by:  JR Hevron - MortgageLoan.com

Five common mistakes that people make during the mortgage process

It’s no secret: looking for your dream home is a lot more fun than applying for a mortgage. The thing is, unless your mortgage is firmly squared away before you start house hunting, you may not get the house you want. You won’t know exactly what you can afford, and you won’t be competitive with other prospective buyers who can close the deal quickly.

Here are five common mistakes that people make during the process of getting a mortgage. These mistakes can cost you money and make it harder to get the right mortgage for you. And they can make the process take a lot longer, which can cost you the house that you want.

Mistake #1: Not being on top of your finances ahead of time

Long before you even think about buying a house or getting a mortgage, make sure that your finances in order. Here are a few things that you should do now:

• Do a credit check on yourself at least six months in advance. This will give you time to tend to any problems that show up and hopefully fix your score. A lower score means a higher interest rate.
• Don’t make any large purchases (like a car or a boat) or switch jobs before after you have applied for your loan and your loan is funded. These kinds of activities can lower your debt-to-lending ratio and make it harder to get a loan.
• Always pay your bills on time. Late payments can hurt your rating.
• Let your loan broker know about any past financial difficulty. If they know about your situation ahead of time, they can likely help you to work around it.

Mistake #2: Not getting pre-approved for a mortgage before looking for a house.

Getting pre-approved for a mortgage not only gives you a better idea of what you can actually afford, but it puts you in much better a better position for getting the home that you want.

Getting pre-approved means that you have already chosen a lender, filled out the paperwork, submitted it, and have received a pre-approval certificate. For the seller, it means that you should be able to close quickly on a home and that might make you a better match for them.

Take note: getting pre-qualified is not the same thing as getting pre-approved. Getting pre-qualified means that the lender has informally reviewed your assets, funds, and debts to find out the range of mortgages you might qualify for. A pre-approval is more of a commitment from the lender for the loan.

Mistake #3: Not shopping around for loan brokers

For those who feel stressed out by the process, it’s easy to go with the first broker that you find.

 In the case of a bad broker, this can ultimately lead to even more stress. Make sure that you are working with a loan broker who understands the process and is willing to take the time to explain the terms to you in easy to understand ways. Also, ask your broker for his or her performance guarantee: a sale can easily be stopped by a mortgage not going through.

 Mistake #4: Not factoring in expenses beyond your mortgage payments

When you are figuring out your monthly expenses, your mortgage payment isn’t everything. It’s easy to end up with a mortgage that you can’t afford if you don’t factor in property taxes, homeowners insurance, HOA fees, potential higher utilities, maintenance, and repairs.

 A smart idea is to limit you total payments to something reasonable like 25%.

 Mistake #5: Not factoring in closing costs

When you close on your loan, you should have enough money on hand to cover closing fees. These fees can total as much as to 2% to 5% of the total price of the house. These costs include expenses for things like escrow fees, property taxes, title, insurance, interest adjustments, appraisal fees, various loan fees, and home inspections and more.

To get an idea what these fees will be, make sure to get a Good Faith Estimate from the lender. They should be able to provide this to you within three to seven business days of applying for the loan.

You should also have money on hand for after the sale to take care of unexpected moving expenses or emergency home repairs like a broken water heater.

Do yourself a favor and educate yourself online or with a basic book. When it comes to getting your dream home, the time spent will be more than worth it.

Note:  How to get your REAL FREE CREDIT REPOR - www.annualcreditreport.com

About FHA Loans

FHA Loan Eligibility

An FHA loan is a federally insured loan made by the Federal Housing Administration, which has been insuring mortgages since 1934. FHA loans are very good options for many borrowers.

Summary of FHA loans

FHA Eligibility requirements

• You must have a valid Social Security Number, be a legal resident of the United States and be of legal age to obtain a mortgage in your state.
• The lender verifies whether you can qualify for the mortgage by checking income, assets, debt load and credit history.
• You must be able to qualify for the loan.
• Typically, the only income limitation is to have enough income to afford the mortgage in addition to other debt payments.
• Although there is not a minimum credit score required to qualify, your score is still examined to help determine the interest rate. Your FICO scores can be lower than those required for a conventional loan.

Good candidates for FHA Loans

• If you are a first-time home buyer, an FHA loan is a good option. It can help you get a better rate than a conventional mortgage and you do not have to have as large of a down payment.
• Those who can only afford a small down payment or those who were given the down payment as a gift often find an FHA loan to be a good choice. It only requires 3.5 percent down and the down payment can be a gift from a family member or other source.
• If you have less-than-perfect credit, an FHA loan might be your best option. Because the Federal Housing Administration insures the loan, lenders can provide a loan to a borrower with poor credit without needing to charge exorbitant interest rates.

If you meet the eligibility requirements and seem to be a good candidate for an FHA loan, you can contact an FHA-approved lender to see if you can qualify for a mortgage. However, it is always important to compare when shopping for a mortgage. Investigate conventional loans, too, to see where you can get the best deal.

Note:  If you have had a bankruptcy. You may be able obtain an FHA loan two to three years from the date of your bankruptcy discharge, as long as you've maintained good credit since your debts were discharged. 
If you have had a foreclosure. If you keep your credit in excellent shape since a foreclosure, an FHA loan may be available to you two to three years from the final date of your foreclosure. 

Buying a house

Getting Loan Approval - What Banks Look At

What is your FICO?

A FICO score is a credit score developed by Fair Isaac & Company to help lenders determine the risk involved in lending money to a person applying for a loan. It is widely accepted by lenders as one of the most important things to help determine eligibility as well as specific amounts, rates and terms that can be offered. FICO scores range from 300-850. The higher your score, the less risk involved in lending to you. There are many factors that influence your credit rating. Some of these factors, such as your payment history, weigh more heavily than others.  Your score can change frequently as new credit is established or paid down/off.  All factors can be grouped into 5 main categories:

·Payment History – Do you make your payments on time? Since this determines (on average) 35% of your score, it is obviously in your best interest to make all payments on time! Your payment history includes credit cards, car payments, mortgages, student loans and other loan types. Other public records on file, such as a bankruptcy, will be calculated in this group as well. If you have been late on payments bits of additional info, such as how recently these payments were made and how much time elapsed between the due date and pay date, will also factor into your score.

·Outstanding Debt – Most people have debt. The important factor is how much much debt do you have.  All outstanding balances for credit cards, car loans, mortgages, etc. will determine (on average) about 30% of your score. How many of these accounts have balances?  If you can significantly pay down or pay off credit card debt, this will really help during loan approval. 

·Credit History – How long have your current accounts been opened and how long has it been since you used each of them? This usually determines approximately 15% of your score. If you don't have a credit history yet, you should begin by establishing credit accounts and be sure to always pay them on time. The less credit history you have, the less you'll be able to borrow.  Read article about how to repair your credit.

·Pursuit of New Credit– Every time you apply for credit, there is an inquiry into your current credit score. How many inquiries into your credit score are there and how recent were they made? If you recently applied for a VISA card, Nordstrom account and car loan, you may want to hold off applying for a home loan for a few months. Each inquiry may slightly reduce your FICO score.  This usually accounts for approximately 10% of your total score.

·Types of Credit in Use – How many types of accounts are reported for ATM cards, car loans, credit cards, travel accounts, or any other type of account where payments are being made? This makes up about 10% of your final score as well.

Once your bank is aware of your FICO score they may or may not choose to share this information with you. Assuming they do share your score with you, it is important to remember the higher the score, the more likely you are to obtain a loan. Also, a higher score also means lower interest rates.  See two examples of home loans below and the amount of money you can potentially save while boasting a great FICO score.

Example of a 30 Year Fixed Rate Loan for $150,000
 
FICO Score                   

As you can see, over a long period of time you would save much money if you have a good credit rating upon loan application. For this particular loan, you have the potential to save $56,520 over 30 years. That’s money that could potentially be invested into your retirement, used for vacations, a new car or two, etc. etc. It pays to keep your credit score as high as you are able.

Now, a great FICO score is not the only determining factor in loan approval. There are additional factors that figure into the approval process as well. FICO scores aren't as important in FHA loans as with conventional loans.  Some examples include:

    * Income – Your current income will also be a significant determining factor in loan approval. Pay stubs for the previous two months as well as W-2 forms for the previous year will be requested to help determine your ability to repay the loan amount.

    * Employment History – Your employment history can tell a lender much about your stability. If you’re constantly switching jobs it could raise a red flag. However, as their may be other factors influencing your employment length (such as a spouse in the military), lenders may choose to ignore this factor.

    * Down Payment – Do you have a down payment? How much? Being able to provide a down payment can be extremely useful in the loan approval process. It means the amount borrowed will be less than the total cost to purchase the home. In some cases, depending on the amount of the down payment, your monthly payments can significantly drop.

The important thing to remember is that no matter what your FICO score, employment history or income levels are there are things you can do to help improve your chances of obtaining loan approval. Get referrals to local non-profit credit counselors or financial advisors to help optimize your resources fully.

And one last thought, get your finances in order, including working on improving your credit scores, before you get serious about buying a home. 

Buying a house                                        

What to consider

Some Advantages of Owning Your Home

There is a lot of personal satisfaction with owning your own home, but there are more advantages than that, including some pretty significant financial ones. The cost of your mortgage loan interest can be deducted from your federal income taxes, and usually from your state taxes. Interest (as opposed to principal) will be nearly all of your monthly payment for over half the number of years you'll be paying your mortgage. So this adds up to some savings come income tax time. Property taxes that you pay are also deductible. Another financial plus in owning a home is the possibility that its value will go up through the years. Property values don't always increase but generally over time the trend is to increase in value.

Choosing a Location

Deciding on where to buy your home depends mostly on where you work and whether you are willing to commute or not, and also on your family lifestyle. If you have children, how good are the schools and how close are they to the neighborhood? Will you need public transportation?  Is it available? If you're considering moving to an a neighborhood you aren't familiar with, drive and/or walk around it during the day and evening.  Visit with some of the residents.  Find out what they like and don't like about the neighborhood.  It's also a good idea to travel the route to and from your work - and do that during the same hours that you would be driving should you purchase in that neighborhood. 

There are many other factors you should consider when choosing the location of your home. Contact the local police department to find out about crime in the area.  Also, contact the city to determine if there are any proposed changes to zoning  or any new major developments planned.

Hire an Experienced Realtor to Help You

Using a real estate agent is  a particularly good idea for a first-tim  home buyer. All the details involved in home buying, especially the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. 

Understanding "The Market"

Its important to understand the market conditions at the time you are going to buy a home. Your Realtor can help educate you and there is a lot of information available on the internet.  You'll want to look at the trends with home prices, mortgage rate movement, the level of real estate sales activity. The more you know, the more control you have. In a "buyer's market," the number of homes available for sale exceeds the demand, so prices will either stabilize or drop. With fewer buyers and more homes, you not only have more options to choose from, you also have greater negotiating leverage. You have more time to look for the right home and you can evaluate the choices without feeling pressure to act too quickly. A "seller's market" is when the number of potential buyers exceeds the number of homes for sale in a market.

What Will I Have to Pay for At Closing?

How much money will I need? In general, you need to come up with enough money to cover three costs: earnest money is the deposit you make on the home when you submit your offer to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay; and closing costs, the costs associated with processing the paperwork and the loan if you are borrowing money to buy a house.  You will learn more about the specific amounts of these items in working with both your Realtor and your loan officer.

What is a Mortgage?

A mortgage is security for a loan on the property you own. It is repaid in regular mortgage payments which are blended payments. This means that the payment includes the principal (amount borrowed) plus the interest (the charge for borrowing money). The payment may also include a portion of the property taxes.

How Much Can I Afford?

All taken into account, how much can you afford? The shortest and best answer to that question is: it depends--on a number of factors. The most important are your gross household income, your down payment, and the mortgage interest rate. Lenders also consider your assets and liabilities. Your own lifestyle and debt comfort zone also come into play. If you understand these variables, you can examine all your options. You can make the best choice for you and even save money. Lenders follow these two simple rules to determine how much you can afford in monthly housing costs: The first affordability rule that many lenders suggest is that your monthly housing costs shouldn't be more than 28 percent of your gross monthly income (before taxes and other paycheck reductions). Housing costs include including mortgage principal and interest, hazard insurance, real estate taxes, and PMI (mortgage insurance - if applicable), but exclude utility bills.

FHA Loans

If you don't have great credit and don't have much money for a down payment, your best bet might be an FHA loan.  These loans have the lowest down payments available (other than VA loans). Currently the minimum down payment for FHA loans is 3.5%.  These are good loans and are helping lots of people who can't come up with the higher down payment required with conventional loans. 

Here are a few more things that you will need to understand in buying a home:

Mortgage insurance:  Which is also known as private mortgage insurance (PMI), is required for some loans (all FHA loans). It protects your lender, should you default on your loan.  According to the Federal Reserve Bank of San Francisco, "Under [The Homeowner's Protection Act of 1998], mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan."

Escrow:  With a purchase as large as this, it is important that one party doesn't run off with all the funds and that there be a neutral party to handle the funds.  This is where an escrow comes into play. All necessary and agreed upon funds are put into a third party account. When all terms have been met, then the funds are released to the appropriate parties.

Offer or purchase agreement: When you have found a home you like, you'll discuss with your agent how much you want to offer for the house. This will sometimes be than the price the seller is asking and sometimes it may be more.  It will be based on the current market in your area and the condition of the home, and the price of homes in the neighborhood. Remember, your offer is the price you are willing and able to pay for the property. Listen to your Realtor's advice on how much to offer.

Property taxes:  Property taxes are paid each year to your local county government. In Riverside County we pay twice a year.  Property taxes are generally a percentage of the value of your property. But in Southern California, some developments and neighborhoods have additional taxes (mello roos and special assessments).  Read about Mello Roos taxes. Those are usually a flat fee that is paid in addition to the base tax rate.  The more expensive your home, the more you will spend on property taxes.  

Hopefully, this will help prepare you as you get started looking at homes. When the time is right and you find a house that you would like to make an offer for, make sure the asking price in line with prices of similar homes in the area, the price is in line with how long the home as been on the market and be sure to consider how much competition with buyers there is in the market at that time. Your agent can provide information on the prices of similar homes - usually called "comps" or comparable homes. 

Read about First Steps for First Time Buyers

Learn about Closing Costs

The Perfect House Does Not Exist