Monday, December 3, 2007

Lending Options

After the fall of the sub prime market this past August, home buyers have growing concerns about their own financing. Initially people thought they wouldn't be able to get a loan at all. That is definitely not the case. We have asked all of our clients, old and new, to get a new pre-approval letter if the original had been done before August as some restrictions have changed.

Being approved by a lender is one of the first necessary steps in the home buying process. It will give you a clear idea of what you can, and want to afford. Many people don't know where to begin when looking for a lender. It is wonderful if you know somebody in the mortgage business or can get a referral from a friend, but if not here are some basics.

There are different types of lenders, each with their own set of restrictions and loan programs. The three most common types are banks, mortgage brokers, and credit unions. Credit unions are known to offer the lowest rates but have the strictest guidelines, and you must already be a member. Banks are second in line in terms of guidelines, and mortgage brokers have the most leniency as they can shop around with different lenders to find one that fits your needs.

We recommend doing some comparison shopping. Have a conversation with your bank and a mortgage broker. Make sure to compare with your own numbers. Don't compare your scenario with the loan your friend got as there are many factors that go into it.

Get as much information up front as possible. Ask to see different loan scenarios based on the same purchase price. Make sure they include property tax and insurance in the equation. Don't let them make any assumptions; tell them you want to see all of the possibilities based on your purchase price, down payment, and income to debt ratio. There are many options from a two year fixed to a thirty year fixed and everything in between.

The shorter the fixed period of the loan is, the lower your interest rate will be. A thirty year fixed loan is the most conservative and safe, but also the most expensive with the highest interest rate. If you are on the conservative side, the thirty year fixed loan is your best bet. If your goal is to keep your monthly payments as low as possible, you might want to go with a five year adjustable rate mortgage which is fixed for the first five years and then adjusts according to a predetermined schedule.

Once you submit a loan application, you should receive a good faith estimate from your lender which itemizes your closing costs. You don't want there to be any surprises at the end.

One more piece of advice. Monitor your credit score to make sure there aren't any mistakes or surprises. Make your payments on time, especially from the time you applied for the loan to the time you close escrow on your home. The lender will pull your credit report a second time at the end, and if there are changes they may reject the loan in the eleventh hour. Don't make any big purchases in this time.

Everybody is extremely busy, especially this time of year. If you are in the home buying process make sure you take the time to inform yourself. There are many options available to you, but if you wait until the last minute you may be stuck with whatever you get.

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