Home Mortgages 101: A First-Time Buyers Guide to the Loan Process of 2012
Happy Martin Luther King, Jr. Day!
We’ve covered, rather exhaustively, the difficulties stricter lending practices pose to buyers seeking home loans, But banks are under more pressure now to streamline the process, as the government is well aware part of the country’s economic recovery rests in the recovery of real estate: in other words, the country needs homebuyers. So, if today’s more affordable home prices and the record low interest rate has you thinking you’re ready to buy, you shouldn’t be discouraged or intimidating by seeking a mortgage.
Instead, get educated, with ZipRealty’s Home Mortgages 101, an overview tailored for the 2012 economy.
A) Your Credit
1.Know the Score
You already know your credit score can make or break your chances of getting a good loan. But do you know your credit score, from all three of America’s credit-rating agencies? You can obtain this information free once a year (and we mean really free, not that “free” that suddenly includes a service charge to get the reports. The Federal trade Commission is perhaps the best source for how to do this. From that website:
To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. The form is on the back of this brochure; or you can print it from ftc.gov/credit.
2.Improve that Score
Since banks today are looking for near perfect credit, you may find it worth your while to improve your score before you apply for a loan. You can in fact build credit, and for ways to do that, check out this free and helpful about.com article.
B) What Can You Afford?
1. What Do You Pay out Every Month Already?
If you have reviewed your finances as we suggested last week in our hidden and otherwise oft overlooked costs of buying a home, you won’t need a broker to tell you how much you can afford to borrow. Be sure to sit down and run through the mortgage calculators ZipRealty provides in our Learning Center before you go to the bank.
An additional figure you want to understand if your debt to income ratio. In other words, know how much you bring in and how much you owe: the payments you’re already required to make will count against what a bank will offer you.
C) What Kind of Loan Best Suits You?
1. Loans for First-Time Buyers
These programs often exist in cities. If you’re a first-timer, you should spend some time researching the city government pages for first-time buyer programs available to you.
2. Types of Loans
Understand the Expense and Cost Savings of 15 year, 30 year, and Option ARM mortgages. The latter stands for Adjustable Rate Mortgages, and these are the riskiest of the bunch, and often the hardest to qualify for these days, though they can save you money if you use them correctly. They might not be the easiest or safest for a first-time buyer, but take a look at this information explaining the ARMhere and decide for yourself.
Again, our Learning Center is a great place to start figuring out which loan you want: We cover the differences between loan packages and allow you to run your own calculations.
3. Should you buy down interest points at the loan’s inception?
Today’s interest rates may render this consideration less popular than in the past, but you should run the numbers: how much can you save if you shave off some interest in the beginning with a one-time payment? We’ve got the calculator you need.
D) Your Down Payment
1. You need 20% down: Myth or Reality?
Most banks want 20% of the agreed sale price of the home you want to buy, paid in a one-time payment up front. But if you don’t have that much saved, you may be able to buy a home through the Federal Housing Administration’s loan programs. Quicken Loans has a good overview of how these mortgages work, but you can get all the info you need from the Feds themselves at the HUD website. Additionally, if you find a knowledgeable local Realtor, that agent can help guide you toward FHA loan approved homes, even some that qualify for remodeling loans as well in cases of bank owned homes that need repairs. Best of all, you can qualify for these loans with as little as 3.5% down.
E) Special Advice to the Self-Employed
1. What You’ll Need
Cory Martilla, corporate sales manager of Supreme Lending in Dallas, says that self-employed applicants have a harder time getting loans than traditionally employed applicants."First, they need to prove their income with tax returns rather than using a 'stated income' loan. Second, the recession has caused declining income for many self-employed people. Even if their income has stabilized, the loan will be based on the average of two years of tax returns, which could show reduced income……"A better credit score and lower debt-to-income ratios will not necessarily help people who are self-employed, because the most important factor is their ability to prove they can repay the loan.”
2. How to Make Your Case
You may be applying with a partner, but even here, both applicants must prove income. Fox Business advises that “Those who report a loss on their taxes may be better off applying only with the co-applicant's income. For example, if one borrower earns $100,000 and the other has declared a loss of $10,000, their combined income is $90,000.”
All in all, the loan process certainly qualifies as dense study material, but every hour you put in is an hour you save in once you decide to apply. Think of it this way: if you do your homework, you eliminate the stress of the unknown, the mystery that shrouds mortgages and confounds the first-time buyer; plus, you improve your chances at getting a great loan. . And you’re not alone: Your Realtor can guide you too, as most local Zip agents maintain relationships with lenders in their communities, and certainly know the ins and outs of area specific loan programs. This insight can really help cut through some of the red tape and get you graduated from student of Loans 101 to actual homeowner!