Get the Best Mortgage in Town

One of the newest and most important developments in real estate lending is that now almost everyone can get financing, from the most- to the least-qualified buyers.
In the past, in order to get a mortgage you had to be a premium buyer—high salary, few other debts, cash in the bank, and sterling credit. Not so anymore. Lenders are taking less-qualified buyers and offering them financing with slightly higher interest rates to make up for the added risk. In other words, if you’ve been shy of applying for a mortgage because of some credit problems, give it a try. You could be surprised at the positive results. Of course, if you’re that prime buyer, you’ll get the lowest interest rates and the best terms.

The Lowest-Interest-Rate Hunt
For most people, the first consideration with regard to a mortgage is the interest rate. Higher interest rates translate into higher payments; lower rates, lower payments. Consequently, most people want the lowest interest rates possible.

TIP—SHOP LENDERS, NOT MORTGAGES
If you have a credit blemish or have trouble otherwise qualifying, shop for a lender, not an interest rate. Some lenders specialize in borrowers with problems; others won’t touch them.

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TRAP—BE CAREFUL WHEN COMPARING MORTGAGES
The best way to compare interest rates is to do it for like-kind mortgages. You don’t want to compare apples and oranges. Today there are two major kinds of conventional (nongovernment insured or guaranteed) mortgages available: a fixed-rate mortgage, where the interest rate does not change for the life of the loan; and a variable-rate mortgage, where the interest rate can change. When you compare mortgages, be sure you compare fixed-rate to fixed-rate and variable to variable. (There are so many different varieties of variable-rate mortgages that comparing them is really very difficult.) Of course, atsome point, you’ll also want to compare variable with fixed, but that’s a much more complex calculation, as we’ll see shortly.
How to Compare New Fixed-Rate Mortgages
Each lender who offers fixed-rate mortgages posts its current interest rate. These rates are often printed weekly in local papers. They also can change daily. In many areas a newsletter or online service gathers them all up and sends them off to agents.

TRAP—WHEN INTEREST RATES ARE LOW, LOCK THEM IN
Variable interest rate mortgages always offer lower rates. But the variable rate will rise when the interest rate market goes up. It’s usually better to lock in a fixed-rate mortgage when the interest rate market is low, rather than to try for an extra point or so by getting a variable rate.
*
There are also numerous online lenders such as eloan.com and mortgage.com that post their current interest rates. These are very easy to check simply by going to their Web site. Major online services such as MSN.com and AOL.com will also lead you to mortgage rate postings.


But best of all, if you check with a mortgage broker who handles dozens of lenders, he or she can quickly tell you the best rate in town for the specific amount and type of loan you’re hunting for.

There are also points and fees. What’s that all about?
What Are Points?
A point is a single percentage of a mortgage. Thus two points on a $100,000 loan equals $2000; four points equals $4000, and so forth.

Points are a trade-off the lender is making. If you want a lower-interest-rate loan (lower than the market), you can get it, if you’re willing to pay points. The more points you pay, the lower the interest rate will be.
On the other hand, since points are cash out of your pocket, you may be willing to accept a higher interest rate. The higher the rate, the fewer the points. Normally, at zero points, you’re paying the market rate.
Note: The interest rate is very important since it will help determine your monthly payment. The higher the interest rate, the higher your payment. The lower the interest rate, the lower your payment.

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How to Get a Lender to Put Up All the Money

Nothing-down financing—does it really exist? Or is it just a buzzword used by real estate gurus selling you a seat in a seminar or a tape on late-night TV?
Today, it really does exist, for some buyers.
And that’s a good thing, too. Most people who want to buy a home often find that the biggest roadblock is coming up with the cash down payment. (So if you’re feeling the pinch, rest assured you’re not alone!)
Let’s face it; we live in a credit society. Afamily with a $100,000 annual income can easily obtain a new car loan with almost nothing down and a $500-a-month car payment. But that same family may not have $5000 in the bank in a savings account. In fact, over 70 percent of all families have little or no cash savings. (On the other hand, that other 30 percent or so have whopping big savings accounts!)
What Your Mortgage Payment Includes:
■ Interest on your loan
■ Return of equity (principal)
■ Hazard insurance (if you put down less than 20 percent)
■ Taxes (if you put down less than 20 percent)

I’m reminded of that old saw about the two investors who want to buy the Empire State Building in New York. The first investor, just returned from a meeting with the sellers, tells the second, “I’ve got good news and bad. The good news is that they’ll take our $100 million offer.” “Great,” says the second investor. “What’s the bad news?” “They want $500 cash down!”

Where Do I Find a Good Lender?
Before you get a good loan, you must get a good lender. These days they are everywhere. You can go to a single-source lender such as your bank or your credit union. Or a multiple-source lender such as a mortgage broker.
The mortgage broker has the advantage because he or she solicits loans from a wide variety of lenders, including banks, insurance companies, and pools of investors. Often a mortgage broker can match you up with just the right lender for your needs.
Ask your real estate agent for a mortgage broker recommendation. Also, check with any friends, relatives, or associates who recently bought a home. Chances are they used a mortgage broker and can recommend (or steer you away from!) a mortgage broker. As a last resort they are listed in the yellow pages under Mortgage Brokers. (Note: A mortgage banker may not make loans directly to consumers. Look for a mortgage broker.)



Also consider online mortgage brokers. Check a good search engine for them. Also, look into:
http://www.eloan.com
http://www.quicken.com
http://www.lendingtree.com
Will a Lender Give Me 100 Percent of the Purchase Price?
Just a few years ago the “standard” down payment on a home was 20 percent. That’s $40,000 on a $200,000 property, a lot of money for most people.

How to Get a Lender to Put Up All or Most of the Money
Today, however, with new financing available from Fannie Mae and Freddie Mac (the “big brothers” of financing who buy most of the loans that lenders and others make on the secondary market), that’s all changed. Today you can easily get financing for 90 percent of your purchase. Depending on your financial situation, you may be able to get 100 percent, sometimes even 103 percent of financing (to help pay for some of your closing costs)! These are called “conforming” loans. (They conform to Fannie Mae and Freddie Mac underwriting standards.)
Is there a catch?
Of course there is! You have to meet specific guidelines set up by the two giant secondary lenders. Generally speaking these guidelines are as follows:
Underwriting Guidelines for “Big Brothers:” Fannie Mae and Freddie Mac Loans
■ Maximum loan amount (as of this writing) is $322,700
■ Must meet strict credit guidelines including a strong FICO score (see below)
■ Must meet strict income guidelines
Where do you get this “miracle” financing? Almost any bank, mortgage broker, or other large lender can handle it for you. (See Chapter 4 for more details on locating a good lender.)

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Choosing Between a Single-Family, Home, Condo, or Co-op

For many people, there is no choice to make. They simply want a single-family house and nothing else will do. Others demand a condo or co-op and will not consider an alternative.
Most people, however, at least consider their options. If homes are expensive, will a condo/co-op be cheaper? Will prices appreciate (or drop) faster in a condo/co-op than a single-family house? Are there any real differences?

Price Appreciation in Condos versus Single-Family Homes
Going back about 50 years, the rule of thumb was that when prices went up, condos were the last to appreciate. When prices fell, they were the first to go down. That’s changed.
Today, in many parts of the country, condominium price appreciation is faster than for single-family homes. Indeed, in many areas condos sell quicker and for more money per square foot than their single-family counterparts.


TRAP—GETTING THE RIGHT COMPARISON
Always compare apples with apples. When comparing prices between condos and single-family homes, do it on a square foot basis. If a 2000-square-foot house is selling for $300,000 and a 1500-square-foot condo is selling for $250,000, which costs more for what you get? The answer is the condo! The condo is selling for $167 a square foot, the home for $150 a square foot. It’s something to consider.

The reason condos are appreciating faster now than in the past is
mainly because there are fewer of them available. Thirty years ago,
builders swarmed to condominium construction and conversion. (A
conversion is where an apartment building is converted to condo-
miniums.) For the builders, the costs were less for multiple family
dwellings, yet the prices they could get were handsome. So they built
condos.
Then came the lawsuits. As it turned out, builders had grabbed
hold of the tail of a tiger. When the roof on one or two units
leaked, the HOA( Home Owners Association) often demanded
that the entire roof over all the units be replaced before leaks
could appear elsewhere. When the ground settled, the HOA
sometimes demanded that the whole building(s) be lifted and a
new foundation poured. Similar problems were found with
plumbing, electrical, mold—all matter of things. Since the
builders often had to guarantee the construction for as long as 10
years (in some cases by state law), they were faced with enormous
liability.
Some builders went out of business. Others took the heavy financial hit. But very few built more condos. In California, as an example, in 1999 there were roughly 20,000 new condo units built. By 2002 that number had dropped to roughly 2000.
As a result, in many areas there is a shortage of condominiums. And, consequently, the price of those available is driven higher.

TRAP—WHEN OLDER MAY BE BETTER
When buying a condo, it’s best to look for units that are at least 10 years old and that don’t have any pending lawsuits. Chances are that any construction problems will have already been taken care of. And you probably won’t have as big a risk of being assessed if the existing lawsuits go against the homeowners.


What Is a Condo?
A condominium, as most buyers know, involves shared ownership. You end up with a deed to the property (called a “fee simple”) and separately own the inside of the unit while sharing with the other owners the grounds, walkways, and recreational facilities—in short, everything outside.
Another way to look at it is as if you were renting an apartment and then decided to buy your rental unit. (Indeed, some condos are converted apartment houses.)
It’s sometimes useful to know that there are actually two sepa-
rate kinds of condominium ownership. The first is the one with
which most people are familiar—you could be on the fifth floor
of a building and you own only that airspace that your unit occu-
pies.
The second is called a townhouse (technically known as a PUD, or planned unit development). Here units are not arranged on top of one another. Rather, you own the ground underneath your unit and the airspace above.

How to Get a Good Deal in Rising or Falling Markets ver.2

Should I Rent Instead of Buy in a Falling Market?
In a falling market there is negative price appreciation. Then the costs of home ownership often more than exceed the benefits. In a down market, you can often rent a home for far less than it costs monthly to buy that same home. (In some areas, a house that costs an owner 2000$ a month for mortgage payment, taxes, insurance, and maintenance can be rented for just about half to three-fourths of that amount—$1000 to $1500.)
In short, unless your property appreciates (increases annually in
value), from a strictly dollars-and-sense perspective, you may be bet-
ter off renting temporarily until the market turns around and prices
turn up.


What Should I Do Right Now?
Today, instead of deciding to buy or not to buy, take a few moments
to analyze the market. Check with your local real estate board, as
noted above, about inventories and how quickly homes are selling.
Check out home affordability. Look at interest rates. Learn about
housing shortages. Investigate the market before you make your
move.
Don’t let personal factors influence your investment decision. For many of us, our purchase decision is made strictly with regard to our personal situation, without considering the market. For example:


Reasons to Buy Without Considering the Market

* You’ve finally saved up enough money for a down payment.
* You need a bigger house to accommodate a growing family.
* You’ve moved into an area because of a job change and want a place to live.
* You’ve received an increase in salary and can now afford bigger home payments.
All of these are excellent reasons to buy a house, but it could be a mistake to act only on them. None of these reasons takes into consideration the housing market.
Buying a home is not like buying a refrigerator or even a car. You expect those items to decline in value as you use and enjoy them. But a home is also an investment, probably your biggest. You should look forward to your home going up in value over time.
Therefore, beyond your personal motivation for buying, you must also consider the market.

TRAP—ASK YOURSELF IF YOU SHOULD RENT
Before you commit to a home purchase, ask yourself again if renting, at least temporarily, doesn’t make more sense given market conditions? Only buy when buying makes more sense than renting.


Can I Really Do This?
Keep in mind that all real estate markets are regional. That means that while the market may be up in California, it could be down in Michigan. Down in Massachusetts, up in Arkansas. If you’ve only got one house to buy, national statistics don’t make too much difference. It’s only the market in your area that counts.
And it’s only you who can decide if now is the right time to buy. If you’ve got to make a housing choice, then give yourself every chance of it being an educated decision. Don’t simply say, “Prices are too high to buy.” They may be even higher next year and the year after.
Don’t simply say, “This house is cheap because it’s selling for less than it did a year ago.” It may be worth far less a year from now— and the year after, worth even less.


Look at the facts. To reiterate, check out all of the following:


Checklist for Determining
Market Conditions
Are interest rates low or high, rising or falling?______
Are housing inventories high and rising, low and falling?______ Are listing times getting shorter or longer?______
Are their housing shortages in your area?______
Can more (or fewer) people afford to buy in your______ area? Where are you today in the “seven-year cycle?”______
And always keep in mind Will Roger’s famous quip about real estate, “They ain’t makin’ any more of it!” Even if you guess wrong and buy in a down market, if you can just hang on long enough, chances are you’ll come out smelling like a rose. The long-term prospects for real estate are rosy.

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About real estate

How to Get a Good Deal in Rising or Falling Markets

Buy in the winter months.
There are good and bad times of the year to buy, and there are good markets and bad markets.
If you can, probably the best time of the year to buy your home is in December, preferably during the last two weeks of the month when everyone is fussing about the holidays.
Historically, there are fewer home sales between Thanksgiving and New Year’s (by a wide margin) than any other time of the year, simply because fewer buyers are out looking. Most buyers get involved with the holidays and put off home searching until after the New Year. The last few weeks of December traditionally have the poorest sales of all.
Most sellers who haven’t been able to sell their homes during the summer months feel the same way and remove them from the market after Thanksgiving. Often the only sellers who keep their homes up for sale (or list them at this time) are those who are desperate to get out. And if they haven’t sold by the end of December, those sellers are very desperate, indeed.
There are so few buyers at the end of the year, in fact, that “motivated” sellers will often grab at ridiculously low offers just to get out of their property. If you want to save money, that’s when you should make your offer.
Buy your home in late December..


TIP—BUY AND SELL AT THE PEAK TIMES OF THE YEAR
Buy in the winter months, and then sell in the spring and early summer to maximize your profit.


TRAP—BEWARE OF HOT
MARKETS
During the very hot markets of the first years of this century, prices and sales continued to rise even at year’s end!

Try to avoid buying in late spring and early summer, specifically the months of April, May, and June. Historically, 30 to 40 percent of all homes (new and resales) will be sold during those three months. They are the peak selling times.
Abig reason that April, May, and June are such good sales months has to do with school schedules. The school year is ending and fami-
lies with children feel it is an optimum time to make a move. Also, fam-
ilies tend to be more financially optimistic in the spring and more willing to take the big step involved in a home purchase. Finally, it also has to do with appearance. After the cold and/or wet winter, houses tend to look fresher and more appealing in spring. (Sellers, of course, know this and spruce up their places even more to lure buyers.)
If you want to pay top dollar, join the throngs of buyers and purchase in spring and early summer. Otherwise, wait until the cold of December when you’ll usually have better prices.

What If It’s a Seller’s Market?
A rising market is often called a “seller’s market.” The reason is simple: There are many more buyers than sellers. Thus, the seller can raise prices and dictate terms—hence a “seller’s market.”
One characteristic of a seller’s market is that homes sell very quickly. This is measured by how long they are listed for sale, before actually selling. If listed homes are selling in less than 30 days, it’s a sign of a seller’s market.


Another characteristic of a seller’s market is that there will be low inventories. Inventory means how many homes are for sale and how long it would take to sell all those that are listed. Normally there will be around a six-month or longer inventory of homes in any given area. When that number dips below two or three months, it suggests a sellers market.
Also check the direction of inventory change. Is the inventory growing, or falling? A falling inventory is another indicator of a seller’s market.

TIP—GET THE BEST INFORMATION
To find out how quickly homes are selling and what the current inventory is your area, you should check with your local real estate board. You can contact any member agent who should be able to readily get the information for you. Or you can simply call them—their number is in the phone book under “Board of Realtors®” and they should either be able to give you the information, or refer you to an agent who can get it for you.
Finally, keep a lookout for prices. In a seller’s market, prices will rise. As soon as you see them going up, it may be a good idea to jump in. Never be afraid of the early days of a seller’s market. Keep in mind that even though prices may be somewhat higher today than last year, they’ll probably be even higher next year. If prices are going up, the home you buy today will be worth even more next year and, hopefully, more still the year after that. You want to catch and ride the wave.


Buy in the winter months

How Do I Know When the
Market Has Peaked?—The
Seven-Year Cycle
After there’s been a seller’s market for awhile, the news commentators on TV, the radio, and in print will sometimes begin talking about a “real estate bubble.” They will begin forecasting that the market, which may have gone up for a few years, is ready to crash. They may speak of a “real estate bubble” about to burst.

Should i Buy a Home?

Try a Reality Check
Okay, now it’s time to take a realistic look at your budget. What can you really afford?
It’s not hard. Just calculate your total spendable monthly income. That’s what you get after taxes, alimony, and other amounts are taken out. Now subtract what the computer says you can afford monthly and see what’s left. Can you really live on that for a month?


TIP—DON’T FORGET TO FACTOR
IN TAX AND INTEREST
DEDUCTIONS
Remember,you candeduct the interest on your mortgage (up to very high limits) and your property taxes from your ordinary income. By adjusting your W-4 form with your employer, you can factor this in and get a higher monthly take-home paycheck. Be sure to ask your accountant.

Your Reality Check
Take home pay (after increasing for mortgage interest and property tax
deductions) $______
Monthly payment (including taxes and insurance) as determined by the lender $______
What’s left for you? $______
Few people want to radically change their lifestyle in order to buy a home. Those with long memories will recall families in the 1970s who bought homes and then sat on the floor inside because they couldn’t afford furniture. Nobody wants to be in that position. So be realistic with the numbers.
Take a few minutes to determine what your actual monthly living expenses are. Don’t forget medicines, entertainment, eating out, and so on. On the other hand, for a home that might bring you strong appreciation (read profit) in the future, you might very well want to give up trying to live a princely lifestyle. What you need to decide is what you can live without, and what you absolutely must have. Here’s a chart to help you figure it out.


Budgeting to Determine How Big a Payment You Can
Afford

Income
$___________ Net*
$___________ Increase after calculation for interest and property tax
deductions
$___________ Increase after eliminating voluntary deductions
Less Expenses
$__________ Utilities (Gas, electric, water, garbage) $__________ Phone
$__________ Cable/Satellite TV
$__________ Auto (Lease/Purchase pmt., ins., gas) $__________ Food
$__________ Entertainment $__________ Clothing
$__________ Child Care
$__________ Tuition (private schools)-
$__________ Maintenance (gardening, painting, etc.) $__________ Repairs
$__________ Child Support/Alimony
$__________ Medical (services, drugs)
$__________ Recreation (gym, sports, etc.) $__________ Unpaid credit card debt** $__________ Long-term loans
$__________ Total
$___________ Income Available for Mortgage Payment

*It’s important to remember that your net monthly income is after voluntary deductions such as 401K contributions, which can be reduced or eliminated. Also remember, some of your involuntary deductions, such as for taxes, should be reduced because of the deduction you’ll get for home mortgage interest and taxes, thus increasing your take-home pay. (See Chapter 2.)
**Unpaid credit card debt is the worst type of liability because it’s paid back at extraordinarily high interest rates. Try to pay this down


or refinance it into long-term debt before moving to make a home purchase. Lots of credit card debt may cause lenders to reject you for a mortgage.

Add up all of those monthly items you must have. Now compare the total to “what’s left for you” after making your house payment, as determined earlier.

Reality Check 2
What’s left for me $______
What I must have to live on $______
If “What’s left for you” is bigger, congratulations. The lender’s
computer was right and you can easily make those monthly pay-
ments!
If “What you must have to live on” is bigger, whoa! You’ll either have to tighten your belt more, or you’ll have to reduce your monthly payment, cut back on the size of your mortgage, and purchase a smaller house. Or reconsider renting.

Life Is Making Choices
You still have other options. In later chapters we’ll see how to get sellers to reduce their price. We’ll look at mortgages that require nothing down, indeed, that even pay some of your closing costs! We’ll see how to rent-to-buy. And more!
Nevertheless, at some point you’ll have to return to the above comparison and one way or the other, make “What’s left for me to live on” fit under, “What I must have to live on.”
You might want to come back to this chapter several times as you go through this article learning different tips and traps when buying and make the comparison anew. Remain confident, however. Almost everyone eventually decides to go forward and buy a small home, once they know the trick of how to go about getting it.

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Are you ready to make the home-buying commitment?
There are lots of pros and cons revolving around buying a home
versus renting one. The old advice that home buying always pays off
is no longer automatic in all parts of the country and for some
people.


Rent or Buy?
You should rent:
* If you don’t want the bother of home maintenance and repair
* If rental rates in your area are low (compared to home prices)
* If you plan on moving around a lot because of job or other commitments
You should buy:
* If you want to take advantage of (recently very high) equity appreciation
* If you want the interest and tax write-off from a home
* If you want added security and privacy


While you can spend a lot of time debating the rent versus own question, my suggestion is that if you’re even remotely interested in a home purchase, you at least move forward enough to find out what

1
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2 Chapter One

you can afford. After all, you can always opt out to stay/become a tenant.

Can I Afford to Buy a Home?
Once the decision to investigate buying has been broached, it
becomes a matter of determining what you can afford. To find out,
most prospective home buyers usually begin the traditional task of
putting together a budget of their income and expenses. Their two
big questions are, “How much money will I have to put toward a
monthly payment? How much money do I need for a down payment
and closing costs?” Unfortunately, this is like putting the cart in
front of the horse.
My suggestion is to stop, take a deep breath, and rethink. What your budget tells you at this stage is moot. Today it all comes down to what the lender says you can afford—how big a mortgage the lender is willing to give you. (It could be for 100 percent of the purchase price!) After all, you can always borrow less than a lender’s maximum (to reduce your monthly payment, for example). But, it’s very hard to borrow more.
If you bought a home in the past, say ten years ago, it may seem odd to go to a lender first, before you even do your own budgeting. But be aware that the process of buying a home has changed. Today your budget needs to come later. Your first questions should be, “How big a loan (and monthly payment) can I get?” For that information, you must contact a lender directly.


TRAP—DON’T RELY ON
SECONDHAND INFORMATION
You can only get the answer to how big a loan and monthly payment a lender will offer from a lender. Don’t make the mistake of thinking you can fill out a quiz in a book, go through some formulas, and get that information. Neither I nor any other author can realistically tell you what you can afford without knowing your specific financial information and without submitting that to a lender.



Should I Buy a Home?
3

Therefore your first step is an easy one. You find a lender and get “pre-approved.” (This is something you will need to do in any event in order to get home financing, so it’s not a wasted or extra step.)
Pre-approval takes perhaps a half an hour or so of your time. You
contact a lender or mortgage broker (see where to find them in
Chapter 4), fill out an application, provide some documentation,
and that’s it. It might cost you $35 for a credit report (or it might
not, depending on how good your lender/mortgage broker is), but
that’s really a very small investment. You’ll have your answer in a few
days or less.

What Does Pre-approval Do for Me?
You’ll find out how big a monthly payment you can qualify for, the maximum size of a mortgage you can afford, and what size down payment you’ll need. (If you even need a down payment—in many cases no-down financing is available; see Chapter 4!)

TIP—GET A COMMITED
“PRE-APPROVAL” LETTER

Today virtually all lenders will take a look at your credit history, your income, and your assets and then, based on underwriting standards, issue you a “pre-approval” letter. It will typically state the biggest monthly payment their computers say you can afford. If they’ve actually gotten a credit report on you, checked with your employer, and looked at your bank statements, this is a pre-approval commitment that you can “take to the bank.”

TRAP—BEWARE OF BEING SIMPLY “QUALIFIED”
On the other hand, a mortgage broker or even a real estate agent can ask you a couple of financial questions over the phone and then send you a “pre-approval” letter.

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The Home Improvement Resource Center a wholly owned subsidiary of the privately held interactive marketing consulting firm, MAP Marketing, LLC, has recently launched the latest version of its home services website. The website matches homeowners with prescreened service providers, depending on the specific needs and location of the homeowner. Among the free services provided to homeowners are: contractor home improvement project estimates; quotes for mortgages, refinancing; home equity loans & lines of credit; bids on moving & relocation services; insurance quotes; and home security system estimates. Other services provided are magazine subscriptions and Internet sale specials on home furnishings & electronics.