Getting a loan to buy your home or rental

Most first time homebuyers want to look at homes before they have the money to do so and before they even think about the kind of money they need. Making matters worse, they often shop for a mortgage loan only after they've fallen in love with a particular house that they absolutely must have. This is a huge mistake. You need to get your money arranged beforehand – before you even start looking for a mortgage.

You don’t want to be in love with a house before you have the money to get it. You will be heartbroken at worst and at best, frustrated as you watch someone else come in and swoop in on your dream home or home rental while you try to figure out if you are getting a good deal or not, when it comes to finances.

Therefore, the lesson is to educate yourself if you don’t have the first clue about what a mortgage loan is and how it affects your ability to buy the dream home or paradise vacation rental that you have been thinking about for some time now. You can start by taking the first step toward educating yourself now. Read on and learn the ropes when it comes to getting a home loan.

Getting Pre-Qualified for a Mortgage

Getting pre-qualified for a mortgage helps give you an idea of how much you might qualify to borrow but not necessarily the amount you can handle. However, we will get to that in due time. For now, you have keep in mind, since you have not actually applied for a loan, and the lender only has your word on your credit, income, assets and liabilities, a home loan or mortgage amount is not guaranteed and does not really mean squat. With a pre-qualification, no information has been verified – it is like a good faith estimate. If you receive a letter from the lender, it may only state that you are likely to be approved for a mortgage. Nonetheless, this is nice to have so that any potential sellers can see that even though you don’t have the money lined up at the moment, that will likely change on quick notice.

Getting a Pre-Approved Mortgage

A pre-approval goes one-step further than a pre-qualification. When being pre-approved, you may receive a letter stating how much you qualify to borrow. Your lender will pull your credit report and find out what liabilities you have and review your credit history. However, not everything, like your income and assets is verified at this point.

Pre-approvals don't always guarantee financing since the buyer's information has not been verified at this point. We heard it expressed this way on the popular finance site, “think of it this way: a mortgage pre-approval is like getting a pre-approval letter in the mail for a credit card. You can't go to the store and buy anything with that letter—you have to have the approved credit card. Having a firm mortgage approval is like having the actual credit card.” We agree with that sentiment. If you are pre-approved, you can talk and when you talk, most people will now listen.

Still, things can fall apart. You see, sometimes not all buyers are completely honest or accurate when they give their financial information to a lender. They may mislead them. It is funny how many people seem to suffer amnesias about bad debts that simply won’t go away or bills that have been unpaid though they are well aware of the negative financial impact they may have on the borrower.

It's not unusual for some buyers to inflate their income or savings. Issues like these have caused many real estate agents and home sellers to distrust pre-approval letters but generally speaking, pre-approval is a good thing. It means you are serious and have begun the lending process.

Can you even afford a house right now?

Assuming you can afford a house, how much can you afford? Can you afford the amount the bank is willing to lend you? Does that mean any amount you qualify for is a house you can afford?

These are important questions that many people don't research, focusing on what their mortgage payments will be, ignoring other monthly payments and costs that come with owning a home or home rental. You need to see the big picture such as costs associated with owning a property, homeowner’s association dues and even yearly maintenance. After all, if you don’t cut the lawn, somebody will have to.

Failure to see the big picture puts many people down the wrong path to bad debt or taking own more than they can chew. For example, your monthly expenditures will be more than just the home loan, there will also be homeowners insurance, flood insurance, mortgage insurance, utilities, garbage collection, cable or satellite TV, groceries, unexpected auto repairs, lunch money, and many other obligations – heck, maybe even your gambling losses. They must all be accounted for in your family or personal budget. What's that? You don't have one. You are not crazy are you?

The point is to not necessarily assume that just because the bank will loan you the money, you can afford to pay it back. Most loan originators are in business to move as much cash as possible – that is how they make money. With low interest rates that hit the real estate scene in the early 00’s, many lender’s relaxed the standards of exactly how much debt borrowers can afford to take own. This, partly, is why we are now undergoing a market correction so to speak, as foreclosures are cropping up in record numbers. You don’t want to be in that statistically category. So, be realistic when it comes to the money you are borrowing. Yes, you may not be able to afford that 4-bedroom colonial in the post neighborhood, but that the 3-bedroom that needs a few things isn’t so bad either if you really think about it. In addition, you should – think about it.

What is a Mortgage? However, right now, we need to take some time to educate you on what a mortgage is and how it works. A mortgage represents a loan or lien on a property/house that has to be paid over a specified period. Think of it as your personal guarantee that you'll repay the money you've borrowed to buy your home. Mortgages come in many different shapes and sizes, each with its own advantages and disadvantages. Make sure you select the mortgage that is right for you, your plans, and your financial picture.

How a Mortgage Works

• There are two parties to a mortgage. You are the mortgagor, or borrower, and the lender is the mortgagee. That is it. That is not too complicated is it?
• A mortgage document creates a lien on the property, which serves as a lender's security for the debt.
• The lien is recorded in public records, probably at your county courthouse.
• Ownership cannot be transferred to someone else until you pay the debt to release the lien.
• Even if your loan is secured by a mortgage, you still have full title to the property. No one else has rights of ownership.
• A mortgage gives the lender the right to sell the secured property to recover funds if you do not pay the debt. The sales process is called foreclosure.
• When a mortgage is used for security, foreclosure must usually progress through the court system. That type of foreclosure is called a judicial foreclosure.

Deed of Trust

• Over half of the states in the United States use mortgages as “security instruments.” The other states use a “deed of trust,” which serves the same purpose, but with a few important yet critical differences:
• A deed of trust is a special kind of deed that is recorded in public records, where it tells everyone that there is a lien on your property.
• A deed of trust involves three parties. You are the trustor, the lender is the beneficiary, and a third party is the trustee--someone who holds temporary (but not full) title until the lien is paid.
• The trustee should be a neutral third party, someone who won't favor either you or the lender if problems crop up. In some states, attorneys act as trustees, and in others, title insurance companies often provide the service.
• The trustee cannot take your property for no reason--documents are in place to protect against that.
• The deed of trust is cancelled when the debt is paid.

The differences between a mortgage and a deed of trust affect homebuyers only when foreclosure is an issue, because the trustee has the power to sell the house if your loan becomes delinquent and we know you will avoid that at all costs, if you did your homework and take our previous advice to heart. The lender must give the trustee proof of the delinquency and ask the trustee to initiate foreclosure proceedings.

The trustee must progress as allowed by law and as dictated in your deed of trust, but the process bypasses the court system. This makes it a much quicker and inexpensive way for the lender to foreclose.

Remember, you, as the borrower, cannot choose the way your loan is secured, that's determined by where you live. However, it's important to have an understanding of the type of lien that secures the debt for your home. Knowledge is always power when it comes to financing your home or home rental.

Start planning 6 months before you apply for a home mortgage Generally speaking, you should start planning about 6-months before you expect to buy your home. In this time, you need this time to clean up your credit report, and get funds that are contributed by family into your account long before the lenders go looking for it.

Try to think ahead a little. For instance, if you plan to buy in June and July like many families, you need to start planning your finances in January. You should get your credit report at least once every year to verify it for accuracy, and make certain your credit score is up to par. If your credit is clean and you have your down payment ready to go, you won't need as much time to plan but try to error on the side of more planning. It can’t hurt.

Lastly, remember that buying a home is a very serious investment that must work right on the first try with no mistakes. Preparation and planning will always win the day. Do not be impulsive. Make sure your credit is in order and as squeaky clean as possible. Afterwards, apply for a home mortgage. You can even apply online. You will find a myriad of choices just be simply keying in the words “mortgage” in Google or another search engine of your preference. Remember though, whoever you choose to go with, check them out as if you would a stranger that you are letting into your house; although, ironically, they are letting you in your house because they are financing it. Still, you get the point.

Why is your credit score so important?

Oh, now we come to a subject few people enjoy talking about. Yes, probing your credit can be every bit as invasion as a trip to the doctor’s for you annual, eh, examine. However, it needs to be done. Everyone has a credit score calculated at the time your credit report is requested. It's based on over 100 different proprietary variables and algorithms developed by Fair Isaac (FICO).

The range for your credit score is 300 to 850. You can get your credit score from Experian, True Credit or Equifax. Most lenders consider people above 650 to be prime borrowers, meaning they will most likely be approved at favorable rates because they will likely pay back the money they borrowed.

According to Equifax, 71-percent of the people with a credit score from 500-550 will default on their credit. Another 51-percent of buyers with a credit score from 550-600 will default on their credit. That's a lot of defaulting. This is why lenders run your credit report and head straight for your FICO score to determine how likely you will be to pay back the money you borrowed.

Common types of Mortgages

Generally mortgage products can vary greatly but they will typically be classified under two different types – those with fixed interest and those with adjustable rates. The first, the fixed rate mortgages, are you traditional mortgages. As the name indicates, the rate does not change for the term of the loan, which is usually 15 or 30-years, though now there are even 40-year mortgage products.

Fixed rate

The pros to the fixed rate are exactly that – your payment will never increase of the life on the loan. Your payment is locked in and that is final. 30 years later, when renters are meeting and exceeding inflation, you are paying what you were paying 30 years back. That is really nice huh?

Adjustable rate

Adjustable rate mortgages, also called arms, have rates that are tied to a fluctuating variable namely the prime interest rate charged by the fed. If it goes up, you rate of interest on your mortgage will go up. The pros of this type of loan are that you traditionally received a lower interest rate compared to a fix because the lender is less exposed to the vagaries of the financial markets. The biggest drawback is that the rates can go up – potentially making your ARM unaffordable, even leading to foreclosure.

What exactly is an FHA loan?

An FHA loan isn't really a loan, so much as a program that insures home loans. The FHA doesn't actually fund your home loan in any way. The FHA simply provides mortgage insurance to help consumers become homeowners. In other words, the FHA insures lenders from losses associated with homeowner default. This helps mortgage lenders prepare mortgages for people who might not otherwise qualify for a loan. That's pretty much it. To keep things simple, we (and most other mortgage lenders) call any loans insured by the FHA, "FHA Loans." Or in our case, the FHA Express.

80/20 Loans

An 80/20 loan is type of financial product where you take out a first lien mortgage for 80-percent of the price of the home or home rental you are purchasing. Then, for the remaining balance, you take out another loan, oftentimes at a higher interest rate, for the remaining 20-percent. You can use this smaller loan amount if you are short on down payment money. It also helps you get around PMI (Private Mortgage Insurance), which is something many lenders make you pay if you don’t have a typical 20-percent down payment.

Interest Only

You can get in trouble with these types of loans. They are usually for people who have every intention to flip a property or re-finance in a few years to get qualified for a better rate. However, if you can’t get qualified for a better rate, then you might be staring at foreclosure proceedings.

Balloon payments

We all know balloons with hot air or helium go up. Well, this is good to keep in mind if you are put into a loan with a “balloon” payment. Chances are there are stipulations that after so many years of interest only payments, much higher payments are required. This is a great way to get into a house if you can’t get a 30-year fixed, but equally as good way to get out of it if you can’t catch the balloon when it takes off.

Prepayment Penalties

Pay attention to the fine print on you loan as well. Often times, there could be a prepayment penalty if you were lucky to be financed to begin with. This usually stipulates a fee, which could be a certain percentage or a specified amount, that must be paid to your current lender should you choose to refinance with another lender in a certain period. This is generally to ensure they make enough money off your loan before someone else can.

How To buy a home with a very small down payment

A great point about FHA loans and the FHA Express is that you can buy a house with a tiny down payment; only 3-percent to be exact. That's one of the lowest down payments for any mortgage loan offered in today's economy but there are even other options too. However, as a bonus, the FHA allows homebuyers to use gifts from family members and non-profit groups to cover their down payment and additional closing costs and fees. In fact, even a 100-percent gift (or a personal loan) from a relative to cover all closing costs and down payment is acceptable.

Gift from family

You can also borrow money form a family member, but you have to check with your lender on what they will allow. Many lenders only allow for a certain amount of money to be “gifted” to you from a family member.

Sellers Assistance

Also, keep in mind, you can have the people you are buying the place from kick in money for your down payment? How is that possible? Easy, you agree to pay a higher amount for the house, if they take the extra money about what they wanted to get, and put that toward the closing costs of the purchase.

For instance, say you need 10,000 toward closing costs on a 200,000 property. Well, tell them you will pay 215,000 for it if they will kick in 10,000 toward the costs. You get it. The trouble is the seller had better like you and want to sell their real estate soon.

Private Mortgage?

You can even entice the owners of the property to float you a private mortgage. You see, banks are not the sole domain of mortgage holders. Anyone can grant a mortgage so long as all the legal terms are spelled out according to your State and County. Keep in mind, it is best to have a professional or lawyer help draft up a private mortgage but generally you are cutting the bank out of a certain portion of the money in hope that the bank will see the remaining balance as much more affordable to one of your credit standing.

For instance, say you are buying the aforementioned $250,000 property but the bank only approves you for $200,000. What you can do now is see if the owner of the real estate will consider holding a private mortgage for $50,000? This means you simply pay them according to the agreed upon terms and interest (if there is even any). A lot of the willingness among the seller to work with you will depend on how badly they need to move the property. After all, they may be in a pinch – waiting to sell so they can move on their new home. If you find that out, well, chances are if you make an offer, they will be more than willing to help you out somehow so they can move on with their own affairs.

Should you get an FHA loan?

Do you want to buy a house with a small down payment? Are you a first-time homebuyer? Do you have poor or no credit? Are you troubled that you don't make enough money to qualify for a home loan and cover all expenses? If any of these are true, an FHA loan is probably a great way out for you. Even with first-class credit and if you have a down payment, the increased options of FHA home loans make them attractive choices for your mortgage.

The FHA is a great way for first-time homebuyers to buy a home. The FHA permits borrowers to have a higher debt-to-income ratio than most insurers typically allow. In other words, you can get more home with the FHA than with a conventional loan. With only a 3-percent down payment, the FHA is ideal for people without large savings accounts to afford getting a home.

What should you do if you have poor credit?

Be very wary about lenders that will claim to approve you no matter what. The shame of it is that there are many unscrupulous lenders out there, who might get you approved for a loan but at a cost far greater than what you should be paying or what you can afford to pay back.

Keep in mind, with the FHA, credit is not a big issue. There is no minimum FICO score - mortgage bankers look at each application on a case-by-case basis. It is also perfectly acceptable for people with NO established credit to receive a loan with this program. That's why the FHA is an attractive loan. It is ideal for those who think they probably can't qualify for a mortgage. Don't assume anything. Get in touch with a reputable lender, find out your situation, and see what lender can get you best loan possible. Do your homework and you just might surprise yourself!

Choosing a Settlement or Escrow company

A settlement or escrow company is simply the third party agreed to by the buyer, seller and lender to oversee the entire real estate transaction. They will make sure each party has its conditions meet before money changes hands and title is transferred.

For starters, you should know that most states allow you to pick your settlement, or escrow company. However, most people don’t know what a settlement company is or familiar with one in their area, so they usually differ to the one recommended by lender. This is not always a bad thing. After all, the lender and the escrow company will have experience doing business with each other, which should ensure the transaction goes smoothly. However, you want to make sure also, they are not conspiring with adding exorbitant fees or the paper work changes at closing. In this case, such a relationship can work to your disadvantage. So, spend some time talking to the lender about any escrow company they recommend.

Closing the deal and moving on

At this point, you are ready to close the deal on purchasing your home or home rental. We congratulate you on taking this step because we are sure you put the time in to do your homework and take our advice to heart.

Ultimately, owning property has proven to be a great investment and you will be wise to reap some of those benefits too. Buying a home or home rental is an exciting time and you should rightly be excited about it. You should also be on solid footing and knowledgeable about getting a mortgage now and securing a financial product that can get you into that home or home rental of your dreams.

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