Getting the Mortgage

by Everett Short

When your mother and father bought their first home, they probably financed it through their local savings and loan, where the bank officer knew their first names and always asked about the children.  The down payment was 20%, the mortgage lasted for 30 years at the same interest rate, and paying it off was a real sign of financial success.  Almost none of that applies any more.

Today, you can go to any number of sources for a mortgage - banks, mortgage companies, insurance companies, private investors, or even pension plans.  How you structure your mortgage, and what rate of interest you pay are almost as infinitely flexible as well.  And no one is surprised if you roll over your mortgage every few years; staying in one place for 30 years is a thing of the past in our increasingly mobile society.  Even paying off your mortgage isn’t regarded in the same light today.  Most, if not all of your mortgage interest payments are deductible, so hanging onto a mortgage lowers your taxes. The type of mortgage you seek will depend on a number of factors.  If you are a qualified veteran of the armed forces, you may be able to obtain a 0% down payment loan.  Other loan programs require as little as 3% down, with standard loans available with 5, 10, 20% or more down.  Your agent can often help you determine the best loan for you and may recommend that you get “pre-qualified” or “pre-approved” for a specified loan amount.  You can save yourself thousands of dollars by taking the time to explore all the possible mortgage plans for which you may qualify.

A lot of your mortgage planning is going to be based on how large a monthly payment you can afford to make.  For example, let’s say you want to put down the standard 20% on a $95,000 house.   That leaves $76,000 to be paid.  Financial planners say you shouldn’t pay more than 28% of your gross income for housing, a figure that includes principle, interest, real estate taxes and property insurance (PITI.) If you earn $45,000 a year, 28% is $12,600 or roughly a thousand a month.  Can you make a $75,000 mortgage work?  Depending upon the amount you’d have to pay for taxes and insurance, probably you can.

After you know how much you can afford to pay, choosing a mortgage plan is the next step.  There are dozens of loan possibilities out there. The following are just a few of the options you can consider:

• Traditional Fixed Rate - usually carried for 30 years, its virtue is that the payment rate always stays the same.  When you budget, that unchanging sum is something you can count on, and you won’t get any nasty surprises if inflation goes crazy.  Still the most popular type of mortgage.

• Adjustable Rate -  ARMs, as they’re known,  can save you quite a bit of money.  You pay less initially, often two or three percent less than the going mortgage rate.  But later, if interest rates increase, so does your payment.  There are also ARMs that build increases into your loan no matter what happens to mortgage rates.  First-year payments may be low, but they increase (or “Balloon”) regularly.

• Convertible – these loans are adjustable with one foot in the fixed-rate world.  You can convert it to a fixed rate at certain times during the course of the loan.

• Two-Step Loans – these may be fixed or adjustable mortgages with a built-in rate increase after five or seven years.  Although the initial rate is temporarily low, after the increase your rate is always higher.  For the last 23 or 25 years of the loan you’re paying more than the going rate.  Also you may have to qualify again when the rate jumps, and it can be difficult if your life circumstances change.

• Fifteen-Year Mortgage – A 15-year payout can save you thousands of dollars in interest. The drawback, of course, is that your monthly payments will be a lot larger. Ask yourself if the next tax benefits you lose will be worth it.

• FHA and VA Loans – You don’t apply directly for Federal Housing Administration and Veterans Administration government-backed loans. You go through your lender, who will tell you if you qualify. Both types allow you very low down payments or, in the case of VA loans, no down payment at all. Your real estate agent can tell if you, and the property you want to buy, fit the criteria. A warning: The application process can be very time-consuming.

• Owner Financing – Sometimes the property owner will be willing to take back all or part of the mortgage. Generally, owner financing will be at a rate higher than average, and it won’t last for long – two or three years is common. The balance of the note, known as a balloon, has to be paid off in full when it comes due.  If you get owner financing, try for the longest possible term and be certain you can switch over to a bank or mortgage lender.

• No Income Check, No Asset Check – There is a mortgage out there for anyone, even people with uncertain incomes or a poor credit history. No income, no asset loans aren’t quite that open-ended. The lender will want to see your tax returns and other proof of your ability to pay. Because they are more flexible in terms of qualifying, these loans command a much higher interest rate.

With the variety and complexity of loan programs available you will probably want to contact a mortgage professional. Mortgage professionals or loan officers work with you to determine the type of mortgage financing that best fits your financial situation. These loan professionals are generally paid a portion of the fees (points) paid as part of the loan transaction. A point in real estate parlance is one percent of the total loan. If you select a mortgage loan program that requires one point, you will be required to pay one point ($750 on a $75,000 loan) at loan closing. Lenders also use points to cover the cost of making a loan as well as to create additional flexibility when setting interest rates. Generally, the more points a borrower is willing pay at closing, the lower the interest rate.

When you choose the kind of loan you want and you fill out an application for the lender, expect to pay a few up-front fees. Sometimes the application fee will include an appraisal fee and a credit report fee; other institutions charge separately for the appraisal. Generally these are non-refundable.  Before you invest in an application, it’s a good idea to get a copy of your credit report from a national reporting agency such as TRW. Often credit reports contain inaccuracies and you want to be able to correct them.  Your credit usage and credit history are critical components to loan approval. That is why it is so important to review your credit prior to application. By starting early, you have the opportunity to correct inaccuracies, begin to resolve with creditors any negative credit references that appear and to make sure that your credit usage is in line with standard lending guidelines. Most lenders allow your housing and debt payments to represent no more then 36% of your gross monthly income. If you find that your level of debt substantially reduces your ability to qualify for a home loan, you may want to consider establishing a budget that allows systematic reduction of your debt before you begin your home search. It is also important to establish a down payment. While down payments as low as 3% are available, your lender will need to verify the existence of these funds. Funds to be used for down payments and closing costs should be on deposit in a verifiable account for no less then 90 days prior to application.

 If you are turned down for a loan due to credit, help is available. Ask your lender if there are any special loan programs for which you might qualify or for the name of the local Consumer Credit Counseling Services. With a little help and some hard work, even bad credit can be corrected.  Richard A. Winters, a mortgage professional from Southold, New York says mortgage money is definitely out there. “What’s tightened up is not the availability, but the details the lenders want. You really have to make sure that all your I’s are dotted and your T’s are crossed before you apply or it will be kicked back to you.” So make sure you can contribute your part of the paper trail before you set out. Expect to be asked for two or three years of income tax returns. If you own your own business, or have income outside of your job, you will probably have to supply a financial statement.  Prepare to spend from 3-5 weeks locking up your mortgage. It can be a long process, but of course, it’s going to be worth it the moment you become a homeowner.

TAX BENEFITS: Yes, there are great tax benefits to owning a home! A sizeable portion of your mortgage interest and property tax can be deducted if you own a home (consult with your tax professional). The longer you own the more equity you establish in your property. Essentially, owning a home becomes an investment, a useable asset for future opportunities!