Mortgages 101: Quick Answers to Over 250 Critical Questions About Your home Loan - Softcover

Reed, David

Softcover

ISBN 10: 081440166X ISBN 13: 9780814401668

Publisher: Amacom, 2008

Synopsis

With mortgage stories dominating the front-page news, people---whether they're buying a new house or refinancing---increasingly have questions about the complicated issues at stake. Arranged in an easily accessible question-and-answer format, Mortgages 101 provides readers with essential lending formulas, as well as important information on lending requirements and application procedures.

About this title

About the Author

David Reed (Austin, TX) is a veteran mortgage banker who has closed more than 1,000 mortgages. He is a columnist for Realty Times and Mortgage Originator Magazine and is a member of the Mortgage Speakers Bureau. He is the author of Mortgages 101 (0-8144-7245-1), Who Says You Can't Buy a Home (0-8144-7340-7), and Mortgage Confidential (0-8144-7369-5).

Excerpt. © Reprinted by permission. All rights reserved.

MORTGAGES 101

Quick Answers to Over 250 Critical Questions About Your Home LoanBy David Reed

AMACOM

Copyright © 2008 David Reed
All right reserved.
ISBN: 978-0-8144-0166-8

Contents

Preface.............................................................................................xxiSECTION I MORTGAGE FUNDAMENTALS....................................................................1CHAPTER 1 Introduction to Mortgages................................................................3CHAPTER 2 How to Know How Much Home to Buy.........................................................29CHAPTER 3 Getting Your Finances Together...........................................................38CHAPTER 4 Down Payments and How They Impact Your Mortgage..........................................51CHAPTER 5 Getting Your Credit Together.............................................................71CHAPTER 6 Credit Scores: What They Are, How They Work, and How to Improve Them.....................90SECTION II THE RIGHT MORTGAGE......................................................................101CHAPTER 7 Finding Your Home Loan...................................................................103CHAPTER 8 Loans for Good to Great Credit...........................................................135CHAPTER 9 Loans for People with Impaired or Damaged Credit.........................................147CHAPTER 10 Refinancing and Home Equity Loans.......................................................162CHAPTER 11 Construction and Home Improvement Loans.................................................182SECTION III THE RIGHT LENDER AND RATE..............................................................197CHAPTER 12 Finding the Best Lender.................................................................199CHAPTER 13 Finding the Best Loan Officer...........................................................213CHAPTER 14 Finding the Best Interest Rate..........................................................225CHAPTER 15 Closing Costs and How to Save on Them...................................................243CHAPTER 16 The internet and mortgages..............................................................254APPENDIX: Monthly Payment Schedules................................................................267Glossary............................................................................................271Index...............................................................................................289

Chapter One

Introduction to Mortgages

There's a lot more to buying a home than just picking one out and moving in. If you don't have a wad of cash stuffed in your sofa cushions, chances are you'll need a mortgage. Mortgage lending has been around for a long, long time, and some things haven't changed, while other parts of the mortgage process are brand new. Knowing what you're getting into can help you to make the right decisions.

1.1 WHAT'S THE DIFFERENCE BETWEEN BUYING AND RENTING?

One way you own the roof over your head, and the other way, you don't. If you've always rented or otherwise never owned a home, one of the things you'll discover is that when things go wrong with your house there's no landlord to yell at. There's no superintendent to come fix your leaky faucet. If your hot-water heater is busted, you're the one who has to make the trip to your appliance store to shell out another thousand bucks or so just so you can take a hot shower in the morning.

When you rent, you can pretty much walk away as long as your lease agreement has been fulfilled. Want a change of scenery? Pack up and move across town. Want a swimming pool and fitness center without the hassles of owning either? Rent. Want new carpet or drapes every year? Rent. Want your utility bills paid? Rent. Free cable? Ditto. You get the point. Renting has its perks. Much less responsibility and no hassles of ownership.

1.2 HOW DO I KNOW IF IT'S BETTER TO BUY A HOME OR CONTINUE RENTING?

Perhaps one of the easiest ways to determine if it's better to buy or rent is to sit down and calculate the financial advantages of owning versus renting. This is commonly done online with a "rent versus buy" calculator found on the Web.

TELL ME MORE

These calculators compare your current or probable rent situation with a projected home ownership number. They're easy to find. I ran a Google search for the term "mortgage and calculator" and retrieved 6,100,000 websites that had those two terms in combination.

But the kicker is that these calculators rarely will tell you, "No, it's not a good idea to buy." That's because of the tax benefits of home ownership. The interest and property taxes associated with a mortgage are generally tax deductible. You can deduct them from your gross income when you file your taxes. With rent, you can't.

Yeah, I know. When you're a renter you don't pay property taxes or mortgage payments. Instead you give money to someone else for the privilege of living there. But you can't write off your rent. It's just that. Rent.

When might a "rent versus buy" calculator suggest it's better to rent? When you intend to own your next home for only a year or so. Buying a home incurs other expenses, such as money for the down payment, property taxes, and hazard insurance (which is much higher than a renter's policy). Many apartment complexes pay your electric bills along with water and other utilities. When you own, you pay all these expenses. Owning a home with all its tax benefits doesn't outweigh the acquisition costs to buy the home if you're only going to own it for a short period. Short term, rent. Longer term, buy. Are your rent payments the same or less than what a mortgage payment would be? Depending upon where you live, they may be the same. Especially if interest rates are relatively low.

Let's say you're renting a nice 3,000-square-foot, three-bedroom home close to schools in a friendly neighborhood. You might be paying $1,800 each month in rent. A similar three-bedroom home might cost $150,000. If you put 5 percent down to buy the home, your monthly house payment, including taxes and insurance, would be close to $1,200 using a 30-year fixed rate at 7.00 percent.

If rent payments in the area in which you want to buy are near what a mortgage payment would be, it makes sense to buy. If you can save $600 per month and you also get to write off the mortgage interest and property taxes, then it's truly a no-brainer.

Another reason buying is generally better than renting is simply a matter of appreciation and equity. When you rent and property values increase, your landlord will probably raise your rent again. And, of course, each time you make a rent payment you're not increasing your equity in anything; you're just helping your landlord increase his stake in your house or apartment. I'll give you an example.

Your rent is currently $1,000 per month, and you're thinking about buying a $150,000 home. If you put 20 percent down and borrow $120,000 at 7.00 percent on a 30-year fixed rate, your principal and interest payment are about $800 a month. Let's also assume that property values are increasing in your area by about 5 percent per year. What's the situation after two years?

If you rented, you paid someone else $24,000. But if you owned and itemized your federal income taxes, you likely deducted over $16,600 in mortgage interest on your income taxes. You also paid your loan down by over $2,500 while at the same time increasing your equity position in the house by nearly $18,000.

Now you see why those calculators always tell you to buy a home.

Through all of these calculations, remember the real reason for buying: You buy a home because you want to. Because you like the place. It's your home. A home is one of the largest single financial commitments someone can make. And while I agree with that statement, let's not go overboard here. Buy a house because you want to, not because some calculator told you so.

1.3 HOW SHOULD I SEARCH FOR A HOUSE?

That's easy. Start doing some research on your own on the Internet, even before contacting a real estate agent. If the Internet was invented for any particular industry it has to have been for real estate. Before the World Wide Web was born, one could typically locate houses only in the newspaper on the weekend. If you saw a house that you liked, you'd contact the agent selling the home. Then came the endless cycle of driving around in a real estate agent's car looking at houses until—finally, finally—you found a home you wanted to buy.

TELL ME MORE

The Internet has helped agents become more productive by letting consumers do a little shopping first before they get serious enough to use an agent. An agent who advertises a house is called the "listing" agent, because he puts the house for sale on the multiple listing service, or MLS.

The agent will show you the home and ask if you are using another agent. If you aren't, the agent will ask if you would like to see other homes for sale. You of course say "yes," and the agent then becomes a "buyer's" agent as well, helping you find a home to buy and not just listing a house for sale. You give your agent your requirements for your dream home, such as four bedrooms on a culde-sac with a swimming pool. Your agent would then scour the MLS to search for such homes. After the search, you'd both get in the agent's car and go see the homes.

But viewing homes on the Web gives both you and your agent a head start. You only look at homes you're interested in, and the agent's not dragging you all over town to look at homes you'd never buy. Your agent spends more time selling or listing homes and less time driving all over the place.

You can start with www.realtor.com. At this official site of the National Association of REALTORS, you can search for homes anywhere in the country or across town using home listings from your local newspaper to your local or even national real estate brokerage. It's really cool. You simply log onto the site, choose where you want to live, and select your preferences, like four bedrooms in this zip code in this price range with a pool or without, and so on. Next thing you know, there are your potential dream homes right on your computer screen. Some sites even have "virtual" tours showing different views of the house. This way you can see what homes are selling for and what's generally available.

1.4 WHEN IS A GOOD TIME TO BUY A HOME?

Have you ever heard a real estate agent say that it's a bad time to buy? I haven't. It's either "The market's hot, buy now before prices go up even further," or "It's a buyer's market right now, make an offer while the deals are good." Come on, agents need to make money, too, right? A good time to buy is when you, and only you, decide that it's right.

TELL ME MORE

When I moved from San Diego, California to Austin, Texas, I knew I wanted to live in Austin, but I really had no idea about where to live within the area. Austin's a great town with a lot going on, but I knew nothing about the area's traffic, schools, or where the best dry cleaners were. I know that there are plenty of tools out there to help make decisions and there are many relocation experts that can help. But I picked out a house to rent for about a year instead of buying. I wasn't ready to buy. Why? While I knew Austin, I didn't know Austin. I couldn't have known certain things without living there. I also knew that if I bought in Austin, I would most likely soon be moving out of that house to the area where I determined I really wanted to live.

It worked out great. Now when I go to work in the mornings my commute is quick, the kids are in a blue-ribbon school district, and we're close to downtown while in a nice, quiet neighborhood. Lucky me, right? Maybe, but I don't think I would have been so lucky if I had tried to buy a house in a city right off the bat without living there first. Life's like that. Sometimes just reading a book about something doesn't make it feel real. Living it does. Is there something that tells you, "Wham! Buy a house!"? No, of course not. But perhaps one of the best ways to know if it's a good time to buy or not is the fact that you're even thinking about it in the first place. It's a good time to buy if you're ready, and a bad time to buy if you're not. Don't get pushed into home ownership.

Too many people get caught up in real estate valuations, home price cycles, the number of homes listed, buying in the winter instead of the summer, and so on. While these are all useful considerations, they shouldn't make that much of a difference when all is said and done. Yes, it's easier to buy in the summer and move if you have kids and you want them to start a brand-new school at the beginning of the new school year. Yes, home prices might be a little softer in the wintertime than in the spring or summer because of seasonal demand. And yes, it might be a good time to buy a home because the market is soft and values will certainly appreciate. But don't get caught up in all of that. At least not to the point of paralysis. There is no right answer. Certainly, these things should be taken into consideration at some point, even more so if you're a real estate investor who studies market trends and buys and sells homes for income. But if you're just looking for your first home, don't get bewildered by such facts.

Buy a home because you want to, rather than for an investment. Buy a home that you can call your own. Begin saving for the future by building equity. But buy from the heart while using your head. Don't buy because some real estate guru told you that you could make millions in real estate. Bookstores and late-night infomercials have enough on real estate investing. If you're reading this book because you want to become a real estate tycoon, you bought the wrong book.

1.5 WHAT'S THE DIFFERENCE BETWEEN BEING PREQUALIFIED AND PREAPPROVED?

Before you get into any agent's car, the first thing you'll be asked is if you've applied for a mortgage and been prequalified or preapproved. Those terms may sound similar, but it's critical that you know the difference. A prequalification is typically no more than a conversation with a loan officer who asks about your job, how much you make, and what kind of car payments and so on you might have. If the new house payment is below a certain percentage of your gross income and your total debts (for home, car, student loans, etc.) are under yet another certain percentage of your gross monthly income, then voila`, you're prequalified. It used to be that after such a conversation a loan company would issue a prequalification letter stating that yes, you can afford the house payments. But that's pretty much about it.

If all you want to determine is whether a lender thinks you can afford a particular debt load, then that's probably all you need. But if you're getting serious about all this and are ready to shop for houses, then a prequalification means little. You need to take the next step, which means getting preapproved.

Preapproval verifies all the information you provided. At this point, your credit report is run not merely to verify the amount of total debt but to check whether your credit is up to par for a particular loan request. In a preapproval, the income you verbally gave to the loan officer is now verified by a third party by reviewing your paycheck stubs or a recent W-2. Your down payment and closing cost funds are verified by reviewing bank or investment statements showing that your required funds are sitting in the bank somewhere just busting to get out. This is your preapproval. It's nothing more than a verified prequalification, but it's also nothing less than what your real estate agent or home seller wants to see.

1.6 WHAT IS THE PREAPPROVAL PROCESS?

The "pre" stuff verifies two critical elements in credit approval: your ability and willingness to repay a mortgage. Ability and willingness go hand in hand. While you can make enough money to be able to afford to pay back a loan, if you don't have the willingness to do so, then it won't work. And, of course, there are certainly a lot of people out there who may have the willingness to pay someone back, but they just don't have enough money to do so.

By verifying income and the available assets to close on a house, and then reviewing the credit report, these two initial hurdles are overcome. It's no big deal, but documenting your prequalification really is your very first step. Let's examine the process a little more in detail.

TELL ME MORE

First, here's what doesn't happen: Loan applications aren't sent to some loan committee for review. Loan committees went out with leisure suits. Once upon a time, yes, that's how it happened. Potential borrowers would apply for a mortgage and extol their financial virtues; a loan committee, usually meeting once per week, would later discuss the positives and negatives of the applications. A host of old men in black suits, smoking cigars and saying things like "harrumph," would eventually approve or disapprove the loan request.

Today, your loan application is approved or not approved at the very beginning of the process—before it ever gets to an underwriter (the person who physically approves your loan). This process is now mostly automated and everything is approved first, before anything is ever verified. It's different from the old days. It used to be document and verify absolutely everything before any approval whatsoever. You could go three to four weeks without really knowing if you were approved. Today, your loan is approved first, then verified later.

Those of you who have applied for a home loan more than five years ago will recognize this next drill.

First, you gathered all your documentation—bank statements, tax returns, and paycheck stubs—whatever you could think of. Then you trotted down to your local mortgage company, bank, or savings and loan and met with a loan officer. You completed the loan application with the loan officer, who then detailed the types of documentation needed. Your credit report was also pulled and reviewed. Your debt ratios were calculated to make certain you weren't borrowing more than you—in the lender's eyes—could handle.

If there were any credit problems—say, a late payment on a car last year—the loan officer would ask for an "explanation letter." The credit report would show whether the problem was a pattern or an isolated instance. The explanation letter was a secondary requirement that had to be in the file. Many times the letter simply said, "I forget why it was late," and it would still be okay. The explanation didn't have to convince anyone or be necessarily plausible, it just had to be there.

(Continues...)

Excerpted from MORTGAGES 101by David Reed Copyright © 2008 by David Reed. Excerpted by permission of AMACOM. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Edition details

• Publisher: Amacom
• Publication date: 2008
• Language: English
• ISBN 10: 081440166X
• ISBN 13: 9780814401668
• Binding: Paperback
• Edition number: 2
• Number of pages: 352