages with payment caps and negative amortization are usually re-amortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARM's have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
When is a negative-amortization
loan a good idea?
Experts don't agree on this question. Negative amortization is less likely
to occur in rapidly appreciating markets. In markets where prices are stable
or dropping, it is possible to end up with a loan balance that is higher than
the market value of your home.
Adjustable rate mortgages with payment caps and negative amortization are usually re-amortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative amortization.
Can I convert a negative-amortization
loan to a regular loan?
Loan terms vary and each agreement needs to be reviewed carefully. Talk to
your lender about specific situations.
Negative amortization occurs when monthly payments on a loan are not enough to pay the interest accruing on the principal balance. The unpaid interest is added to the principal due.
Adjustable rate mortgages with payment caps and negative amortization are usually reamortized at some point so that the remaining loan balance can be fully paid off during the term of the loan. This could necessitate a substantial increase in the monthly payment. Most ARMs have a limit on the amount of negative amortization allowed, usually 110 to 125 percent of the original loan amount. If the loan balance exceeds this amount, the borrower has to start paying off the excess.
Negative amortization can be avoided by paying the additional interest owed monthly. ARMs that don't have payment caps usually don't have negative amortization.
EQUITY SHARING
Is equity sharing a good idea?
Equity sharing is not as popular in a slowly appreciating real estate market
as in a rapidly appreciating one (when equity investors are easy to find).
Nevertheless, a form of equity sharing called tenants-in-common partnerships is becoming more popular, particularly in high-priced markets. First-time buyers are the most interested in TIC arrangements because it gives them a way to buy property collectively with an unrelated partner.
Loan underwriting standards are more complicated in TIC deals because lenders have more than one party's financial situation to assess. But many standard loan programs do apply.
What about splitting my mortgage
in two and paying bi-weekly?
Some people set on paying off their home loan early and reducing interest
charges opt for a biweekly mortgage. Monthly payments are divided in half,
payable every two weeks.
Because there are 52 weeks in a year, the program results in 26 half-payments, or the equivalent of 13 monthly payments per year instead of 12. Using the biweekly payment system, a homeowner with a $70,000, 30-year biweekly mortgage at 10 percent interest could save $60,000 in interest and pay off the balance in less than 21 years.
PREPAYMENT
What
are the benefits of pre-paying the mortgage?
By making additional
payments that go toward the principal balance, you can save thousands of dollars
and shave years off the length of your loan.
Principal payments over and above the minimum monthly amount required by the terms of the mortgage constitute partial prepayment of a mortgage. Each mortgage will have terms describing how and when prepayment may occur. Refer to the note to see if there is any penalty incurred for prepayment.
The total savings potential also depends on how long you want to stay in the house. Borrowers who plan to move in the near future should not expect to realize as significant a savings as people who pay ahead of schedule until they own the home free and clear.
Check with your lender, who should be able to provide specific answers as to how such a prepayment plan will shorten the life of the loan and what kind of interest savings can be expected.
What can I afford?
Know what you can afford is the first rule of home buying, and that depends
on how much income and how much debt you have. In general, lenders don't want
borrowers to spend more than 28 percent of their gross income per month on
a mortgage payment or more than 36 percent on debts.
It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan.
The price you can afford to pay for a home will depend on six factors:
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI.
This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.
What do I do if I get turned
down for a loan?
Increasing numbers of loan applicants are finding ways to buy their own home
despite past credit problems, a lack of a credit history or debt-to-income
ratios that fall outside of traditionally acceptable ranges. Ask the lender
for a full explanation, then appeal the decision in writing.
PMI - PRIVATE MORTGAGE
Click here for information on PMI.
REFINANCING
When is the best time to refinance?
It depends on how long you plan to hold on to your house and if you have to
pay anything to refinance. In addition, it also depends on how far along you
are in paying off your current mortgage.
If you are going to be selling your house shortly, you probably will not recoup any costs you incur to refinance your mortgage. If you are more than halfway through paying your current mortgage, you probably will gain little by refinancing. However, if you are going to own your home for at least five years, that's probably long enough to recoup any refinancing costs you incur and to realize real savings on lowering your monthly payment. If it is going to cost you nothing to refinance, you can gain even more.
Many lenders will allow you to roll the costs of the refinancing into the new note and still reduce the amount of the monthly payment. Also, there are no-cost refinancing deals available. In any case, it pays to consult your lender or financial advisor, or run the numbers yourself, before you refinance.
Where do I get information on
refinancing?
For information on refinancing, the following booklet may be helpful:
* "A Consumer's Guide to Mortgage Re-financings;" Federal Reserve Bank of
San Francisco, Public Information Department, P.O. Box7702, San Francisco,
CA 94120; call (415) 974-2163 to order.
Can I refinance after bankruptcy?
Refinancing may be prudent but could be difficult after a bankruptcy. If you're
considering bankruptcy, you may want to go to your current lender first and
explain the situation. If you have been current on your payments, the lender
may be accommodating and refinance your loan, easing your financial situation.
REVERSE MORTGAGE LOANS
What is a reverse mortgage loan?
A reverse mortgage is a
special type of loan available only to older homeowners with full or nearly
full equity in their homes. Such owners can borrow against the equity they
have built up over the years, but no repayment is necessary until the borrower
sells the property or moves elsewhere. If the borrower dies before the property
is sold, the estate repays the loan (plus any interest that has accrued.
These loans have become increasingly popular. If you believe you qualify for such a loan, be sure to have the document reviewed by an attorney or financial advisor.
SELLER FINANCING
What is seller financing?
Seller financing is when a seller helps to finance a real estate transaction
by taking back a second note or even financing the entire purchase if the
seller owns the home free and clear. Usually sellers do this when a buyer
has difficulty qualifying for a conventional loan or meeting the purchase
price.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. These special circumstances must be acceptable to the lender who makes the first mortgage on the property.
The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller. If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. Fear of default makes many sellers reluctant to take back a second. But seller financing can bring a higher price plus complete the sale sooner in some situations. For more information, contact the Internal Revenue Service for a copy of its Publication 537, "Installment Sales." Order by calling (800) TAX-FORM.
What are the benefits of seller
financing?
Seller financing offers tax breaks for sellers and alternative financing for
buyers who can't qualify for conventional loans.
If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?
You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. It is wise to consult a lawyer when putting together this kind of transaction.
How are the rates set for seller
financing?
The interest rate on an owner-carried loan is negotiable. Ask your agent to
check with a lender or mortgage broker to determine the current rate on institutional
first (or second) loans.
Seller financing typically costs less than conventional financing because sellers don't charge loan fees (points). Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money was invested elsewhere.
Do states offer help to home
buyers?
Most states have a housing finance agency, usually located in the state capital,
which offers help for first-time home-buyers.
INFORMATION RESOURCES
Click here for information resources pertaining to loans.
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