Nolo's Essential Guide to Buying Your First Home (30 page)

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Authors: Ilona Bray,Alayna Schroeder,Marcia Stewart

Tags: #Law, #Business & Economics, #House buying, #Property, #Real Estate

BOOK: Nolo's Essential Guide to Buying Your First Home
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If you want to make a low down payment,
check out FHA mortgages, which allow you to purchase with as little as 3% down. For more information, see Chapter 7.
 
If you are able to find one of these loans, you’ll usually have to show good credit and pay higher interest rates and more fees, including PMI. So while the out-of-pocket expenses will be relatively low (pared down to your remaining closing costs), your monthly costs will be significantly higher.
While we won’t prophesy heartache, putting nothing down is still risky. If the value of the property falls below what you owe, you’re either stuck paying your way out of the hole or selling the house for less than you paid and finding cash elsewhere to pay off the mortgage balance.
The risk is even greater when you combine low-cost financing tools like option ARMs and interest-only mortgages. In those cases, if you can’t afford to pay down the loan principal and your property value doesn’t rise, you could go deep into debt and even lose your home.
Where Do I Look? Researching Mortgages
 
Once you understand your loan options, you can start researching where to get the best deals. We advise exploring several research avenues, from a mortgage broker to online. Then you’ll have plenty to choose from, or at least know what to ask a mortgage broker about.
As you research, organize your findings in one folder or file. It’s easier to do this if you get printed information about different loan options, so ask for that whenever possible. You might also want to create a worksheet or spreadsheet to compare different mortgage features like interest rates, fees, or other terms or requirements. You can create this worksheet yourself or use one available online, like on the Federal Trade Commission website (
www.ftc.gov
, search for “Mortgage Shopping Worksheet”). No need to fill out your worksheet for every mortgage, just the few you’re seriously considering.
Online Mortgage-Related Sites
 
The quickest way to get information about mortgages is on the Internet. In addition to sites operated by individual lenders, various sites aggregate lender information and allow you to compare different loan options. At bankrate. com, for example, you can compare rates based on your geographic location, the amount you want to borrow, and the terms you’re seeking. Then you can contact the prospective lenders directly to get more information.
 
CHECK IT OUT
 
Check out these sites to compare different lenders:
•
www.bankrate.com
 
 
Be careful, however, about any websites that require you to enter personal information like your name, Social Security Number, or address. In the worst case, you can actually agree to purchase a mortgage online—not the smartest impulse buy. More likely, you’ll be contacted by potential lenders, or they’ll check your credit history (and multiple inquiries can affect your credit score, though all checks within a 14-day window are treated as one.)
Newspaper Ads
 
The real estate sections of newspapers often advertise interest rates. Usually, lenders will list the different loan products they offer, with their base interest rate, APR, any points, and sometimes fees charged. These are probably the lowest rates offered to the very best borrowers—not necessarily the rate you’ll get. Also, because interest rates change daily, these numbers may not be an accurate reflection of what actual rates are. Use them only to ballpark what’s available.
Banks and Other Direct Lenders
 
You can also research rates through banks and other direct lenders (such as savings and loans, credit unions, and investment firms). You can do this online, pick up printed information that’s available in bank lobbies or sent in the mail, or talk to a loan officer. Your options range from large national lenders to small local ones: Don’t assume a bigger bank means a better loan.
Mortgage Brokers
 
A mortgage broker is an obvious resource and should be able to give you detailed information and help you get preapproved when you find a good loan. For more information on choosing a broker, refer back to Chapter 5.
I’ll Take That One! Applying for Your Loan
 
Assuming you get preapproved for a loan (described in Chapter 3), you’ll have already dealt with most of the necessary loan paperwork and given a lender a laundry list of your relevant financial information. (Even if you decide to work with another lender, you’ll still have all the documents in one place.) If you don’t get preapproved, you’ll probably get a loan after you’ve made an offer on a house and may be pressed for time. Usually, your contract will give you a few days to find financing on terms laid out in the contract. The lender is still going to want the documents listed in Chapter 3, as well as those below.
Assembling Your Documents
 
After preapproval, and after you’ve chosen a house, but before the loan is finalized, your lender will need:
•
A copy of the house purchase contract.
Your real estate agent should be able to provide this directly to the broker or lender.
•
A preliminary title report.
The title company should give this directly to the lender or broker. The report tells the lender whether the seller owns the property free and clear and whether there are any financial or other encumbrances on the property.
•
A property appraisal.
The appraisal report tells the lender whether you’re asking to borrow more than the house is worth. The lender will probably schedule the appraisal and just ask you to show up for the appraiser’s house visit. The appraiser will normally give a copy of the report directly to your broker or lender.
 
It’s also typical for the lender to ask permission to get more financial information about you by contacting different entities who have that data. This can include getting not only your credit history, but also your employment and bank records, and possibly even IRS tax records.
 
CD-ROM
 
The “Financial Information for Lenders” worksheet in the Homebuyer’s Toolkit on the CD-ROM includes a complete list of the documents you need to apply for a loan.
 
Filling Out the Application
 
Many lenders use a standard mortgage application form called the Uniform Residential Loan Application (sometimes called “Form 1003”), mainly because it’s used by Fannie Mae and Freddie Mac. You might want to take a peek at the form before it’s given to you, at
www.efanniemae.com
. Although the form is quite long, a lot of the information is stuff you already know. The rest, the loan officer or mortgage broker should be able to help you with.
If you’re lucky, your mortgage broker or loan officer will actually offer to fill out the form for you (sometimes after asking you to fill out a mini-version). At a minimum, they should be willing to explain how certain items should be filled out. Ultimately, however, you’re responsible for making sure the information is accurate, truthful, and complete, so review the form carefully before signing.
You May Want to Lock in a Rate
 
Interest rates change frequently. If you apply for a loan and rates go up before the sale is complete, the lender will require you to pay the higher rate.
To avoid that, you can ask for a “lock in” or “rate lock.” It ensures you get the interest rate quoted to you. If interest rates are on the rise, this is a great thing, especially if you can’t afford a higher rate.
There are some downsides: Lock ins are usually tied to a specific property, and they’re usually short term. Typically, you can get a lock for 30 to 60 days without much trouble, but you may have to pay for it, often in the form of extra points or a slightly elevated interest rate.
If you get a lock in, make sure it’s in writing and specifies the interest rate and points you’ll pay on the mortgage. For more information, see
www.federalreserve.gov/pubs/lockins
.
 
 
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Play it straight.
Think a little fib on your application is no big deal? Watch out: It’s known as mortgage fraud, and as mortgage broker Russell Straub explains, “It’s rarely prosecuted on the front end, but if a mortgage goes bad and ends up in foreclosure, a scapegoat is usually looked for. The original application is scrutinized, and in the worse cases—which I’ve seen—borrowers go to jail.”
 
Getting an Appraisal
 
The final—and easiest—step in your loan application process is allowing the property to be appraised. Usually, you literally stand back while the lender chooses the appraiser and tells you what day to be at the house to meet him or her. You also pay the appraiser’s fee, around $400.

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