Preparing to Buy a Home

| step 1: preparing to buy | step 2: needs vs. wants | step 3: searching | step 4: closing

Preparation for the purchase of your new home is fundamental to a smooth and effective transaction. Having the right resources and information at your disposal will get you there. I have designed this section of my site to arm you with tips, literature and resources which will help prepare you for getting the most effective financing for your home.

Here are the fundamental steps in preparing to buy a home:

• Finding financing
• Get Pre-Approved
• Establish & understand your credit
• Understanding Debt
• Choose the right mortage
  
  

Finding Financing:
These days the Internet conveniently provides buyers with a multitude of mortgage companies and lenders from which to choose.
 
I am often asked whether a client should choose their local bank/credit union or use a mortgage broker. The honest answer is a buyer should choose the lender that provides them with the appropriate loan at the lowest cost and interest rate with the level of customer service they feel they deserve.

Brokers and lenders should answer all of your questions and there are certainly no restrictions on the number you ask. Compare loans, compare rates and compare the lenders you speak with. The best advice is to shop rates and shop lenders. Look to a trusted financial advisor or your Real Estate Agent for sound advice on which loan is right for you and where good local mortgage companies can be found.

Finding a Local Mortgage Broker and Lender
If you are looking for a local mortgage broker here in the Portland Metropolitan area,  I have references for brokers and direct lenders whom my clients and I have worked with in the past and who provided superior service. Simply email me or contact me via phone. jim@pdxhomes.com (503) 497-5330. 

Other sources of financing include:

• www.bankrate.com
• www.lendingtree.com
• www.e-loan.com
• www.quickenloans.com
• www.mortgage101.com

Whichever source you choose to underwrite your mortgage, there are several things you should know about the process and what should be expected of both you and the lender.

Pre-Qualification:
This constitutes meeting with a mortgage broker or direct lender and identifying how much you can afford to pay for a home. Typically you simply articulate what your income is, how much debt you have and what your cash on hand is in order to come up with an idea of what a lending institution might lend you to finance the purchase of a home.

Pre-Approval:
Pre-Approval constitutes the buyer actually applying for a mortgage and receiving a commitment in writing from a lender. Becoming pre-approved by a lender means that you have supplied that lending institution with the information they require to identify how much they can loan you for your purchase. Each lender has different requirements for qualifying for certain loan amounts and each lender has different requirements for qualifying for different types of loans. (I will explain the various types of loans during step 3.) The pre-approval process has been simplified with the internet, now buyers can make the necessary steps online at their convenience and can apply and submit the necessary information to inform them of what they can afford and at what expense.

Once you know how much home you can afford and once you know what kind of mortgage is most comfortable, you and your real estate agent are well prepared to know which homes to consider.  When you make an offer with your pre-approval (assuming the home you’re interested in is at or below the pre-approved amount) the seller knows immediately that you are a serious buyer for that property. In cases where there are multiple offers this also enhances the buyer’s chances of having their offer accepted.

Costs for pre-approval are generally nominal and lenders will usually permit you to pay them when you close your loan.

Examples of “extra” fees which may not be necessary can include administration fees, miscellaneous fees, documentation fees, processing fees, preparation fees and management fees.

These costs are associated with most loans, so its hard to get around them, but knowing what exactly you will be required to pay to each lender can help you make a better decision. The biggest item to look for in a mortgage is the interest rate. Each of the different loan types will have different interest rates and some loans will have a fluctuating or adjustable rate of interest. Be sure to keep an eye on Alan Greenspan and the FED to see if a rate hike is possible in the future. If so, make sure to lock in a rate prior to the change or if the rate is going to be lowered, maybe wait to get your loan until the move has been made. This can save you thousands of dollars on every move of 25 basis points or 1/4 percent.

If you have concerns regarding your credit you should look into your history before embarking on a home loan.

You can request your credit report from one of the three credit bureaus listed below. You may consider requesting it from more than one as your lender will likely do the same. The reports will cost approximately $10.00 dollars.

» Experian | www.experian.com   1 (888) 397-3742
» Equifax | www.equifax.com  1 (800) 658-1111
» Transunion | www.transunion.com  1 (800) 888-4213

 
Factors Lenders Consider When Scoring Your Credit

• Delinquency in payments (30, 60, 90 days late)
• Number of Inquiries from creditors regarding your credit in the last year.
• Your public record (collections, lawsuits or legal judgments).
  
• The amount owed on your balances vs. the respective credit limits.
• Length of time your accounts have been active.
  

Understanding Acceptable Debt Loads:
First and foremost, know how much your mortgage payment, property taxes and home owner’s insurance can be, relative to your comfort level, monthly income, monthly debts and other expenses. Lenders set ratios associated with acceptable debt load. These ratios are not always the same as your comfort level and every loan program has different ratios that they deem acceptable to the applicant. When identifying an acceptable debt load, a lender with take your proposed house payment against your gross income. They will also look at your proposed house payment and all other debts (credit cards, child support, and required employment fees) against the annual gross income of your household.

Choosing the Right Mortgage:
There are hundreds of loan types available to buyers today and knowing which one is right for you can influence how much the purchase impacts your lifestyle. The most common type of mortgage in the U.S. is the 30-Year Fixed Mortgage. Other mortgages include Adjustable Rate Mortgages, Graduated Payment Mortgages and VA & FHA loans.

In this section I will explain the mortgages most commonly chosen, however there may be a number of other options which better suit your comfort level and goals and which can be explained by mortgage companies and lenders.  Ask them to explain all their loans to you and if you want to ensure you know everything available in the market, I advise picking up Mortgages for Dummies by Eric Tyson and Ray Brown at your local library, bookstore or online.

TIP › Make sure to ask your mortgage broker or lender to detail all fees associated with the loan. Standard fees include: “points” (loan fee, i.e. one point on a 100,000 dollar loan is 1,000 dollars), origination fees, appraisal fees, processing fees, mortgage insurance and any “garbage fees” (extra fees which some lenders charge).

Fixed Rate Mortgages
Consider a fixed rate mortgage if:

• You plan on living in your new home for many years, and/or
• You are not a risk-taker and prefer the stability of knowing how much your payment will be each month.

Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you.

Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments towards your principal will allow you to pay your loan off sooner.

Paying off the loan early may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you'll be stuck with that high interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you'll come out ahead with interest rates that will stay low no matter how high interest rates go in the future.

15-Year Fixed-Rate:

• You pay off the loan in 15 years.
• Equity builds up more quickly than in a 30-year loan.
• Payments are higher (which may be a problem if you lose your job or become unable to work).

20-Year Fixed-Rate:

• You pay off the loan in 20 years
• The overall interest paid is considerably less than for a 30-year loan.

30-Year Fixed-Rate:

• You pay off the loan in 30 years
• The most common choice, especially for first-time homebuyers as it's typically the easiest of the fixed-rate loans to qualify for.
• Monthly payments are lower than for 15-year and 20-year loans.
• As a tax advantage, the 30 year term provides the maximum interest deduction.

Adjustable-Rate Mortgages (ARMs)
Consider an adjustable-rate mortgage if:

• You are comfortable taking the risk that the rate may adjust upward, increasing your mortgage payment with or without the expectation that your income will increase as the rate adjusts.
• Interest rates are very high at the time you take out your loan and choosing an ARM creates a monthly mortgage payment you feel comfortable with.
• Your plans for ownership are short-term.

Generally, the interest rate when you take out your loan will be lower than a fixed-rate mortgage. While this is typically true at the early stages of the loan, it may exceed a fixed-rate mortgage as the rate adjusts.

Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income isn't sufficient to cover the highest possible payments, then this option isn't for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if and when the rates go up.

Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or the London Interbank Offered Rate).

The monthly payment will be based on the index your lender uses plus a margin, which are generally two to three points. Get the formula used by your lender in writing and make sure you understand what it means before you choose that lender, lock your rate and employ that loan.

The good news is that the amount an adjustable rate mortgage can increase is limited. There are restrictions on how much your lender can increase your rate, both for a period of one year and for the life of the loan. My advice, ask your lender to calculate what the maximum payment would be if your rate went to the highest amount allowed for your particular mortgage. If you're not confident you'll be able to pay that amount on a monthly basis you may want to think seriously about safer alternatives.

Convertible ARMs
Consider a Convertible ARM if:

• Neither the fixed-rate nor the adjustable-rate mortgage appears to be completely right for you.
  

These mortgages combine the advantage of an ARM’s initial low rate with a fixed rate after a predetermined number of years. This type of mortgage has more advantages when the initial interest rate is low and the future rate is not guaranteed.

Government Loans
Other mortgage options available to some people are in the form of a government loan.

VA and FHA loans:

• VA Loans: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
• FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase "FHA approved" when looking at ads for homes.
  

» Fannie Mae | www.fanniemae.com
» HUD Homes | www.hud.gov
» Commercial Properties | www.ccim.com

Bridge Loans
Bridge loans are used to bridge the gap between purchasing a new home and still owning the home you are currently in.  In cases where buyers approach the next home they want to buy but have yet to sell their current home, they can employ a bridge loan which mitigates the contingency of the sale on the buyer’s current home.  Removing the contingency makes their offer to buy the new home more attractive, typically the party pays mortgages on two homes, waiting for the old home to close, having already closed on the new home. 

If you have enough equity in your present home, this is a special loan that allows you to get some cash so you can make a down payment and buy the new home.  However, be aware, interest rates tend to be high, points on the loan are high, and there are costs and fees involved.  If you are not a risk taker making the sale of your current home a contingency of the next purchase is likely a more comfortable process.

Pure Interest Loans and Other Options
Lenders have introduced a host of less conventional loan options in addition to the standard loans most people employ.  Among these loans are pure interest loans in which a lender only charges the interest on the mortgage.  With this product you do not pay down your principal ultimately requiring you to refinance once the term of your loan is complete.  Other options include 40 year loans which take the term of loan through 40 years increasing the overall interest paid, but reducing the principal and interest paid on a monthly basis.  Ultimately, consult more than one lender to determine which loan options are best for your needs and goals.

Portland Alternative Financing and Housing Resources
The following organizations and their associated websites provide a multitude of options for those looking for affordable, alternative options for financing their home.

» Oregon Housing and Community Services | www.ohcs.oregon.gov | 503-275-3660 |
Includes home buying information to include first-time home buyers, low-interest programs, and grants/tax credit programs.

» Home Ownership a Street at a Time (HOST) | www.hostdevelopment.com | 503-331-1752 | fax: 503-280-2135 | 1818 NE MLK Blvd, Portland, OR 97212 |
HOST is dedicated to providing affordable homeownership opportunities for low- to moderate-income families. HOST believes strong, healthy communities are created and sustained when homeowners have a stake in their neighborhoods.

» Association of Oregon Community Development Organizations | www.aocdo.org |
Founded in 1992, The Association of Oregon Community Development Organizations (AOCDO) is a membership-based organization that represents those with an interest in affordable housing and community development. This includes over 50 nonprofit developers of low-income affordable housing throughout the state of Oregon, and those who support their efforts, including banks, law firms, government entities, and technical assistance providers.

» Habitat for Humanity | www.pdxhabitat.org |
Find out what it takes to receive a Habitat House here in Portland. As a volunteer Crew Leader I can’t say enough good things about Habitat for Humanity and the manner in which they provide housing to those in need. Email me or visit Habitat’s web site for information about Habitat for Humanity in Portland.

» Housing Authority of Portland | www.hapdx.org |
HAP is committed to providing safe, decent and affordable housing to individuals and families in Multnomah County, Oregon, who face income or other life challenges. HAP offers support through a wide variety of programs and services. Our website is designed to educate citizens about these programs and services, and to share how HAP is working to build a stronger community.   

Interest & Paying Points
Remember, interest is tax-deductible. The interest you pay as part of your mortgage and the interest relative to paying points on a loan upfront mean tax deductions at the end of the year in which they are paid.