Financing
I have written the following section to serve as a resource to buyers
preparing to procure a loan on a home and to those simply seeking more
information about the lending process. If you would like more information
on those lenders and brokers I refer clients to in the Portland Area please
feel free to contact me via email.
Articles written by Jim Arnal
Finding Financing
The good news is that with the advent of the Internet buyers now have a
multitude of mortgage companies and lenders to choose from at their fingertips.
I am often asked whether a client should choose their local bank or credit
union vs. using a mortgage broker. The honest answer is a buyer should
choose the lender that provides them with the appropriate loan at the lowest
cost and interest rate with the level of customer service they feel they
deserve.
Brokers and lenders should answer all of your questions and there are
certainly no restrictions on the number you ask. Compare loans, compare
rates and compare the lenders you speak with. The best advice is to shop
rates and shop lenders. Look to a trusted financial advisor or your Real
Estate Agent for sound advice on which loan is right for you and where
good local mortgage companies can be found.
Finding a Local Mortgage Broker and Lender
If you are looking for a local mortgage broker here in the Portland Metropolitan
area I have references for brokers and lenders my clients and I have
worked with in the past that provided superior service. Simply email
me or contact me via phone. jim@pdxhomes.com (503) 497-5330
Other sources of financing include:
Whichever source you choose to underwrite your mortgage, there are several
things you should know about the process and what should be expected of
both you and the lender.
Get Pre-Approved
What does this mean and what is the difference vs. being pre-qualified?
Pre-Qualification:
This constitutes meeting with a mortgage broker or direct lender and identifying
how much you can afford to pay for a home. Typically you simply articulate
what your income is, how much debt you have and what your cash on hand
is to come up with an idea of what a lending institution might lend you
to finance the purchase of a home.
Pre-Approval:
Pre-Approval constitutes the buyer actually applying for a mortgage and
receiving a commitment in writing from a lender. Becoming pre-approved
by a lender means that you have supplied that lending institution with
the information they require to identify how much they can loan you for
your purchase. Each lender has different requirements for qualifying
for certain loan amounts and each lender has different requirements for
qualifying for different types of loans. (I will explain the various
types of loans during step 3.) The pre-approval process has been simplified
with the internet, which now allows buyers to make the necessary steps
online at their convenience to apply and submit the necessary information
to inform them of what they can afford and at what expense.
Knowing how much home you can afford at a mortgage you feel comfortable
with puts you and your real estate agent in a better position to show you
homes which not only suit your tastes but that you can afford. This way,
assuming the home you're interested in is at or under the amount you are
pre-approved for, the seller knows immediately that you are a serious buyer
for that property. In cases where there are multiple offers this also enhances
the buyer’s chances of having their offer accepted.
Costs for pre-approval are generally nominal and lenders will usually
permit you to pay them when you close your loan.
Examples of “extra” fees which may not be necessary can include
administration fees, miscellaneous fees, documentation fees, processing
fees, preparation fees and management fees.
These costs are associated with most loans, so it’s hard to get
around them, but knowing what exactly you will be required to pay to each
lender can help you make a better decision. The biggest item to look for
in a mortgage is the interest rate. Each of the different loan types will
have different interest rates and some loans will have a fluctuating or
adjustable rate of interest. Be sure to keep an eye on Alan Greenspan and
the FED to see if a rate hike is possible in the future. If so, make sure
to lock in a rate prior to the change or if the rate is going to be lowered,
maybe wait to get your loan until the move has been made. This can save
you thousands of dollars on every move of 25 basis points or 1/4 percent.
Establish & Understand your credit
As part of the process of financing a home, lenders
require information regarding your credit history. Good or Bad credit can
make or break getting a home loan and in some in many cases getting the
best rates possible.
If you have concerns regarding your credit you should look into your history
before embarking on a home loan.
You can request your credit report from one of the three credit bureaus
listed below. You may consider requesting it from more than one as your
lender will likely do the same. The reports will cost approximately $10.00
dollars.
» Experian | www.experian.com 1
(888) 397-3742
» Equifax | www.equifax.com 1
(800) 658-1111
» Transunion | www.transunion.com 1
(800) 888-4213
Factors Lenders Consider When Scoring Your Credit
- Delinquency in payments (30, 60, 90 days late)
- Number of Inquiries from creditors regarding your credit in the last
year.
- Your public record (collections, lawsuits or legal judgments).
- The amount owed on your balances vs. the respective credit limits.
- Length of time your accounts have been active.
Acceptable Debt Loads
First and foremost, know how much your mortgage payment, property taxes
and home owner’s insurance can be, relative to your comfort level,
monthly income, monthly debts and other expenses. Lenders set ratios associated
with acceptable debt loads they feel make the candidate for the loan a
low risk or not. The ratios set by lenders are not always the same as your
comfort level and every loan program has different rations them deem acceptable
to the applicant. When identifying an acceptable debt load a lender with
take your proposed house payment against your gross income. They will also
look at your proposed house payment and all other debts (credit cards,
child support, and required employment fees) against the annual gross income
of your household.
TIP> Make sure to ask your mortgage broker or lender to detail all
fees associated with the loan. Standard fees include: “points” (loan
fee, i.e. one point on a 100,000 dollar loan is 1,000 dollars), origination
fees, appraisal fees, processing fees, mortgage insurance and any “garbage
fees” (extra fees which some lenders charge).
Understanding Acceptable Debt Loads
First and foremost, know how much your mortgage payment, property taxes
and home owner’s insurance can be, relative to your comfort level,
monthly income, monthly debts and other expenses. Lenders set ratios associated
with acceptable debt load they feel make the candidate for the loan a low
risk or not. The ratios set by lenders are not always the same as your
comfort level and every loan program has different rations them deem acceptable
to the applicant. When identifying an acceptable debt load a lender with
take your proposed house payment against your gross income. They will also
look at your proposed house payment and all other debts (credit cards,
child support, and required employment fees) against the annual gross income
of your household.
Choosing
the Right Mortgage
There are hundreds of loan types available to buyers today and knowing
which one is right for you can influence how much the purchase impacts
your lifestyle. The most common type of mortgage in the U.S. is the 30-Year
Fixed Mortgage. Other mortgages include Adjustable Rate Mortgages, Graduated
Payment Mortgages and VA & FHA loans.
In this section I will explain the mortgages most commonly chosen, however
there may be a number of other options which suit your comfort level and
goals better which can be explained by the mortgage companies and lenders
you speak with. Ask them to explain all their loans to you and if you want
to ensure you know everything available in the market I advise picking
up Mortgages for Dummies by Eric Tyson and Ray Brown at your local library,
bookstore or online.
Fixed Rate Mortgages
Consider a fixed rate mortgage if:
- You plan on living in your new home for many years, and/or
- You are not a risk-taker and prefer the stability of knowing how much
your payment will be each month.
Since most home loans are for a period of 30 years, if you want a payment
you can count on for that long of a period of time, a fixed rate mortgage
may be what works best for you. Once your loan amount and interest rate
are calculated and locked in, a fixed rate mortgage will guarantee that
you will have the same payment over the life of the loan. Making extra
payments towards your principal will allow you to pay your loan off sooner.
Paying off the loan early may not always be the best choice, however.
If interest rates are very high at the time you take out your loan, with
a fixed rate mortgage you'll be stuck with that high interest for the life
of the loan (unless you choose to refinance). Conversely, if interest rates
are very low, you'll come out ahead with interest rates that will stay
low no matter how high interest rates go in the future.
15-Year Fixed-Rate:
- You pay off the loan in 15 years.
- Equity builds up more quickly than in a 30-year loan.
- Payments are higher (which may be a problem if you lose your job or
become unable to work).
20-Year Fixed-Rate:
- You pay off the loan in 20 years
- The overall interest paid is considerably less than for a 30-year loan.
30-Year Fixed-Rate:
- You pay off the loan in 30 years
- The most common choice, especially for first-time homebuyers as it's
typically the easiest of the fixed-rate loans to qualify for.
- Monthly payments are lower than for 15-year and 20-year loans.
- As a tax advantage, the 30 year term provides the maximum interest
deduction.
Adjustable-Rate Mortgages (ARMs)
Consider an adjustable-rate mortgage if:
- You are comfortable taking the risk that the rate may adjust upward,
increasing your mortgage payment with or without the expectation that
your income will increase as the rate adjusts.
- Interest rates are very
high at the time you take out your loan and choosing an ARM creates a
monthly mortgage payment you feel comfortable with.
- Your plans for ownership
are short-term.
Generally, the interest rate when you take out your loan will be lower
than a fixed-rate mortgage. While this is typically true at the early stages
of the loan, it may exceed a fixed-rate mortgage as the rate adjusts.
Since an ARM rate rises and falls depending on the prevailing interest
rate, your mortgage payment will rise and fall accordingly. If your income
isn't sufficient to cover the highest possible payments, then this option
isn't for you. On the positive side, the lower initial payments will allow
you to qualify for a larger loan than if you choose a fixed-rate. The downside
is that your payments will increase if and when the rates go up.
Typically, ARM interest rates are tied to a specific financial index (such
as Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed
Arms or the London Interbank Offered Rate).
The monthly payment will be based on the index your lender uses plus a
margin, which are generally two to three points. Get the formula used by
your lender in writing and make sure you understand what it means before
you choose that lender, lock your rate and employ that loan.
The good news is that the amount an adjustable rate mortgage can increase
is limited. There are restrictions on how much your lender can increase
your rate, both for a period of one year and for the life of the loan.
My advice, ask your lender to calculate what the maximum payment would
be if your rate went to the highest amount allowed for your particular
mortgage. If you're not confident you'll be able to pay that amount on
a monthly basis you may want to think seriously about safer alternatives.
Convertible ARMs
Consider a Convertible ARM if:
- Neither the fixed-rate nor the adjustable-rate mortgage appears to be
completely right for you.
These mortgages combine the advantage of an ARM’s initial low rate
with a fixed rate after a predetermined number of years. This type of mortgage
has more advantages when the initial interest rate is low and the future
rate is not guaranteed.
Government Loans
Other mortgage options available to some people are in the form of a government
loan.
VA and FHA loans:
- VA Loans: Veterans may qualify for a loan from the Veterans Administration.
There is a limit on the amount you can borrow, so this option works best
for those buying a lower priced home.
- FHA Loans: The Federal Housing Association offers loans to lower-income
Americans. Look for the phrase "FHA approved" when looking
at ads for homes.
Other Resources for identifying what loan and financing
options are right for you:
» Fannie Mae | www.fanniemae.com
» HUD Homes | www.hud.gov
» Commercial Properties | www.ccim.com
Interest & Paying Points
Remember, interest is tax-deductible. The interest you pay as part of
your mortgage and the interest relative to paying points on a loan upfront
mean tax deductions at the end of the year in which they are paid.
Bridge Loans
Bridge loans are used to bridge the gap between purchasing a new home
and still owning the home you are currently in. In cases where buyers
approach the next home they want to buy but have yet to sell their current
home they can employ a bridge loan which mitigates the contingency of the
sale on the buyer’s current home. Removing the contingency
makes their offer to buy the new home more attractive and typically meaning
the party pays mortgages on both homes while waiting for the first home
to close, having already closed on the new home.
If you have enough equity in your present home, this is a special loan
that allows you to get some cash so you can make a down payment and buy
the new home. However, be aware, interest rates tend to be high,
points on the loan are high, and there are costs and fees involved. If
you are not a risk taker making the sale of your current home a contingency
of the next purchase is likely a more comfortable process.
Alternative Financing and Housing Resources for Portland
The following organizations and their associated websites provide a multitude
of options for those looking for affordable, alternative options for financing
their home:
» Oregon Housing and Community Services | www.ohcs.oregon.gov |
503-275-3660 |
Includes home buying information to include first-time home buyers, low-interest
programs, and grants/tax credit programs.
» Home Ownership a Street at a Time (HOST) | www.hostdevelopment.com |
503-331-1752 | fax: 503-280-2135 | 1818 NE MLK Blvd, Portland, OR 97212 |
HOST is dedicated to providing affordable homeownership opportunities for
low- to moderate-income families. HOST believes strong, healthy communities
are created and sustained when homeowners have a stake in their neighborhoods.
» Association of Oregon Community Development Organizations | www.aocdo.org |
Founded in 1992, The Association of Oregon Community Development Organizations
(AOCDO) is a membership-based organization that represents those with
an interest in affordable housing and community development. This includes
over 50 nonprofit developers of low-income affordable housing throughout
the state of Oregon, and those who support their efforts, including banks,
law firms, government entities, and technical assistance providers.
» Habitat for Humanity | www.pdxhabitat.org |
Find out what it takes to receive a Habitat House here in Portland. As
a volunteer Crew Leader I can’t say enough good things about Habitat
for Humanity and the manner in which they provide housing to those in
need. Email me or visit Habitat’s web site for information about
Habitat for Humanity in Portland.
» Housing Authority of Portland | www.hapdx.org |
HAP is committed to providing safe, decent and affordable housing to individuals
and families in Multnomah County, Oregon, who face income or other life
challenges. HAP offers support through a wide variety of programs and
services. Our website is designed to educate citizens about these programs
and services, and to share how HAP is working to build a stronger community. |
