Thursday, February 5, 2009

Getting a Mortgage

Timing the real estate market is a lot like timing the stock market. By the time you think it's at the bottom, it's already on it's way back up. There are signs the real estate market is improving. Home prices are very good, since some of the sub-prime loans have readjusted and people who couldn't afford the new adjustment let the home go into foreclosure. Foreclosures have driven all home prices down.
Loans are going to be tougher to get. Unless you've been in a 9 month deep sleep you know banks are in trouble. They are now over-reacting to the mess they got us in about 3 years ago. It's the old pendulum theory, they were so far to one side in giving away loans to people who didn't deserve them, now they have to swing back 180 degrees the other way and make qualified buyers go through hoops to get a loan they more than qualify for.
If you are interested in buying a house, get prepared. You must have sterling credit. Even one late credit card payment could "ding" you FICO score 60-80 points.
*Speaking of credit cards, there are a lot of misunderstandings out there. Do not cancel your old credit cards. FICO scores, at least for now, are partially based on credit history. Keep that old credit card paid off, but use it once every 3-6 months for a small item, then pay it off immediately. That will help your credit history. Also, it is recommended you keep your credit card balance to no more than 30% of your total allowed credit limit. So, if you have a credit limit of $3000, do not charge over $1000 on any given month and pay in full at the end of the month.
*Contact a lender and get a copy of your credit report. Start fixing your credit by writing letters, finding out if there are any issues, etc. You need a FICO score of 740 for the best loan programs.
*You will need a downpayment of at least 3.5% for an FHA loan. If you want to avoid MIP (mortgage insurance premium) you will need 20% down. Some of this money can come in the form of a gift letter from a family member (this varies by program).
*You must show proof of income and reserves. There are very few "no doc" or no document loans where lenders will just take your word. Reserves can be up to 2-3 months of pay in the bank in the form of savings/retirement.
*Compare mortgage loan rates, however, be mindful that the real value in a mortgage is service as well. If an online mortgage company promises you something that seems too good to be true, it probably is. They may use a bait and switch program at the last minute, make you jump through impossible hoops and then deny your loan at the last minute or linger in their answers to your questions until you lose the low rate loan lock-in. I am not saying all online lenders are this way, but buyer beware. Value is cost plus service!

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