Tips for First Time Home Buyers

 

 

Tips for First Time Home Buyers

So you’re thinking about buying your first piece of real estate? Congratulations!
But before you even begin to comb through real estate listings, you need to make sure you can actually qualify for a mortgage. And the best way to do so is by getting pre-qualified/pre-approved.
That said, the following are some useful “tips for first time home buyers” and seasoned buyers alike to ensure you qualify for the best mortgage possible:

Check Your Credit!

The first thing any potential homeowner should do is obtain a free credit report, either from AnnualCreditReport.com or via a free trial website.
The latter actually provides a credit score so you can see where you stand (what credit score do I need to get a mortgage?). The first link only provides your credit history, which is useful, but you shouldn’t go into a mortgage without knowing your credit scores too.
Once you’ve got your credit report at your fingertips, analyze it and determine what your monthly expenditures are. You will see a monthly payment next to each liability on the credit report. Add up all those payments and jot it down somewhere. These are your total monthly liabilities and will be important when determining how much house you can afford.
Also scan the credit report for derogatory accounts and clean them up as best you can. If you’ve got delinquent accounts, resolve them. If you see collections/charge-offs, call the associated creditors and ask to get them removed (or dispute them online). If everything looks good, you can move on. If not, you may want to work on your credit before applying for a mortgage.
A credit score of 620 or higher is probably the minimum you’ll need before beginning your property search. Just know that the lower your credit score, the higher your mortgage rate, assuming you are able to qualify at all.
*One important note: Do NOT open any new credit accounts or make any large purchases using your credit cards within a few months before applying for a mortgage. This includes buying that plasma screen on a Best Buy card for your new crib. It can drive your credit score down needlessly which will result in a much higher interest-rate.

See What You Can Really Afford

Now that you’ve got your credit in order, it’s time to figure out how much you can afford. Most banks and lenders allow borrowers to have a debt-to-income ratio up to 45%, though that number has probably dropped post-mortgage crisis. Read more about debt-to-income ratios.
By taking your total liabilities and adding it to a monthly housing payment, and dividing that number by your monthly gross income you’ll come up with your DTI ratio.
Let’s look at an example:
$10,000 monthly gross income
$1,500 total monthly liabilities
We know from the above example that your total monthly payments can’t exceed $4,500, or 45% DTI based on your $10,000 gross monthly income.
So if you already have $1,500 in total monthly liabilities, you can add a housing payment of $3,000 a month. That doesn’t leave much room in this market.
Let’s look at the same example with a housing payment, including taxes and insurance, based on California rates:
$550,000 purchase price
$440,000 loan amount
6.25% interest rate

Bankrate Daily Mortgage Rates

Mortgage Payment:
$2291.66 monthly interest-only payment
$572.92 monthly taxes
$128.33 monthly insurance
$2,992.91 total monthly housing cost
In the above scenario, a prospective homeowner making $10,000 in gross income a month can barely afford a $440,000 loan making just the interest-only payment. What does this tell us?
It tells us that there are a ton of homeowners out there living paycheck to paycheck and overstating income to qualify for homes they simply can’t afford. At least not in the eyes of banks and lenders that require borrowers to keep their DTI below 45%.
So now you’ve got an idea of what you’ll be able to afford. There are a number of mortgage calculators out there that will give you a better idea of what you can qualify for.

Document Rental History and Assets

Now that you’ve got your credit profile in check and you know what you can afford, you’ll need to make sure you’ve got a verifiable housing history and seasoned assets.
Most lenders ask that you verify your last 12 months housing history. You can do this with cancelled checks or a VOR (Verification of Rent) from your landlord. This is important to determine the payment shock effect on the borrower.
Liquid assets are always helpful when applying for a loan, and are almost always a necessity for a first-time homebuyer. Make sure you have an account with at least two months PITI (Principal, interest, taxes and insurance) available.
Also make sure the money in said account has been there for at least two consecutive months to ensure that it is seasoned. Banks and mortgage lenders don’t give much weight to unseasoned assets, as any friend, relative, or even a mortgage broker or loan officer can easily dump assets into your account before you apply for a mortgage to boost your net worth.
Now that you’re prepared, it’s time to be vigilant and proactive. Avoid predatory lenders and do your interest rate homework. Check out a rate sheet from the bank or lender that you’re being quoted from. Ask what the interest rate adjustments are. Ask if the loan carries a prepayment penalty and for how long? Get all the facts before you sign anything. And once you like it, lock it!
With all this preparation behind you, the loan flow will be a comfortable process with few surprises. It might not be perfect, but if you follow these rules you will definitely save money and reduce stress!

Let’s review the tips for first time home buyers in a condensed format:

• Order a free credit report and view your credit scores
• Review your credit and clear up any derogatory accounts
• Do NOT open any new credit accounts or make any large purchases
• Calculate your total monthly liabilities
• Figure out your DTI and what you can afford
• Make sure you have a 12-month verifiable housing history
• Make sure you have a seasoned asset account with at least 2 months PITI
• Do your interest rate homework
• Get pre-approved

How to Qualify for a Mortgage?

 

How to Get a Mortgage

Mortgage Q&A: “How to get a mortgage?”

If you already know what a mortgage is, you may be wondering how to obtain one. In short, a mortgage is just another way of saying a home loan.
Mortgages serve different purposes – some are used for the purchase of a home and others are used to refinance an existing mortgage. You may even open a second mortgage behind an existing mortgage to tap into the equity of your home (home equity line of credit).

Can You Afford a Mortgage?

Either way, the first step to getting a mortgage is figuring out how much you can afford, or if you even qualify.

The best way to accomplish this is by figuring out your debt to income ratio. At the same time, you’ll want to organize all your assets and take a hard look at your credit score to make sure it’s in good shape.


Once you’ve done all your homework, you can start looking for a a bank, mortgage lender, credit union, or mortgage broker to work with.
They can get you pre-qualified to help determine how much you can borrow and at what interest rate, at least a ballpark. If the mortgage is for a purchase, you’ll also need to get pre-approved to show the home seller (and their real estate agent) that you’re a serious candidate (pre-qualification vs pre-approval). They surely won’t want to waste their time with ineligible borrowers.

The Mortgage Loan Process

Once you’re actually ready to apply for a loan, the bank or mortgage broker will pull your credit and ask you to provide documentation for the loan.
In return, they are required to provide you with a Good Faith Estimate and Truth in Lending disclosure within three days of loan application. This is essentially a loan summary and an estimate of the charges you’ll incur upon settlement of your loan.

Bankrate Daily Mortgage Rates

After everything is submitted, it will take anywhere from a few days to a couple weeks to get a decision on your loan. Generally it doesn’t take too long, but after the mortgage crisis, things got a little backed up.
Assuming you get approved, you’ll be issued a loan approval with a list of conditions that must be met before loan documents are released. Once you satisfy these and receive your loan documents, they must be signed and a list of funding conditions must also be met. Once they are satisfied, your mortgage will fund. Yes, it sounds like a lot, and it is, but mortgages are no joke folks.
If for some reason your loan application is declined, you can make an appeal with the bank that denied you or apply elsewhere. In some cases, you may need to restructure the loan or simply wait until your credit/asset/employment outlook improves. Not everyone is eligible for a mortgage…

Where to Get Your Mortgage

I’d guess that most prospective and current homeowners seeking a mortgage would go to their bank or credit union first. After all, if you keep your money with them, there must be a certain level of trust and some kind of relationship.
That relationship could equate to savings and special deals on a mortgage, and perhaps a streamlined process. If they already have information about you, they may be able to assess your borrowing profile more easily, and get you an answer sooner.
However, a bank or credit union is only as good as the loan programs it offers. In other words, you’re stuck with whatever they’re selling. This might mean you can only get a fixed-rate mortgage or the loan-to-value may be capped at 80 percent.
If you want more options, consider a mortgage broker. They work as middlemen between banks and borrowers, and can offer loan programs from an infinite number of lenders. For example, a mortgage broker may be able to get you mortgage rate quotes from Bank of America, Wells Fargo, Chase, and many others. Then you can compare them all side by side.
To ensure you don’t miss out on anything, you can speak with both your local bank/credit union and a mortgage broker (or two). And grab a quote or two online while you’re at it. That way you can compare mortgage rates, programs, closing costs, and more to determine which is best for you.

Credit Matters Period.

 

 

Credit Score Still the Main Concern

If you’ve got a 620 Fico score, you’ve got bad credit. There’s really no way around it. It’s not awful credit, but it’s about 100 points shy of the American average, and not far from being abysmal.
Still, the FHA may still consider you for a mortgage if a subprime lender won’t.
In fact, many banks cited borrowers having higher costs and/or greater difficulty in obtaining mortgage insurance coverage as a top factor contributing to the reduced appetite for such loans.
But even with a 20% down payment, bankers still indicated that they were much less likely to extend home loans to borrowers with 620 Fico scores.
So it appears as if a prospective borrower’s Fico score is more important to bankers than their down payment.
By the way, the higher risk of putbacks of delinquent mortgages by the GSEs was listed as the most important factor in not wanting to originate such loans.
Another common issue was the less favorable or more uncertain outlook for home prices and the economy.
If a homeowner puts next to nothing down and their home’s value abruptly slips, they could fall into an underwater position. And that would increase the likelihood of default.
Additionally, bankers noted that the current spread of mortgage rates over the cost of funds has been insufficient to compensate for risk, which may explain why rates aren’t as low as they technically could be.

HARP 2.0 Happening

Finally, roughly a third of bankers said they were actively soliciting HARP 2.0 applications, and were satisfying most demand for the negative equity loans.
Most expect about 60 percent or more of the loans to get approved and eventually fund.
However, half of the respondents said they had very little program participation.
And roadblocks are a plenty. There are putback risks, mortgage insurance transfer issues, and difficulty in identifying and subordinating existing second mortgages.
But it’s good to see that the program is actually off the ground and expected to help some people.

FHA Rules

There’s been a lot of hubbub lately about a new rule that was supposed to go into effect on April 1.
I say “supposed to” because the FHA has since rescinded the rule, at least until July 1, and is now asking for public comment to get their head around it all.
My guess is that it will be overturned, and things will go back to how they are now, but only time will tell.
The Rule in Question
In short, the new underwriting rule requires prospective FHA loan holders to pay off any collection or combination of collections that totals more than $1,000.
So if you happened to have an erroneous medical collection, or were currently disputing a credit card collection, you’d have to settle it before receiving your FHA loan.
Even if the charge happened to be bogus, if you wanted an FHA loan, you’d either have to pay the collection off in full or setup a payment plan with the collection agency (and make three verifiable payments).
Those payments would also factor into a borrower’s debt-to-income ratio, which could limit or jeopardize the mortgage.
Put simply, you’d have to make a commitment to pay off the debt in order to qualify for the mortgage.
In the past (and I suppose currently), the FHA did not require that collection accounts be paid off as a condition of mortgage approval (unless it was a court-ordered judgment).
Sure, underwriters would still need to take a look to see what it was and how it might impact the issuance of a mortgage, but it wouldn’t be an outright roadblock.
Why the New Rule is a Problem
The new rule is problematic for a couple reasons. I suppose the biggest issue is that FHA loans were originally intended for lower income borrowers with little money set aside for down payment.
So those with sizable collection accounts, and presumably little cash on hand, would probably have difficulty paying off the debts while having enough money leftover for down payment, closing costs and future mortgage payments.
Along with that, the rule essentially forces would-be borrowers to pay off the collection account(s), even if they aren’t legit. Or if they are currently in dispute.
There are plenty of erroneous collections out there, so forcing borrowers to settle them isn’t necessarily fair.
*The FHA excludes disputed accounts or collections resulting from identity theft or unauthorized use if appropriate documentation is provided.
All that said, this is a good lesson for first-time homebuyers and current homeowners alike to stay on top of their credit.
That means ordering a credit report several months before applying for a mortgage to see where you stand, and also to ensure that nothing is reporting in error (or legitimately) that could hold you back from obtaining a mortgage.

Is Streamlining Your Refinance the Best Deal?

While a streamline refinance may be your easiest option, it may not be the best choice for you.
Whenever you’re in the market for a refinance, it’d be wise to take the time to shop around.
That means looking beyond your current lender and/or loan type to see if there’s something better out there.
You may find a lower mortgage rate with a new lender that will justify a more lengthy qualification process.
Sure, it can be a pain to refinance your mortgage, but the savings afforded each month and over your lifetime should definitely be worth your time.

Income and Mortgage

When determining how much house you can afford, you need to take into account your entire housing payment, not just the mortgage payment.
And certainly not the interest-only mortgage payment, which used to be the norm before the mortgage crisis reared its ugly head.
For example, you may find that you qualify for a mortgage at a rate of 4.25% on a 30-year fixed.
On a $200,000 loan amount, the monthly mortgage payment would only be $983.88. Pretty cheap, right?
However, you also need to factor in property taxes and homeowners insurance, not to mention maintenance costs and other intangibles.
And if it’s a condo, you’ll also need to factor in the HOA, which can be pretty pricey. In fact, in Los Angeles, many condos have monthly HOA dues that exceed $400.
So let’s assume you buy a condo that sells for $250,000, and put 20% down. As mentioned, your mortgage payment would fall below $1,000, which could be lower than the rents in the area.
But once we add the monthly HOA dues of say $400, and another $350 for taxes, you’d be looking at a monthly housing expense of roughly $1,750.
Assuming you put even less than 20% down, you may also be subject to private mortgage insurance, which could further increase your housing costs.
Wow. What happened to that $1,000 a month mortgage payment? It nearly doubled in the blink of an eye.
Consider All Other Expenses
Aside from your entire housing payment, you also need to consider all your other monthly obligations, such as car lease payments, credit card payments, health insurance, utilities, etc., etc.
All of these items will be a factor in determining your debt-to-income ratio, which banks and mortgage lenders rely upon to determine how much you can borrow. Yes, they have a say in it also.
The DTI ratio is broken down into a front-end ratio and a back-end ratio.
You may see limits of 30/45, meaning your monthly housing payment cannot exceed 30 percent of your gross monthly income, and your housing payment plus all other monthly obligations cannot exceed 45 percent of gross income.
So even if you think you can afford more, the lender will limit you based on their own risk appetite. Of course, their limits are usually pretty high, so if you’re exceeding them, you may be headed for trouble.
The Mortgage vs. Income Rule of Thumb
I hate rules of thumb. Why? Because we aren’t all the same, so one single rule won’t work for everyone.
And it’s just lazy. Instead of actually running the numbers, you’re relying on a rule that someone came up with to sum it all up, which could be completely wrong.
Some say to buy a home that is worth 2.5 times your annual gross salary. So if you make $100,000 a year, you’ll be able to buy that $250,000 condo.
But what if the HOA is $500 a month. Or just $200 a month? That $300 difference is certainly significant. Or what if it’s a house without HOA dues?
And what if you only put down 3.5% down via an FHA loan, as opposed to coming in with 20% down and avoiding mortgage insurance entirely?
As you can see, housing payments can fluctuate wildly, so you can’t just rely on a blanket rule.
Speak with your loan officer or mortgage broker to get a good idea of what you can afford when they get you pre-approved. And make sure you’re comfortable with the payments.
At the end of the day, everyone is different, and you may only want a house that is “X” times your salary, while another person may be comfortable with a housing payment double that.

What I plan to STOP

The Department of Justice filed a lending discrimination case against New York-based GFI Mortgage Bankers, claiming the lender violated fair lending laws by charging minority borrowers higher interest rates on mortgages when compared to other borrowers with similar credit profiles.

The U.S. Attorney's Office for the Southern District of New York accused the firm of charging African-American and Hispanic borrowers higher interest rates, violating the Fair Housing Act and Equal Credit Opportunity Act.

The DOJ asserted that white borrowers in similarly-situated situations obtained different mortgage rates. GFI Mortgage Bankers could not be immediately reached for comment early Tuesday morning.

U.S. Attorneys claim from 2005 to 2009, GFI charged minority borrowers excessive rates, with the average African-American borrower paying an average of $7,500 more in the first four years when compared to similarly-situated white borrowers. For Hispanic borrowers, the difference was approximately $5,600 or more.

"The disparities, based on race or national origin, are statistically significant, and are unrelated to credit risk or loan characteristic," the DOJ claimed in a press release.

GFI Mortgage Bankers did not immediately respond to a request for comment.