Mortgage Tips and Facts to Prepare Yourself for Homeownership

Initiating the purchase of a new home will spur a range of emotions from excitement to stress with a touch of helplessness when realizing how in-depth the process actually is. Educating yourself with the lingo and procedures provided by the subsequent list of home loan information can go a long way in insuring successful long-term homeownership and potentially keep a few of those hard-earned dollars on your side of the closing table.

  • If you are thinking about buying a new home, plan to take special care of your credit for a few months beforehand. Making any out-of-the-ordinary deposits, withdrawals, or making late payments on your debts can cause mortgage lenders to ask questions. It is also a good idea to check your credit report with the three reporting agencies to make sure there are not any mistakes or issues that need addressed before applying.
  • Did you know that shopping around for mortgages or loans can affect your credit score? When lenders make multiple inquiries with reporting agencies to review your credit history, this can bring down your credit score. Fortunately, this drop may be less damaging than was first thought. This is because most reporting agencies lump these inquires into one, if transpired within a short period of time, typically 45 days.
  • When shopping around for an ideal mortgage plan, be sure to take into consideration more than just the interest rate. For example, what is the difference between a mortgage which has a low interest rate but charges discount points at closing, as compared to a mortgage which does not charge points and has a higher interest rate? Or, you may want to consider the term of the mortgage or mortgage type such as fixed rate versus an adjustable rate.
  • Are you unsure of how much of a mortgage payment you can afford on a new home? The Federal Housing Administration (FHA), caps the amount of mortgage payments to 31% of gross (pretax) income to prevent homeowner’s from getting into a mortgage that they cannot afford. While this is only enforced on FHA insured loans, you can still use this as a guide for how much you can afford.
  • Did you know that when you refinance your mortgage you do not have to reset the calendar on the maturity date? For example, if you refinance a 30-year mortgage after paying for 10 years, you can choose to have the loan amortized for the original mortgage date, in this case 20 years from the date of the refinance.
  • Are you avoiding refinancing your mortgage for fear that the closing costs will be too much for you to afford? Some lenders may offer a no closing cost refinance option. It is important to understand that this may result in a higher interest rate for the duration of the mortgage, as a result.
  • Are you thinking about applying for an FHA loan in order to purchase a new home? Unfortunately, the amount of the home may prohibit you from qualifying. The FHA has predetermined mortgage limits which may vary by state or county, as well as the type of dwelling (one family vs. multi-family). You can view the limits for your area on the FHA Mortgage Limits page of the U.S. Department of Housing and Urban Development website.
  • Most lenders require the homebuyer to pay approximately 10% of the home’s value, in the form of a down payment. Similarly, those considering refinancing their home are typically required to have 10% equity in the home. On the other hand, FHA loans require a 3.5% down payment, and programs such as VA loans are often free of down payments altogether, which may be more affordable options if you qualify.
  • Are you aware that making a single extra mortgage payment during the year can help you reduce the term of repayment? While this is not an affordable option for all, using unexpected income such as tax returns for this purpose can be very helpful in the long term.
  • Are you struggling with your mortgage payments? Seek a housing counselor to find out how they can help, as well as to avoid foreclosure. These counselors may be able to help you receive a mortgage modification which can help you get a reduced interest rate and ultimately reduce your monthly payment. HUD offers a list of approved housing counselors by state, on their website.
  • When selling a home it is a good idea to determine the market value of your home. Many sellers confuse this with the value determined by an appraiser, or based on the price of other homes in the area. The market value is determined as how much a potential buyer would be willing to pay for the home in today’s market. Visit the Federal Housing Finance Agency website to review their provisions for determining the fair market value.
  • Did you know that the best time of the year to buy/sell a home is in the spring? This may be for a number of reasons including the fact that families do not want to move their children during the school year. If you are planning to move, it is a good idea to have things in order towards the end of winter to allow ample time for showings and open houses.
  • Do you fear that your foreclosure will prevent you from ever owning a home again? Major mortgage bankers such as Fannie Mae and Freddie Mac will typically finance your mortgage after three years, considering your home foreclosure was due to extenuating circumstances such as unemployment, among others. It is important to understand that this mortgage may have a higher interest rate, or may require a larger down payment to offset the risk for the lender. Unfortunately, this foreclosure will remain on your credit report for up to seven years, just as with bankruptcy.

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