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Home Financing (Mortgages)

Consumer Tips when Shopping for a Home and Mortgage

A few tips on pulling together a down payment

  • Bank your extra money. Any time you get a tax refund, bonus, commission or birthday check put it into a separate savings account that you never touch.
  • Try to live on one income. If you are a couple, try living on one partner’s income while saving the others.
  • Get rid of your second car. Or your cell phone, or your cable service.  Pare down your lifestyle so that you can add to savings each month.
  • Get a roommate. Change your life style from solo to shared living. This will reduce your rent and allow you to save more money.
  • Pay off your debt. Get rid of debts with high interest rates, such as outstanding credit card balances. This will ease the strain on your wallet and improve your credit rating. When your debit is paid off, try to save the money that would have gone to the payments every month.
  • Take a second mortgage. If you can’t get the five percent or more together for your down payment, you may be able to get a “Piggyback loan” to cover what your first mortgage doesn’t.

Can I buy a home with damaged credit?
Many consumers have amassed large amounts of debt and have gotten behind in their bill repaying ability. Many think that there is no way they could qualify for a home loan however this is no longer necessarily true. A poor credit history, while unfortunate, does not eliminate the possibility of obtaining a mortgage loan. Many people have experienced credit problems over the past several years. In response to the growing number of potential home buyers with credit problems several lenders have now made available loan programs to assist those individuals with getting back on track with their credit profile. Lenders today have helped thousands of people with credit problems get into a home that they thought they could never qualify for. What bad credit does is impact the rate that you are going to pay and the amount of equity that you will have to have in the property. A few credit blemishes will slightly raise your interest rate over the current rate. Mortgage professionals are not qualified to advise you on correcting your credit. A legal professional or someone specializing in that field should handle this. However, many times, due to common last names, or an error of one number on a social security card number, credit files can be merged inaccurately. You should request a credit report to better prepare you before applying for a mortgage. That way if there are any errors you can work on correcting them before completing an application.

Terms you should be aware of:

Fixed vs. Adjustable
Fixed rate pros-
Your mortgage payment and interest rate stays the same for the length of the loan.

Fixed rate cons-
You will pay a higher interest rate so the lender will commit to lending you the money for a fixed period of time.
If interest rates fall significantly, you maintain your current rate.
There are sometimes prepayment penalties on fixed rate mortgages.

Adjustable rate pros-
Your interest rate is lower which may allow you to qualify for a higher loan amount.
Your principal and interest payments are lower
If your loan has no prepayment penalty you can refinance into a fixed mortgage at a later time.

Adjustable rate cons
It is difficult to budget your bills because your mortgage may change month to month
If rates rise more than 1 or 2 percent and stay elevated, your adjustable rate loan will probably cost you more than a fixed rate.

How Are Pre-Qualifying And Pre-Approval Different?
Pre-qualification is an informal way to see how much you may be able to borrow. You can be “pre-qualified” over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford. Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend on a house. Pre-approval is a lender’s actual commitment to lend to you. It involves assembling the financial records and going through a preliminary approval process. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying.

How Many Homes Should I Consider Before Buying?
Visit as many as it takes to find the one you want. On average, homebuyers see 15 houses before choosing one. Just be sure to communicate often with your real estate agent about everything you’re looking for. Don’t jump into the 1st house you see, shop compare and then make your offer.

Important Readiness Checklist for Homebuyers

  • Do I have a steady source of income (usually a job)?
  • Have I been employed on a regular basis for the last 2-3 years? Is my current income reliable?
  • Do I have money saved for a down payment?
  • Do I have a good record paying my bills on time?
  • Do I have a few outstanding long-term debts, like a car payments, student loans etc?
  • Do I have the ability to pay a mortgage every month, plus additional costs, utilities, entertainment etc.?

Listing Agreements Aren’t all the Same
If you are selling your home, and plan to list it with a real estate agency, what type of listing contract will you sign?
There are three primary types of listing agreements and each one offers a different level of service, rights, and responsibilities for both the real estate agent and the home seller.

Exclusive Right to Sell Listing Agreement
The Exclusive Right to Sell is the most commonly used listing contract. As its name implies, it gives the agency the exclusive right to sell your property. You pay a commission to the agency at closing no matter who buys the property, even if you find the buyer yourself.
If an agency other than the listing agency sells the home, the listing agency typically splits its total commission with the second agency.

Exclusive Agency Agreement
The Exclusive Agency listing contract also gives a specific agency the right to market and sell the property, but with one big difference¬-the seller retains the right to sell the property without paying a commission if he sells it to a buyer who was not introduced to the property by the agency.
The Listing agency shares its commission with another agency if the second agency brings a buyer.

Open Listing
In an open listing, no single agency has an exclusive on selling the property and the owner can sell it himself without paying a commission to anyone. A seller can sign an Open Listing with multiple agencies.
If the seller does pay a commission, it’s to the selling agency only. No commissions would be shared in an Open Listing Scenario.

What exactly is an Interest Only Home Loan?
An interest-only loan is one that gives you the option of paying just the interest or the interest and as much principal as you want in any given month during an initial period of time.   If you choose to make the interest-only payment, your monthly payment will be lower than it would be with an interest and principal payment. Your interest rate may or may not be lower than a traditional mortgage, but you will have the option of flexible payments. Interest-only loans allow you to control your payment amount and your cash flow in any given month during the interest only period.

Do I Need Private Mortgage Insurance? (PMI)
Some lenders require 20 percent of the home’s purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down—sometimes as little as 5 percent on conventional loans. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government assisted programs such as FHA (Federal Housing Administration), the down payment requirements may be substantially smaller.
Ask about the lender’s requirements for a down payment, including what you need to do to verify that funds for your down payment are available.
Ask your lender about special programs it may offer. If PMI is required for your loan, Ask what the total cost of the insurance will be.
Ask how much your monthly payment will be when including the PMI premium.
Ask how long you will be required to carry PMI.

Mortgage Brokers Versus Mortgage Bankers
Many consumers assume that “mortgage companies” are banks that lend their own money. In fact, a company that you deal with may be either a mortgage banker or a mortgage broker.
A mortgage banker is a direct lender; it lends you its own money, although it often sells the loan to the secondary market. Mortgage bankers (also known as “direct lenders”) sometimes retain servicing rights as well.
A mortgage broker is a middleman; he does the loan shopping and analysis for the borrower and puts the lender and borrower together. Many of the lenders through which the broker finds loans do not deal directly with the public (hence the expression, “wholesale lender”).

This paper is intended for informational purposes only. Nothing contained herein constitutes legal, financial or other professional advice. Transmission of these materials is not intended to create, and receipt does not constitute, any relationship of any kind between the provider and the recipient. Some of these points may not apply in your area. Different term and conditions may vary from state to state and province to province. All articles, text and photographic material presented here is for the use and pleasure of the recipient only. Download PDF

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