Financing information for the Buyer
Get Preapproved First!
Shopping for a house before shopping
for a mortgage-
When Brian Peart, president of Atlanta-based
Nexus Financial, meets prospective mortgage clients for the first time,
he doesn't discuss rates and closing costs. Not at the beginning, anyway.
He asks how much they're comfortable paying for a house each month so
they can afford to save some money and pay their other expenses.
After his clients arrive at a realistic
monthly payment, Peart can help them figure out the price range when
they go house-hunting. The danger with doing it backward -- house-hunting,
then shopping for a mortgage -- is that "people find the house
of their dreams and find out they can't afford it. And after that they
can never be satisfied," Peart says.
Get preapproved
for a mortgage instead of merely getting prequalified.
The difference? When you are preapproved, the lender scrutinizes your
credit history and determines whether you are an excellent, good, fair
or poor credit risk -- and what kind of interest rate you will qualify
for. Riskier borrowers pay higher interest rates and, consequently,
can afford less house.
If the credit report contains inaccuracies,
it's best to correct them early, and that's another reason to shop for
the mortgage first.
Diving into the unknown for the loan-
If you don't know anything about
the mortgage lender's or broker's reputation, how can you feel confident
that you're being treated fairly? If you don't shop around, how can
you know that you got a good deal?
"They should get referrals from three people they trust and shop
those three and they will get a good deal," Peart recommends.
That's a point worth emphasizing.
A lot of people choose their lender through a real estate agent. That's
fine in a lot of cases, but talk to at least one lender who isn't beholden
to the real estate agent.
Ask at least three homeowners whom
you respect -- friends, relatives, co-workers -- for referrals. "You've
got three names," Peart says. "You've got three good people
who have been referred to you, and you have creamed the crop. They'll
shoot you straight."
Trust but verify. Ask a lot of questions and choose the lender or broker
who offers a good deal and who makes you feel confident that you're
making the right choice.
Borrowing too much-
The most common mistake that first-time
home buyers make is "not having a clear sense of what their true
budget needs are going to be for the maintenance of their home, their
household living, and seeing how much it is going to add up to,"
says Judy Lawrence, author of "The Budget Kit, 4th Edition"
and a budget coach who runs the Moneytracker Web site.
As a consequence of not planning
their budgets carefully, these people end up buying houses that they
can't afford, Lawrence says. They can make the monthly payments covering
principal, interest, taxes and insurance, but perhaps they didn't count
on the taxes and insurance to cost so much. After making the mortgage
payment they don't have enough money left over to enjoy themselves,
save for retirement and the kids' college, buy appliances and furniture,
and pay for the inevitable repairs, maintenance and upgrades that homeownership
brings.
"When I sit at the kitchen table with people, we have that category
about home maintenance and yard maintenance," Lawrence says. She
asks about her clients' plans for the yard and the pool: Do they want
to buy new plants and trees? Hire a landscaper? Buy a lawn mower? Clean
the pool themselves or pay someone to do it?
Then she moves to periodic maintenance
-- things such as annual carpet cleaning, window cleaning, a furnace
checkup, and so on. "By the time you add all that up and divide
that by 12 to see how much you need to save every month, people say,
'My gosh, we need to make adjustments here,'" Lawrence says.
Borrowing too little-
You haven't borrowed enough if you
spent your available cash on the down payment and closing costs, leaving
little if any money to pay for things that new homeowners need: trash
cans, floor lamps, kitchen tables, new weather-stripping for old doors,
snow blowers, electric drills, pruning shears -- the list seems endless,
especially for first-time home buyers.
"Every homeowner needs to have
three to four months' of emergency living expenses set aside,"
says Susan Hunt, housing counseling manager for Consumer Credit Counseling
Service in Atlanta. "Many people, when they buy, will scrape together
every dime to make a down payment and furnish the house. They have no
reserves to draw on."
The way to prevent this problem
is to save up more before buying a house, buy a cheaper house, or get
a Federal Housing Administration-insured loan and down-payment assistance
from a nonprofit agency.
She estimates that 5 percent of
the clients who come in for delinquency counseling have been in their
homes less than six months. They lose jobs or charge up their credit
cards and they quickly fall too far into debt.
Borrowing too much and borrowing
too little are both sides of the same coin: Buying a house that's too
expensive. That error stems from making the mistake of hunting for a
house before shopping for a mortgage.
Both Hunt and Lawrence recommend
getting budget advice before buying a house. Lawrence, of course, recommends
her book and Web site; Hunt recommends seeing a housing counselor from
an agency such as hers.
Not asking the right questions-
"The first warning sign that
I can see is if you don't understand the type of mortgage the salesperson
is pushing on you," Peart says.
About one-third of borrowers are
getting adjustable-rate mortgages. A big chunk of those consists of
interest-only loans. Those mortgages are right for some people and wrong
for others. You can't know what's best for you if you don't comprehend
the details.
"If you don't understand the way your mortgage payment can fluctuate
and change, or the index and margin, it's not the type of mortgage for
you," Peart says. "Don't just ask what my payment is right
now. Ask does it change, and what can it change to? What is the worst-case
scenario? Because, gosh, man, the rule is that the worst-case scenario
always happens."
Not really. But in the same way
that a responsible gun owner treats all firearms as if they are loaded,
a responsible homeowner treats an adjustable-rate mortgage as if the
rate will rise to its maximum someday. If you know you can handle the
maximum possible payment, fine. But if you can't, think twice and then
think again before getting such a loan.
People with flawed credit, with
credit scores below 620 and especially under 580, need to pay extra
attention to the loan terms. People with excellent credit histories
get A loans, those with good credit get A-minus loans, and people with
credit problems get B and C loans, with higher rates and more onerous
terms. Some loans have stricter terms than others.
Many B and C loans have prepayment
penalties. Understand these penalties thoroughly. If your goal is to
fix up your credit over the next two years, then refinance into an A
loan at a lower rate, you want to avoid a mortgage with a five-year
prepayment penalty. Maybe you can find one without a prepayment penalty,
or only a modest one. This is where it pays to get
referrals to an honest lender, and where it pays to be honest
with the lender. Explain what your plan is, and ask what you need to
do to realize your goals and how much it will cost.
"A mortgage is a tool,"
Peart says. "It's what allows you to buy a home. There's nothing
wrong with a mortgage in itself. It's how you look at it and how you
use it, rather than letting it use you."
Just remember, some Lenders do not
have "your best interest" in mind. Some have only their $interest$
in mind! Do not be afraid to ask someone for
a referral to a trusted Lender!
