Home Financing 101
                                                    By Ashira Davis-Love

So you're thinking about buying a home?  Tons of questions are probably going through your mind right now.  How do I get started?  Which program is right for me?  How much home can I afford?  Whether you're buying your first home or your fifth, there are lots of things to consider when it comes to the financing side.  This article was written to answer some of the most commonly asked questions about financing a home.

I want to buy a home, but I dont have a lot of money to put down. Can I still qualify?

There are many programs available for buyers with very little out of pocket.  Here are the most popular:

• My Community - conventional loans that offer 100% financing and reduced mortgage insurance.
• FHA - government insured loans that require only 3% down which can come from a gift from a family member or a grant from a down payment assistance program.
• VA - government insured loans for people who have served or are currently serving in the military.  0 down payment and no monthly mortgage insurance required.
• Bond Programs - loans specifically for first-time buyers (can't have owned a home in the last 3 years) that offer 100% financing at reduced interest rates.  Buyer can even finance closing costs with a second mortgage at a reduced rate if needed.  Maximum income restrictions apply.

How do I know how much home I can afford?

The first thing you need to do is figure out your budget.  Calculate your monthly income and then subtract your monthly expenses.  You need to decide what the most is that you could comfortably pay each month for a mortgage payment.  Often a lender will qualify you for much more than you want to pay.  The reason for this is lenders use your gross monthly income to qualify you instead of your take home pay.  You want to be sure that you are not getting yourself into a payment that will become a hardship for you.  The actual amount you will qualify for will depend on a number of factors such as:

• Your credit history - if you have a good credit score and a history of paying your bills on time then you will qualify for a larger mortgage.
• Your debt to income ratio - this is defined as your total monthly debt divided by total monthly gross income.  An optimal debt ratio is 40% or less however, I've gotten approvals with debt ratios as high as 65% when the borrower has excellent credit.
• How much money you've saved - Lenders typically like to see that you've got 2-3 months payments saved in the bank in case of an emergency.  This is known as "reserves" in the mortgage industry.  Keep in mind that lenders can also count 70% of a 401k or IRA toward your reserves.  Also, it is important to note that I regularly get first-time buyers approved with no money saved in the bank when they have good credit scores.  Each loan approval is taken on a case-by-case basis.

It is very important to contact a lender to pre-qualify before you start looking at homes.  You want to know how much you actually qualify for and most sellers will not even consider an offer without seeing an LSR (Loan Status Report) first.  This is a form that your lender fills out to show the seller how much you have been pre-approved for.  This form is required, as it is part of the Arizona purchase contract.

I've heard that programs such as adjustable rate mortgages and interest only loans will get me the lowest payment. Is this the way to go?

Let's look at these loan types individually:

Adjustable rate mortgages, commonly know as ARMs, have a fixed introductory rate for a specified period of time with a provision for the interest rate to increase based on a margin and an index.  For example, a 3 year ARM might have a rate of 6.00% for the first 3 years.  After the 3 years is up, the interest rate will adjust depending on what the index it is tied to is at the adjustment time.  If it's a LIBOR ARM, then it will adjust based on the LIBOR (London Interbank Offered Rate) + the margin set at closing.  It might go up to 8% or even 10%, depending on the agreed upon terms.  The important question to ask yourself is how long do you see yourself owning the home?  If you are quite certain that you will be selling in the first 3 years, then this loan may seem more attractive to you than the fixed rate option.  Historically, these loans have had lower interest rates than 30 year fixed loans.  However, with fixed rates dropping in recent years, ARMs often have the same or even higher interest rates then fixed loans do, making them an unattractive option right now.  Also, since circumstances can change, I would caution you to thoroughly consider whether the risk of the interest rate increasing is worth the benefit of a slightly lower initial payment.

Interest only loans are loans where the monthly payment only covers interest.  Nothing is going to the balance.  So if you borrowed $100,000 and you were to only make the scheduled monthly payment for 5 years without paying any extra principal, at the end of 5 years you would still owe $100,000.  This loan has become increasingly popular in recent years where housing prices have increased rapidly.  This offers borrowers a way to finance a home with the lowest possible monthly payment.  However, as with anything, it has its down side.  First, the interest rate is usually a half percent higher than a standard, fully amortizing loan, which offsets some of the potential monthly savings.  Second, if you are not committed to paying down principal voluntarily, this could be a scary loan program to be in.  You could wind up without any equity in your home after several years of payments.  The 40 year fixed loan program can provide a more viable alternative to many borrowers needing to keep their payments low.  The best thing to do is discuss the positive and negatives of all loan programs with your loan officer and make a decision based on the circumstances of your individual situation.

Now that I am thinking about buying a home, what can I do to prepare for the best possible loan approval?

The first thing you should do before you apply for the loan is know what's in your credit report.  You can obtain a FREE copy of your credit report from all 3 bureaus once a year by visiting www.annualcreditreport.com.  Print out each of your reports and review them carefully.  If you find any errors, you should dispute them directly with the credit bureaus online or by mail immediately.  It is important to note that while your credit report is free, your scores are not.  You will have to pay $15-$20 just to get your scores with the free reports.  I highly recommend doing so, as the inquiry does not affect your scores when you pull your own credit reports and it will let you know where you stand when shopping lenders. 

The best credit category is a score of 720+.  This will typically enable you to qualify for the best rates on your home loan.  If you find that your credit scores are not as high as you'd like, try and determine what is making them low.  Do you have any mistakes on your credit report that can be disputed?  Are you maxed out on credit cards?  If so, start paying them down so the balance is below 50% of the credit limit.  Above all else, make sure to pay your bills on time.  35% of your credit score is your payment history.  It is the most important factor in the calculation of your scores!  Keep in mind that creditors cannot report a late on your credit until you are 30 days late with the payment.  Once you are pre-approved for your loan, do not apply for any new credit, switch employers, spend a lot of money from your bank accounts, or make any other changes that might adversely affect your loan approval.  Your loan has to be approved by an underwriter at the end of the process and you do not want to do anything that might jeopardize your loan approval.

Now that I know the basics, how do I get started?

There are many mortgage bankers and brokers that can approve you for a home loan.  You will want to compare different lenders and get good faith estimates from each in writing.  A good place to start is speaking to family, friends, or your Realtor and get a referral to a mortgage advisor that they've had first hand experience with.  Ask a lot of questions, and trust your instincts.  You need to work with the person you feel most comfortable with in terms of service as well as their estimate on interest rate and closing costs.  

For questions, or to pre-qualify now for your home loan please contact:

Ashira Davis-Love
Mortgage Advisor
Suburban Mortgage

Mobile: 520-272-4425
Office: 520-544-8090
Email:     adavislove@submort.com
Website: http://www.loansbyashira.com