The ABC’s of Getting a Home Mortgage Loan

Conventional wisdom has it that there could not be a better time to capitalize on attractive low mortgage interest rates and rock bottom real estate market prices. That being said, here are some very important steps to consider for those in the market to purchase a new home. The first and foremost consideration is to determine whether you are, in fact, in the financial position to buy a home. It is therefore a good idea to check your credit report and FICO (Fair Isaac Corporation) score beforehand to see if you have the creditworthiness to move forward in purchasing a home.Credit Report and Scoring

Your FICO score is a complex credit-scoring formula that assesses the risk that a borrower may default on a loan. It is derived from the three credit reporting agencies (Experian, TransUnion, Equifax) that appear on your credit report and will be indicative of the interest rate that you will pay on your mortgage loan. The good news is that consumers are offered one free copy of their credit report per year, but the bad news is that the actual FICO scores are not included in these free reports. Thus you will still be required to pay for this scoring which is highly recommended to see exactly where you stand. At the time of this proactive investigation you may want to “clean up” your credit to assist in accelerating your FICO score to facilitate getting the best deal on your home mortgage loan.

In general, FICO scores at 640 or better are considered candidates for prime-rate loans, while those under 640 are considered high risk. To get top-tier mortgage rates a borrower needs to have a FICO of at least 740. When you decide to move forward in buying a home your mortgage broker or lender will order an updated credit report to get your FICO, in addition to having you fully document your income, assets and liabilities. This process will serve to “pre-qualify” you for a home mortgage loan.

Lenders will look at this information and determine the amount of debt you can reasonably handle given your income, employment history, and credit history. Based on their perception of this information, as well as specific underwriting policies, lenders may extend credit to you although your FICO score is low, or may even decline your request for credit although your score is high. In the unfortunate event that you are declined by a particular lender you may want to shop around.

Choosing a Mortgage Professional

There are several options available to you in wisely choosing who will assist you in obtaining the best mortgage rate and loan product on the market. Your choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your mortgage loan. There are many types of direct lenders you can choose from such as: banks, savings associations, mortgage companies and credit unions. You may decide to work with either a mortgage broker or one of these direct lending sources. Although as mentioned, being declined by a direct lender could surely become a determining factor in the need to shop around.

Comparison shopping is tantamount to the process of getting a home mortgage loan and a mortgage broker can indeed be instrumental in serving as a trusted partner to help you find the loan that meets your needs. Think about it; a mortgage broker deals only in mortgages and therefore has access to more loans than direct lenders and this can certainly be a critical factor in making the right choices. The individualized attention and flexibility of a mortgage broker is superior to a direct lender because interest rates change on a daily basis. Consequently, a broker can start a loan with one lender and swiftly switch gears to another lender if the rates are better!

By all means be sure that your mortgage professional guarantees your rate with a “rate lock” of a stated interest rate for a specific period of time, usually 30 days. This ensures that even if interest rates rise you will still receive the “locked” rate.

Types of Mortgage Loans

For borrowers that may be unable to meet today’s strict lending requirements, FHA (Federal Housing Administration) backed loans are an alternative. These loans require a minimum down payment of 3.5 percent however borrowers will pay an insurance premium for Private Mortgage Insurance (PMI) as well as a slightly higher interest rate. The down payment required with loans other than FHA may vary according to the market, borrower and property type.

There are both fixed and adjustable rate mortgages available to borrowers and your mortgage professional will explain and advise which may be suitable for you. They will further discuss with you the associated costs that may include broker origination fee, processing and application fees, points, pre-paid items and title charges.

All lenders are required by federal law to provide a Good Faith Estimate of the costs of your loan and a Truth-In-Lending Disclosure within three days of receiving your loan application. Read this carefully with your broker to clearly understand what goes toward principal and interest as well as the cost of mortgage insurance and property taxes to know exactly how much your monthly payment will be.

Here are the ABC’s to getting a home mortgage loan:

a) Be pro-active; check your credit report and work on improving FICO if necessary.
b) Choose your mortgage broker or direct lender wisely to shop the best deal.
c) Your mortgage broker will thoroughly research and shop loans and rates, disclosing mortgage payment and associated costs with you.
d) You will then decide which loan is best for you. Do not forget to lock in your rate!

The American Dream

It is still an integral part of the American Dream to own a home and the truth is; we may never again see the low interest rates and real estate prices that are reflected in our present economy. Buying a home can be a significant investment opportunity and one of the most important decisions you will ever make. Conclusively, it pays to be wise in choosing a trusted mortgage professional who will partner with you in shopping around to find the right home mortgage loan that will reflect your dreams as well as realistic financial goals.

Fixed Or Adjustable – A Mortgage Loan Dilemma

Let’s clear the air: Adjustable rate mortgages are not bad. Yes, they’ve gotten a “bad rap” over the last year because people tend to associate adjustable rate mortgages with recent housing woes plaguing the nation but the loans are not the cause of the nation’s real estate crisis; misunderstanding and misusing them is. The reality is that adjustable rate mortgages can, in fact, be an excellent mortgage loan option IF you fully understand how they work. So, with that said, it’s time to learn.

Who is eligible for an adjustable rate loan? As with any mortgage loan, anyone can apply. However, adjustable rate loans do tend to be more appealing to those who deal with budgeting changes well and those who don’t plan on living in a specific house for more than three to five years. Why? Keep reading…

What exactly is an adjustable rate? An ARM is one of the two most popular mortgage loan types offered in the United States. As the name suggests, the mortgage loans are called adjustable because the rate of the mortgage loan changes periodically-most commonly every six months. Mortgage loan firms often abbreviate “adjustable rate mortgage” with “ARM.”

How do ARM’s work? The process for obtaining an ARM is the same as any other loan type. You must apply for a mortgage loan and then, based on your credit standing, a mortgage loan officer will process your information to determine which lenders are willing to fund your mortgage. In most cases, loan officers will present you with multiple home loan options-ARM and fixed-rate mortgages.

Why do people choose the adjustable rate loan type? The simple answer: The numbers associated with ARMS always look great! In fact, they’re nearly too good to be true…but they are true. The interest rates are low and the monthly mortgage payments are manageable for a much larger percentage of the population than fixed rate loans.

When is an ARM a good idea? Typically, ARMs are best for homebuyers who plan on living in a home for just a few years. The reason: Most ARMs are for 5-years or less; after that time, the ARM typically converts to a higher interest fixed-rate mortgage loan. ARMs can also be a good alternative for real estate investors who cannot obtain an interest only loan for an investment property.

Though anyone can apply for an adjustable rate mortgage loan, whether it’s the best type of loan is completely dependent upon the homebuyer. That’s because the continuous changing of the mortgage interest rates and subsequently, the mortgage payments can be a financial stress for some homebuyers. The ARM becomes even more of a stressor once the ARM matures and the mortgage loan interest rate spikes.

So, what’s the alternative to an adjustable rate mortgage? A fixed rate mortgage of course.

Like ARMs, the name says it all for fixed rate mortgages. Fixed rate mortgages maintain the same interest rate through the life of the loan and therefore, the same mortgage payments. However, there is a tradeoff for that predictability: higher interest rates. That’s why those who plan to stay in a particular home for three or more years often prefer fixed rate mortgage loans.

In the end, the key to determining which type of loan is best-fixed or adjustable-is about mathematics and lifestyle. If you’re on a limited budget but expect your income to increase substantially in each of the upcoming years, an adjustable rate mortgage may be the best option for getting you into a home sooner rather than later. However, if you’re uncertain about if or how your income will fluctuate, it’s best to play it safe and opt for a fixed rate loan. That way, your mortgage payment won’t be a surprise, regardless of what the economy is doing. Of course, if you base your home mortgage loan choice on a mortgage payment that you can afford comfortably based on your current financial situation versus trying to “figure out how to make things work,” either type of loan will have you in your dream home in no time.