Finding the house of your dreams is without a doubt one of the most exciting feelings in the world. Deciding on how to purchase this dream home is the biggest financial decision most of us will ever make. Choosing the proper type of mortgage can be a daunting task for even the most experienced of financial decision makers. Let the Consumer Mortgage Bureau be your guide through the complicated mortgage world of real estate finance.
Mortgage loans are secured by your home. The loan amount is based on a home’s value- the amount of the loan will be determined by the value of your home minus any liens or unpaid mortgage(s). In the event you are unable to meet the monthly payment for the mortgage, the lender can foreclose and take your home.
Standard home equity loans or second mortgages are closed-end loans that can have a fixed term, a fixed interest rate, and fixed monthly payments, or they can carry an adjustable interest rate that fluctuates with a key index, such as the prime rate.
Home equity lines of credit are open-end loans or revolving credit lines meaning you can draw in amounts and at times when you have the need. The lender provides you with checks or other items to access your credit line. You may draw upon the account as long as you don’t exceed you line of credit. The amount of monthly payment is based on the amount of credit you have used. Some lenders may charge a fee for the use of the line of credit.
The Consumer Mortgage Bureau Plan of Attack
The Consumer Mortgage Bureau plan of attack empowers consumers with the knowledge and tools they need to make informed decision regarding the largest investment of most consumers’ lives.
1. How Much Can I Afford?
2. Do Your Research
3. Credit Problems
4. Pay Attention to All Important Cost Information (Rates, Points & Fees)
5. Down Payments and Private Mortgage Insurance (PMI)
6. Get Mortage Companies to Compete For Your Business
7. Can I Afford This Loan?
8. Read Everything Before Signing
9. Things To Remember
Ask Yourself How Much Can I Afford?
Consult your budget and utilize the Consumer Mortgage Bureau monthly spending plan to ensure all expenses are tracked and calculated. Both your current and proposed budget need to be examined.
Hopefully, prior to searching for your perfect home you consulted your monthly budget or spending plan to see what figure works within your financial picture. If not, please utilize the ledger below. This step is pivotal. Regardless of how perfect a home is, if you can not afford it, the dream house will quickly turn into a nightmare.
MONTHLY SPENDING PLAN
- Start with your monthly take-home pay. This is the amount you have left in your paycheck after taxes and other deductions have been made. Include all sources of income.
- Subtract the amount you need for savings, expenses and debt payments.
- The balance is the amount you can safely apply to debt repayment or saving.
- (Current) The column helps you determine how much of a mortgage payment you could bear every month.
- (Proposed) The column reflects your new mortgage payment and will be your new monthly budget if you move forward with this particular mortgage
Do Your Research
Contact only trained and licensed mortgage professionals (link to Consumer Mortgage Bureau member search). Learn about different types of mortgage products. Read the fine print.
Home loans are available from several types of lenders, thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price. You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.
Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers’ advertisements do not use the word “broker.” Therefore, be sure to ask whether a broker is involved. This information is important because brokers are usually paid a fee for their services that may be separate from and in addition to the lender’s origination or other fees. A broker’s compensation may be in the form of “points” paid at closing or as an add-on to your interest rate, or both. You should ask each broker you work with how he or she will be compensated so that you can compare the different fees. Be prepared to negotiate with the brokers as well as the lenders.
Credit Problems? Even More Imperative to Research Your Options
Don’t assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders. If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don’t assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price. Take the time to shop around and negotiate the best deal that you can.
Whether you have credit problems or not, it’s a good idea to review your credit report for accuracy and completeness before you apply for a loan. To order a copy of your credit report, contact:
Equifax: (800) 685-1111
TransUnion: (800) 888-4213
Experian: (888) 397-3742
Pay Attention To All Important Cost Information
Examine very carefully all information concerning rates, points, fees, down payment and private mortgage insurance.
Be sure to get information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved in the loan. Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan so that you can compare the information. The following information is important to get from each lender and broker:
- Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
- Ask whether the rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.
- If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
- Ask about the loan’s annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay, expressed as a yearly rate.
- Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate.
- Check your local newspaper for information about rates and points currently being offered.
Ask for points to be quoted to you as a dollar amount–rather than just as the number of points–so that you will actually know how much you will have to pay
- Ask what each fee includes. Several items may be lumped into one fee.
- Ask for an explanation of any fee you do not understand. Some common fees associated with a home loan closing are listed on the Mortgage Shopping Worksheet (INSERT MORTGAGE SHOPPING WORKSHEET)
A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable. Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. “No cost” loans are sometimes available, but they usually involve higher rates.
Down Payments and Private Mortgage Insurance
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), VA (Veterans Administration), or Rural Development Services are available, 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.
Do Not Be Afraid to Make Mortgage Professionals Compete For Your Business
Remember competition is a good thing. Be upfront with your mortgage professional and let them know what you are doing and where you are in the process. Even if the difference is a tenth of a point interest rate reduction, that is more money in your pocket every month.
When buying a home, remember to shop around, to compare costs and terms, and to negotiate for the best deal. Your local newspaper and the Internet are good places to start shopping for a loan. You can usually find information both on interest rates and on points for several lenders. Since rates and points can change daily, you’ll want to check your newspaper often when shopping for a home loan. But the newspaper does not list the fees, so be sure to ask the lenders about them.
The Mortgage Shopping Worksheet that follows may also help you. Take it with you when you speak to each lender or broker and write down the information you obtain. Don’t be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best deal.
Ask Yourself “Can I Make These Payments”?
Not only today, but in six months, two years, five years and 10 years.
Before applying for a mortgage loan, make sure that you have sufficient money for your expenses and borrow only when you can afford it.
If you are spending less each month than you take home and the additional debt load will not cut into the amount you have committed to savings, only then should you consider taking on additional debt.
Once you have established the amount you want to borrow, take time to figure out what you can afford for a monthly payment without putting a strain on your budget (Please see above monthly spending plan).
Read Everything Before Signing Anything
At the settlement table, review all documents. Read every page, if you have question about anything at all, please ask your settlement agent or mortgage professional. It is their job to make sure you understand the details of documents you are signing.
Know Your Rights, Fair Lending Is Required by Law
The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.
The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.
Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.
Things to Remember…
- You can lose your home if you don’t make the payments on your mortgage or home equity loan.
- You should only sign a contract after you have read the contract: your questions have been answered: and all blank spaces have been filled in.
- You need to make sure the loan payment and terms you were quoted agree with the loan payment and terms on you paperwork.
- You have the legal right to cancel a credit transaction on a refinanced or consolidation loan within three business days from the day the transaction is completed or closed.
- You have the right to change your mind on a home purchase mortgage loan at any time prior to the loan closing