Know before you borrow

10 FAQs on mortgage loans for homeowners and buyers

November 16, 2008|By Andrea F. Siegel | Andrea F. Siegel,andrea.siegel@baltsun.com

Exotic mortgages, as well as some lenders, are a thing of the past. But the need to borrow to buy a home is very much present.

The lending landscape keeps changing fast, economists, mortgage brokers and lenders say, so homeowners and potential buyers need to stay current.

"I think the choices consumers will have will be much more constrained, as will the number of lenders," said economist Anirban Basu, chairman and CEO of the Baltimore-based Sage Policy Group.

Fixed-rate mortgages, the predictable 15- or 30-year kind your parents had, are making a comeback, with adjustable-rate loans getting a smaller share of the market, Basu said.

Whether interest rates will jump is unclear - though it is clear that skittish lenders are pickier about to whom they'll lend and at what rate.

"We are turning away people that we wouldn't have a year ago. They have a lower credit score, they already have more debt, things of that nature," said Hunter Bloch, a mortgage broker with Annapolis First Mortgage in Hanover and president of Maryland Association of Mortgage Brokers.

Meanwhile, home-builders are pushing for greater buyer initiatives, hopeful that if the lame-duck Congress won't help them, the new one will. Programs still exist to help buyers with a house, and more are in the works to aid troubled mortgage-holders.

We put together a list of mortgage questions and talked with experts to get the answers you need.

1. What is the $7,500 federal homebuyer tax credit?

What's billed as the $7,500 tax credit is more of a $7,500 no-interest loan, says C. Dennis Elliott Jr., a senior loan consultant with Advantage Home Mortgage Inc. in Potomac. It applies to a primary residence bought between April 9, 2008, and June 30, 2009. Buyers who haven't owned a home in three years can qualify for this credit amount up to 10 percent of the purchase price of the house.

But, experts say, it works like a loan because you have to repay the full amount over a 15-year period, with caveats. If you sell before you've repaid, and don't show a gain on the sale, you won't have to pay. But if you do show a gain, you have to repay.

2. How do I know how much mortgage I can afford?

"Get a dose of reality," says financial planner James F. Ludwick, of Main Street Financial Planning in Odenton and Washington. He counsels people to paint their financial portrait before taking a step toward buying.

This is not what a lender calculates as the maximum you qualify for. It is your estimate of what you are financially prepared to part with for homeownership, given not only your income and obligations, but your lifestyle and job stability.

What lifestyle expenses do you incur? Fifty dollars a week for lattes? A $5,000 annual vacation? How much goes into your retirement account? Now, forward to likely upcoming expenses. How soon will you want a new car? Furniture? What of these things are you prepared to trim?

"You as a buyer need to find out what your comfort zone is going to be as far as a monthly payment, and what you are comfortable with as the purchase price of the house," said Ashley B. Richardson, an agent with Coldwell Banker in Lutherville. "Some people may qualify for a whole lot more than they are comfortable with."

3. What's a good credit score nowadays?

The better interest rates go to people whose credit scores are at least 720, so check your credit reports before seeking a loan. Why does that matter?

"If you have a $200,000 mortgage, a 1 percent difference in your loan rate is almost $2,000 in interest a year," said Steven Isberg, a finance professor at the University of Baltimore and senior research fellow at the Credit Research Foundation.

Under federal law, you can obtain one free copy a year from each of the three national credit-reporting agencies: Equifax, Experian and TransUnion. Go to annualcreditreport.com.

"If there are problems with your credit report, make sure you get them corrected. It is much easier to work with the creditor first," Isberg said.

If the negative information is accurate, improve your habits: Pay on time. Try to pay in full every month. The closer you get to your credit limit, the riskier you appear to a lender, Isberg said.

"It's not a good idea to spend up to your credit limit even if you are paying it off every month. What shows up is you are running up your credit," he said.

4. How should I go about finding a lender?

Just like finding a pair of jeans. Shop around for what fits you best. Remember, different lenders participate in different programs, so talking to a variety of lenders and brokers and educating yourself on what's available is in your best interest.

If you have an account at a bank, talk to a loan officer there. Talk to the lender(s) who work with your real estate agent. Look online. Go to the library.

5. How large should my down payment be, and where can I get that?

Put down 20 percent of the purchase price if you can. As of Oct. 1, federal rules essentially ended what was the seller giving the down payment through a nonprofit.

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