Are you thinking about buying a home this year?  Very cool! Owning a home is such an awesome experience.  You get your own space, you can paint and decorate anyway you want to.  If you want orange walls with green shag carpet you can have it (although you may be stuck in the 1970's).  You will receive a large income tax benefit because you can deduct the mortgage interest and property taxes you pay.   You also stop paying into your landlord's investments and start paying into your own. 

This is one of the best times in the past thirty years to buy a home.  Interest rates are very low and there are ton's on homes to choose from.  Sellers are more motivated then I have seen them in the past twelve years.  Buying a home can seem overwhelming and a little confusing at times.  Because of that I'm going to give you some very good advice in this article.  I have been providing mortgages for first time home buyers since 1995.  The mortgage programs have changed so much in the past 12 years.  In the 1990's you had to have some money in order to buy a home.  The minimum down payment was around 3% 

Most first time home buyers have very little money saved to invest into a new home.  As a matter of fact a new home buyer that has a down payment (5% or more) is as rare as an IRS agent finding more deductions for you in an audit.  Because of that, zero down payment loans have become very popular.  So popular in fact that 30% of all mortgage loans made in 2006 were 0 down payment loans.  That's an amazing number to me.  In 1995 I had one loan program that was a 0 down payment loan and that was for veterans only.  Today it is the norm and the terms (interest rates and fees) are great. 

OK, so we come back to you and what you need to know.  Well first be aware that there are five areas that will dictate what kind of home loan you can get.

1. What does your credit look like?  At the foundation of every home loan is credit.  That doesn't mean that if yours is bruised you can't get a good rate but it does mean your options are more limited.  So what makes up your credit?  Well it has five major factors;

1. Number of late payments and how old they are.
2. Length of time the account has been open.
3. Collection, Judgments, bankruptcies, foreclosures...
4. How much of your credit limit you have used up ($5,000 limit and you have a balance of $4,788 = not good / $5,000 limit and $1,500 used = great).
5. Number of accounts open (the number of accounts open doesn't hurt you if they are managed well (balances less then 30% of the credit limit is best).

1. What is you income.  This can affect you in two different ways.  The first is that you have to have enough income every month to make your payments.  How lenders determine this is they take a percentage of your monthly gross (before taxes) income and subtract you monthly debts which include the following;

•·        Loan payments for cars, student loans and any other loan you make payments on monthly bases.

•·        Child support and alimony

•·        Credit Card minimum payments

•·        We don't count items like cell phones, insurance, rent, utilities, groceries, day care, etc...).

Example

                        Income is $4,000 a month

                        45% of $4,000 is $1,800 for house payment and debts

Debts are

•·        Car                              $340

•·        Credit Card                 $100

•·        Student loan                $111   

•·        Best buy (TV)                $44

$595 per month in debt payments

$1,800 - $595 = $1,205 for a house payment

The percentage we use will depend on the loan program and the strength of your credit. 

If you are self employed or have other sources of income you can't document then you may need to use a Stated Income loan program.  This program is exactly like it sounds, you tell us you income and as long as it make sense for you profession and you have at least a two year history at the job you may qualify.  The program was created mostly for self-employed people who tend to have a large amount of write offs on there taxes which reduces thier income. 

1. Who are you going to get you home loan from?  This is a very important factort to the type of loans you will have available to you.  Choosing the right lender is so important that it can save you thousand of dollars.  Ok so you have heard the commercials and radio ads and all that noise we tend to drowned out about this loan is the best and this loan allows you to buy a 1.5 million dollar home for as little $150 a month (maybe a bit of an exaggeration on my part).  Well we all know there is a catch and there is.  These ads give you 5% of the information in order to get there phones to ring.  In my opinion 99% of the people that call are very bad candidates for those loan programs.  There are loan programs that are perfect for you and there are programs that are perfect for the banks.  Finding the best one for you will be up to the loan officer you work with.  I would recommend you find a solid mortgage broker and this is why.  I have been a mortgage banker, mortgage lender, and now a mortgage broker.  I have done it all and being a broker gives me the best programs and tools to ensure I can offer my clients the best deal.  When I worked for a bank I was limited to the loan programs they had.  At times some of the loan programs had some good interest rates but I didn't have many to select from.  When I worked for a mortgage lender, which is a company that lends there own money like a bank but only does mortgages, I had a larger selection and could broker out (use other lenders programs)  to a few other lenders for specialty loans.  This was a much better situation then a bank because I wasn't limited to just one set of programs.  After 11 years in the mortgage business I decided to go work with one of the best mortgage brokers in Washtenaw County and this is what I found:  As a broker I can provide loans from hundreds of banks and mortgage companies.  If they have a program that is better then anyone else I use them.  I can also provide the same loans from mortgage lenders all across the country and choice the best ones.  I have so many options to choose from that I am able to offer the best rates and lowest fees at all times.  That's the power of the mortgage broker, but don't forget that the quality of the loan officer is just as important.  If you choose someone who is inexperienced and doesn't have a wide and though knowledge of the mortgages that are available to you it could cost you a lot of money.  Choose wisely.
2. How much money do you have? Some loan programs want to see that you will have some money after you close.  We call this having reserves.  Not all programs require reserves but many do.  Usually these programs want to see two months of house payments as a reserve.  You can use moneys in a 401K, TIAA CREF, mutual fund, stock, money market or a Checking / savings account as your reserves.  We don't use this money in any way except to show you will have a financial cushion if you need it after you purchase your new home.
3. What type of home do you want to buy?  Do you want you standard single family home / Condo?  Or do you want to buy a multi unit home (duplex, 3 or 4 units) and plan to live in one of the units and rent out the other/s.  This is rare that someone buying there first home would decide on an investment property but it does happen.  In that situation it is important that you have a large cushion (6 months of house payments in the bank) after you buy the home.

Those are the five aspects we look at with new home buyers.  There are many different types of mortgage that don't require a down payment.  There are basically three configurations these programs come in.

1. The first is what we call a Combo Loan or 80/20 loan.  This is actually two separate mortgages.  A 1^st mortgage for 80% of the purchase price and a 2^nd loan for the remaining 20%.  The loan would look something like this;

House price $200,000

1^st loan is $160,000 for 30 years with a fixed rate of 6%

2^nd loan is $40,000 for 30 years with a rate of 7.75%

1. The second type of 0 down payment loan is a single loan for 100% of the purchase price.  This loan would also have a monthly fee called mortgage insurance or PMI.  Lenders don't want to lend more the 80% of the purchase price unless an outside company guarantees the loan.  The mortgage insurance guarantees the lenders loan even if they foreclose on the property.  You can have the PMI removed once you can show you have 20% equity.

1. The third type of loan is a single loan for 100% with no PMI.  This is generally a specialty loan for stated income borrowers or borrowers with low credit scores and will tend to have a higher interest rate.

Deciding on the best program for you will be the one with the best combination of low monthly payments and low costs. A good loan officer will run the numbers and help you understand your best options.

My last piece of advice is to get a Good Faith Estimates (GFE).  The Good Faith Estimate will be your best friend.  I talk to people on a daily that have been pre-approved by a mortgage company and have never seen a GFE.  The GFE is so important because it will show you;

•·        How much your being charged in closing costs

•·        How much money will be collected for your escrow account (account set up to pay your property taxes and home owners insurance).

•·        How much money you will need to bring to the closing (if any).

•·        What your interest rate will be (the rate can change a little).

•·        What your monthly payment will be (again this can fluctuate a little).

This is the only way you will be able to get a solid idea if you are getting a good deal.  Now with that said please remember this is only an ESTIMATE.  The closing costs and escrow set up amount should remain close to the original estimate however the interest rate is a different story.  Rates can change daily and you can't lock in the rate until you find a home and have a contract in place to buy it.  It is a good idea to get a new GFE right after finalizing your contract on your new home and before you apply for your home loan. 

So there you go, I hope you will use some of my advice when shopping for your mortgage.  If you are thinking about buying a home in the next year then go get pre-approved.  Most lenders will pre-approve you for free and you are in now way obligated to use that company.   Find out what your credit score is and see if there are any issues with it or your income.  If you have banged up credit and are worried you won't qualify keep in mind that I had a client the other day with a credit score of 582 (low) that I was able to pre-approve with a zero down loan with an interest rate of 6.5%.  You don't know until you try.  Buying a home has never been easier then right now.  Congratulations on taking one more step toward owning your own home.  For more information and some very cool home buying tools go to http://www.annarborfinancing.com/.

Dave Crisp

Senior Loan Officer

Ann Arbor Mortgage