PRE Qual

PRE-QUALIFICATION | MORTGAGE

The lending world is a very complex one and your lender is by far the best source for information, which is why I always share the names and contact information for several lenders with whom I have worked in the past. It still doesn’t hurt to have some idea of what they are talking about when you enter their domain. I have broken down the basic loan types and structures as well as described a few options for special circumstances to help make the lending process a bit easier.

LOAN TYPES
First of all, you need to be aware that there are numerous loan types and lenders are always coming up with creative solutions to help their clients. Here are the basics:

  • Conforming vs. Nonconforming
    The main difference between the two is that one follows the guidelines set forth by Fannie Mae and Freddie Mac (GSE eligibility) and the other does not. In most cases, the underwriting issue is with the loan amount. Anything over the amount set by Fannie Mae and Freddie Mac would be considered a jumbo loan and is subject in most cases to a higher interest rate because the risk is higher. That dollar number is subject to change yearly and is set higher in Alaska and in Hawaii.
  • Conventional Loans vs. Government Loans
    Conventional: Simply put, a conventional loan is neither insured nor backed by the federal government. This is why qualifications for conventional loans are a bit stricter and the amount needed for a down payment is often higher. Recently, that number has been lowered, but you will still need to put down 20% to avoid paying private mortgage insurance.
  • Government Loans
    FHA – stands for Federal Housing Administration and that is the entity that backs these loan types. It is managed by HUD (Housing and Urban Development.) Many people think these loans are limited to first time home buyers when in fact, they are open to a number of different borrowers. This program allows you to borrow money with as little as 3% down; however, you will have to pay for mortgage insurance for the life of the loan which will increase your monthly payments.
    VA – Veteran’s Affairs backs these loans and is a program available to military members and their families. These programs are also insured and backed by the federal government. The biggest advantage of these loans is that the borrower needs no down payment — 100% of these loans can be financed.
    USDA/RHS – United States Department of Agriculture offers loans to those borrowing for purchase in rural communities who meet certain income requirements. Generally, it cannot be higher than 115% of the adjusted area median income. These median incomes vary by county and the label of “rural” is also frequently changing, especially in high growth areas.

LOAN PROGRAMS
Fixed Loans–many different structures can be created at your lender’s discretion, but these are the basics.

  • 30 Year Fixed – your basic loan. This is just as it seems. It is an amortized loan that has a fixed rate and is designed to be paid off in its entirety in thirty years. Your monthly principal and interest payment would remain unchanged; however, if you escrow taxes and insurance and those fees increase (likely) your monthly note will also increase.
  • 15 Year Fixed – ditto above, but over 15 years vs. 30.
  • ARMS– Adjustable Rate Mortgages. Basically, this loan structure fluctuates according to a fixed structure. This is a rather risky loan.
    • One Year Arm – the loan rate changes yearly. Home borrowers who choose this structure often do this when they do not intend to hold onto the property for any great length of time.
    • 10/1 ARM – This rate is fixed for the first ten years and then rises after that. It can be a good choice for borrowers who are certain they will be selling within 10 years or are making extra payments to quickly raise equity.
    • 5 ARM–same as the 10, but for 5. Far more common than the 10.
  • 2 Step Mortgage – has one rate for a certain number of years and another for the remaining years.
  • Balloon Mortgages – these last for a much shorter time and operate much like a fixed-rate. For the first part of the mortgage, the borrower is predominantly paying the interest and then pays the remainder of the note at the end of the term. This can be extremely risky and is most often seen in construction loans.
  • Interest Only Mortgages – RARE. Not to mention risky. And very little benefit. If you need to do this, you may need to reconsider renting for the time being.
  • Loans with Pre-Payment Penalties – this can be a part of any loan program and you should always ask your lender about it to be sure you will not incur it.

OTHER LOAN PROGRAMS AND GOVERNMENT ASSISTANCE PROGRAMS

  • Teacher Next Door Program – HUD developed this program to encourage homeownership among educators in low to moderate-income areas.
  • Good Neighbor Next Door Program – program designed to encourage homeownership among civil servants such as teachers, policemen, and firemen.
  • HUD’s Home Program – available to low-income buyers in certain qualifying areas.
  • ADDI – American Dream Down payment Assistance Initiative is available for first time home buyers buying a single-family, residential home. Income restrictions exist; a buyer cannot have an annual income in excess of 80% of the median for the area.
  • Zero Down Payment Act – eliminates the down payment requirement with FHA for families who can easily afford the monthly payments but do not have the cash reserves for a down payment. The lender is charged a higher fee for insurance which may deter many lenders from offering it. Contact HUD for more information.
  • EEM – stands for Energy Efficient Mortgage Program and is another loan type offered through FHA. This can be useful to any home buyer who is looking to roll the cost of any energy improvements into the loan. This is insured by HUD.
  • 203K – This is an FHA loan designed to rehabilitate distressed properties. Certain qualifications must be met, primary residency being one.
Cost of Homeownership

TRUE COST OF HOMEOWNERSHIP

Americans have always loved the idea of homeownership. It’s the independent maverick in us. But with ownership comes responsibility and with responsibility, cost. It’s best to be prepared.

Standard On-Going Expenses

  • PITI: Principal, Interest, Taxes, and Insurance – in short, your note. Ask your lender what the estimated PITI will be on your potential home purchase before putting in your offer. Your Principle and interest will stay the same for the life of the loan. The taxes and insurance are open to fluctuation.
  • HOA: Home Owners Association fees: Basically, these cover your common areas. In a small, suburban neighborhood with few amenities, it may only be a few hundred dollars a year. In a gated community or high-end condo in town, that cost can quickly escalate to over a thousand. Pay attention when comparing properties; many will have special assessments – one more bill –while some may include trash pick-up or water – a few less.

Other On-Going Expenses

  • Exterior Maintenance –
    • The Structure:
      • This can be minor, like touch up paint or cleaning or a major expense like total roof replacement. It’s a good idea to set aside money every month for both anticipated and unanticipated repairs. Roof life in Houston is considerably less than other parts of the country and our hot summers are particularly tough air conditioning units.
      • Gutters are essential to keep water off your foundation and assure that your yard drains properly.
      • Windows need to be cleaned, caulked, and occasionally replaced.
      • When purchasing a home, including a home warranty as part of the deal is one way to avoid getting hit with expensive repairs the first year.
    • The Equipment:
      • Ladders
      • Power Tools
    • Yard Maintenance
      • Lawn Mowers
      • Rakes, shovels, & Pruning shears
      • Power Washer
      • Hoses
      • Sprinkler Systems – this is a solid investment in the Houston heat. It will not only save your lawn, but it will also save your foundation
  • Interior Maintenance
      • Appliances
      • Flooring
      • Paint
      • Plumbing & Electrical
      • Flooring
      • Pest Control
      • Utilities – Ask the seller for a break down so you have an idea as to average costs.
  • Transportation Costs –

In Houston, this is a big consideration. Traffic can be difficult and time-consuming. Many people prefer the lifestyle afforded by our suburban sprawl, but it does take a toll on vehicles. Budget for wear-and-tear on your car as well as gas, or consider the park-and-ride as an option.

One Time Expenses

WAIT to make a major one time purchase until AFTER you’ve closed. You do not want to jeopardize your financing with a large purchase and you will want to live in your space awhile before you know exactly what suits your new home and the way you live in it.

  • Appliances – sometimes these need upgrading. Be sure to consider the water heater and the HVAC system as well.
  • Furniture — One word – MEASURE. Furniture looks much smaller in a giant, open showroom.
  • Remodeling – Be sure and get estimates before you purchase a home that needs major renovations. What you can’t see behind that wall or under that slab can cost you.
GOLDEN RULES

GOLDEN RULES OF HOME BUYING

Things to Do and Things to Consider

  1. Check your credit report and know that score! This is no place to guess. Your credit score often determines the interest rate on your loan or if you can get a loan at all. Check with all three credit houses – Experian, Transunion, and Equifax. You must have a credit score of at least 625 for almost all lenders. It can take as long as 18 months to bring up a bad score especially if there are broken leases or foreclosures in your past. If you need help, do not wait to get it. Many lenders can steer you in the right direction and suggest reputable credit repair companies get you in better shape.
  2. Get Pre-Approved. Most sellers will not even accept an offer without one, and you need to know your loan limits before you get your heart on something you cannot afford.
  3. Budget for buyer’s closing costs. Expect between 4% and 6% of the home value for pre-paid and lender/title costs… this is in ADDITION to the Down Payment. Be prepared to put down as much as you can. 20% is ideal, but FHA is now offering 3%. The closer you get to that 20%, the better off you are in the long run. If nothing else, 20% will save you from paying private mortgage insurance which in some cases will last the life of the loan.
  4. “PITI” should become your new favorite word: Principle, Interest, Taxes, and Insurance
    • Principle – the mortgage or the amount the bank loans you
    • Interest – the cost the bank charges to lend you money which is collected largely at the front end of the loan life
    • Taxes – In Houston, property taxes are shockingly high and vary markedly by neighborhood and area.
    • Insurance — much like taxes, insurance can run shockingly high and many areas of Houston may require flood insurance as well.
    • HOA – It isn’t usually escrowed but as a buyer, you should budget for it. Some Hoa dues can be as high as $1500 a year; Condos and Townhomes often have monthly dues of $200+ AND yearly assessments for things like a new roof or painting.

Many people forget how high the extras like insurance and taxes can run, focusing instead on the mortgage and interest spit out by mortgage calculators. In Texas – Houston in particular – those two little pieces can be as much or more than the mortgage itself. ALWAYS check the tax rate for any neighborhood before adding it to your must-see list.

5. Beware the Rental Shock. If you are renting, make sure your new note does not vary too much from your current one. This is what lenders refer to as “rental shock,” and can be very frustrating to home buyers. Normally this is more of a problem for first time home buyers whom lenders assume are unaware of the hidden costs of homeownership, but it can affect any home buyer. And it makes sense. Doubling your mortgage overnight can be quite shocking. It’s not uncommon for a lender to require to move up buyers to show reserves if they are dramatically increasing their mortgage.

6. Recognize the art of compromise. No home is perfect. Decide where you are willing to compromise. Usually one of the big three need to change in order to make the numbers work – location, size, or amenities. At the very least, be willing to overlook easy to change things such as paint color, appliances, or wallpaper.

7. ALWAYS get an inspection. Enough said.

8. Avoid ANYTHING that will change your credit. Unless you are prepared to spend a few days explaining that change. Many a deal has died because a would-be homeowner went out and bought a new car or a furniture suit right before close. Just as bad is opening a new credit card just to save 20%. The deal isn’t done until the ink is dry and you have keys in hand.

9. Consider resale value. You may be able to live with a freeway in your backyard but how many other buyers would? And yes, right now, this seems like your forever home, but circumstances change. Ask the guy who ended up with surprise quadruplets – in addition to his two other children.

10. USE A REALTOR. This is a huge error many people make. We often assume that going it alone will save money. In Texas, the seller normally covers all realtor costs with few exceptions. A good realtor can even help you with new builds where you are often at the mercy of the sales agent without one. In almost all cases, buyers agency commission has already been factored in which means the listing agent or sales agent in the case of new builds cannot negotiate it away if you act as your own agent. You wouldn’t try and perform surgery on yourself or handle your own legal affairs. This is likely to be one of the largest purchases you ever make. You owe it to yourself to consult the experts.