Wednesday, July 23, 2008

Getting a Mortgage to Finance your first home

Probable the biggest and most expensive asset that an average individual will buy in a lifetime is a home. Very few people can afford to save and pay cash for a house. Most people will need to apply for a loan to buy a house. The newly purchased property is mortgaged, or used as security for the loan – hence mortgage loan. Individuals and companies use mortgage loans to purchase commercial real estate. Principles of mortgage finance are generally the same, however on this page our focus is on residential property mortgages.

Buy or rent?

Most people live in rented housing before they purchase a home. There are several factors you need to consider to decide whether to buy or continue to rent:

Advantages of renting

Flexibility – it is easy to get into a rental contract, and most of them are for a year, you can therefore terminate it at the end of the lease term and move to another town. By contrast selling your house if you have to move may not be easy especially in the current market conditions (2007 -2008)

Low initial cost – in most cases the rent deposit is just a month’s rent. To purchase a home, you will generally be required to come up with a down payment or at least pay for closing costs that can add up to thousands of dollars.

No maintenance cost – most rental contracts require the landlord to keep the property in a habitable condition, that cost should already be factored in your rent. In some apartments, some utility costs are inclusive in the rent and that makes it even better. When you are a home owner, you pay for your maintenance costs, all your utility bills, home insurance, sometimes home owner’s association fees and real estate taxes on your property.

Advantages of buying

A home is a secure long term investment. You are probably thinking I wrote this before the 2007 – 2008 housing market crisis. There are distortions in the market, created by speculative investors and aggressive lenders that have led to this crisis. The market is going through a correction, and there is going to be casualties, but at the end with all the attention given to this crisis by the Federal government the housing slump may bottom up probably in the 2008 – 2009 period. Historical data shows that besides the occasional housing market slumps, property values go up overtime.

The mortgage interest rate expense is deductible on your tax return, when you itemize your deductions. Put in another way, the Fed is picking up a portion of your cost for home ownership. This tax benefit is far much greater than the renters’ credit that renters receive in some states.
Privacy – if you are living in your own home you have a sense of security that comes with ownership and you have more privacy compared to a renter who has to deal with land lord inspections.

Advice for first time home buyers

Shop Around

Just because you are a first time home buyer does not mean you can not be choosy. When you are looking for your first home, make a list of the criteria of utmost importance and do your best to stick to it. First time home buying is stressful but if you prepare yourself with a good plan, a good real estate agent and a list of what is important to you and on what you are willing to compromise, you'll find a starter dream home that really fits the bill.

Reasons to Use a Real Estate Agent as a First Time Home Buyer

Why should you use a real estate agent as a first time home buyer? They have the professional knowledge and experience to find you the home you've always dreamed of. Here are some basic reasons why using a real estate agent as a first time home buyer is a good idea:

Negotiation Skills - Great real estate agents know how to negotiate. They represent their clients in negotiating the home price, anything that needs to be addressed after the home inspection, closing details and the like. They have an impact on every aspect of your home buying process and using a real estate agent can mean saving thousands of dollars.

Experience - Looking for a home and getting through the closing process the first time can be incredible intimidating. Real estate agents have the experience to guide you through this process and they have the knowledge of neighborhoods, homes or condos on the market and properties coming on the market that you should absolutely tap into.

Resources - Finding a home inspector, a closing attorney or agent, an appraiser, a mortgage broker can all be arduous and painful. Your real estate agent will have contacts in all of these areas. You may find better mortgage rates online, but it doesn't hurt to explore all of your options and tap your real estate agent's network.

Low Down Payments with a First Time Home Buyer Program

Are you worried about coming up with a down payment as a first time homebuyer? There are many programs out there that are specifically designed to help with this very concern. Several programs require little or no money down. Did you know the federal government even allows for a one time withdrawal, up to $10,000, from an IRA or retirement account with no penalty for first time home buying? It is hard to decide between the various mortgage programs out there, which is why you need to develop a relationship with your mortgage broker. They can help you find the right first time homebuyer program for you and explain all of your options thoroughly.

Getting Your First Home Mortgage

If you are ready to start your first time home buying process, make sure you educate yourself on your options and do not just depend on the advice of others. For instance, first time home buyers are often entitled to special government funded mortgage programs that have
low interest rates and low down payments. If you arm yourself with knowledge, you can explore all the options you have.

You may still be renting because you think you can not get a mortgage as a first time home buyer. This is often not the case, so you should really find a mortgage broker online or locally to consult with. The best thing about mortgage brokers is that they will coach you on what you need to do to get into a better position if you need to.
Additionally, they will work harder to find you better programs if you prove your loyalty to them. When you talk to your mortgage broker you need to ask what kinds of programs you qualify for. They will get your credit score and analyze your financial data to assess what you can get and what you can afford. Take this information to your real estate agent and begin your search only looking at the properties you can really afford.

What do you need to look for in a mortgage program as a first time home buyer? Here are a couple of tips and guidelines:

Flexibility - Make sure you get a program that offers a monthly payment you can really afford. Be honest with your mortgage broker if your payment seems out of reach. They may be able to suggest a three or five year ARM mortgage with a lower interest rate and lower payments or an interest only loan to get you into your home without giant mortgage payments.

Building Better Credit - If your credit isn't perfect, your mortgage broker can probably find you a program that will help you build your credit. The payments may be flexible and as you make more payments on time, your interest rate may even drop!

Long Term Goal - Are you planning on staying in this home forever, for three years, for five years? Communicate your goals to your lender because in situations like these they may have several mortgage options from which you can choose.
Why are mortgage applications so painstaking, long and detailed?

You are borrowing a huge amount of money here, and they want to make sure they know everything about you. Here are the most important things on which to focus during the mortgage application process.

Employment Information – Mortgage lenders calculate their risk based on your habits and your employment and income habits are of paramount importance.
Credit History – First, you should know exactly what is on your credit report and what your credit score is before you fill out a mortgage application. They will pull your credit report but sometimes, if a loan has been paid off and not yet removed, they will need explanations about debts that show up. Accurately report your expenses and payments. They calculate what you can really afford, do not lie to get more than you can afford, let your lender guide you on what will be feasible for your budget.

Housing Ratio and Debt Ratio – these ratios are not as complicated as they sound. They are simply percentages of your monthly income.
The Housing Ratio (typically 28%) is the percentage of your income a lender will allow you to use for housing expenses. If your gross monthly income is $5,000 and the Housing Ratio is 28, then the lender will allow you 28% of the $5,000 for housing expenses when you qualify for a mortgage loan. 28% of $5,000 is $1,400.
The Debt Ratio (typically 36) is the percentage of your income a lender will allow for long term debt. Your housing expenses are long term debt, but all of your other loans and credit accounts that will not be paid off within 10 months are considered long term debt, too. Using the gross monthly income of $5,000 mentioned above and a Debt Ratio of 36, your maximum monthly debt allowance is $1,800.

To continue this Debt Ratio example, if you have minimum monthly payments due of $900 for a couple of cars and credit cards, you will have to subtract them from the $1,800 leaving only $900 for your monthly housing payment. Subtract about 10% from this for insurance and taxes and you qualify for a loan with a monthly payment (principal and interest) of $810.00.

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