Carlos & Millie Gil Community Realtors
Bold Real Estate Group
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Important Questions To Ask Your Home Inspector

by Millie Gil

You know when you are buying a home, that you will need a home inspection.  But when it comes time to read the inspection report you feel like you need a translator!  Here are a few important questions you should definitely ask your home inspector to help you understand the inspection report before closing the deal.

1.  Clarify what is truly bad.  Have the inspector tell you exactly what is really bad, what will need to be fixed right away and what can wait.  Also,  have him let you know what he put in the report that he just wanted to let you know about, but was not a necessary repair.  This is important because the inspector may have something noted under the category “Health & Safety Hazards” and all it is a small plumbing issue that would only cost a few dollars to fix.  So it is important to clarify everything.

2   How hard is that to fix?  You should ask the inspector how something should be fixed and they will usually be more than happy to explain to you how easy the repair is to do yourself.  If it is not a simple fix, they may have someone they can refer to you to have the repair done professionally.  Additionally, they can also tell you about how much the repair should cost, whether you do the repair yourself or have it done professionally.  This information can be invaluable when you are not sure about a particular repair.

3.  If it were you, what would you do?  Ask the home inspector what they think you should have fixed or not fixed, whatever the case may be.  It is the home inspectors job to point out every little thing in their report.  That’s what you are paying them for remember.  So find out what is and isn’t a necessary fix.

4.  Get clarification on anything you don’t understand.  Sometimes the inspection report contains a term or a repair that you have no clue what they are referring to.  Ask the inspector to show you each and every item on the report that does not make sense.  It is going to be your new home for years to come and you need to understand everything about it.

5.  How does that work?  There will inevitably be one or maybe several mechanical systems that you don’t know how to work.  Most home inspectors would be more than happy to show you how to operate everything.  But you have to ask.  So go through the entire house and make a list of everything you think you may need help with – then ask.

The home inspection is one of the most important things you will be doing when buying a new home.  Finding out any major defects etc. could keep you from buying a money pit or could help you to renegotiate the deal if many repairs are needed.  Get your realtor involved in the process.  Your agent sees hundreds of homes every year and you might be quite surprised at what they can point out before you even begin the inspection process.

 

Home Seller-Don’t Lose The Sale!

by Millie Gil

You are ready to move and have found the perfect home for you and your family.  The only thing left to do is to sell your current home.  Sounds simple right?  Well, it can be, but there are several things that you may be doing that are making your buyers run for the door.

Here are a few surefire ways to lose the sale
Keep reading so you don’t make these common mistakes

• Make sure you are not at home while your buyer is viewing your house.  Don’t take this personally.  A buyer will not feel comfortable with you around because they cannot envision themselves living in your home – they will see you living in your home.   The buyer will not be comfortable opening the drawers and closets.  Additionally, your buyer will not feel comfortable talking about what they would like to change about your home in fear of offending you.  The buyer doesn’t need you lurking around hanging on to their every word.  Give them the space they need to fall in love with your house.

• Keep your home in tip top shape.  Showing a messy home is a surefire deal breaker.  The buyer may see your messy home and assume that you have not taken care of the routine home maintenance either.   When we say clean – we do not mean stuff everything in the closet – the buyer will be looking there also.  We know your busy and with kids and pets it’s hard to keep your house spotless for possibly months at a time.  So talk to your family and have a plan to keep everything as neat and orderly as possible.

• Do not overprice your home thinking that you can lower the price later.  It is a buyers’ market right now.  Your buyer has a multitude of homes to choose from and if you overprice your home, potential buyers will not even stop to consider yours, they will be onto the next one that they don’t have to work so hard to get.  Talk with your realtor to go over fair market values for your area before deciding on a price.  You don’t want to lose out on a serious buyer just because of a few pricing mis-conceptions.

Any good real estate agent will be able to help you and guide you through the entire sales process from start to finish.  So take advantage of their knowledge and the tools they have available to them to help you sell your home quickly.

 

How To  Restore Your Credit Score Quickly

by Millie Gil

Buying a home is the American dream and you have decided that it is time to start looking into buying a home of your own.  That’s great!  However, you probably know that there are things you should be doing before you begin your search -  but where do you start?

The first thing you need to get in order, before you do anything else, is to get a copy of your credit reports.  That’s plural – credit reports.  You need to get a copy of your credit reports from all three credit reporting agencies -  Trans Union, Equifax and Experian.

If you are thinking about buying a house, you may not realize the importance your credit repots hold in getting an approval for your new home.  The mortgage companies are more concerned about your recent buying and repayment history than what may have happened years ago.

If you have too many  recent late payments or collections, there may not be anything you can do to get approved in the immediate future.  However, there are some things you can do to clean up your report. So in six months to a year or maybe even two years, depending on how bad your credit is and how long it takes you to clean it up, you can apply for a home mortgage and get your approval.

Here are a few things you can do to restore your credit and credit score quickly

1.  Check your credit reports for errors.  Again , that is plural so check all three of your credit reports for errors.  If there are mistakes on your credit reports, you will need to start an investigation with the company or the source of the derogatory information.  Contact them in writing and make sure you include all supporting documentation proving the information is in fact an error.

2.  Set up a timely repayment schedule.  If you have any accounts that you have been late in paying, you will need to begin paying all of them on time.  Paying your bills on time for a minimum of six months will go a long way in improving your credit rating.

3.  Collections.  Try to avoid having your accounts turned in to collections.  A collection is the most damaging of all credit issues.  So work out a re-payment plan before your account turns into a collection.  A credit improvement agency may be able to help you get your collections erased; but only if the creditor did not abide by all of the laws of the Fair Credit Reporting Act.   However, this is generally not the case because most creditors know the laws and how to follow them.  So don’t count on this as a quick fix .  Most collection accounts will stay on your credit report for a minimum of seven years.

4.  Keep a low balance on all of your revolving credit accounts.  Try to keep your balances below 50% of your limit.  The lesser the balance the better it looks to  potential creditors.

5.  Do some soul searching.  Try to determine what caused your credit status to get out of control in the first place.  Then do whatever you have to to amend your bad habits – if any.

6.  Get a secured credit card.  Secured credit cards can be very helpful in improving your credit.

There are many things you can do to get your credit report back on track quickly.  So talk to your real estate agent for more information about how you should go about doing this.  In the meantime, your realtor will be able to get you started on your path to homeownership while you are working out your credit issues.  Your agent has the experience and the know how to help you get into your new home as quickly as possible.  So take advantage of all they have to offer you.

 

Surefire Ways To Lose The Deal

by Millie Gil

Buying a home is a wonderful experience.  However, you must go about it in the right way.  So if you think that you can go around spitting out offers and using dirty dealing techniques just because you know that it is a buyers’ market right now – you are sadly mistaken.

When you are trying to buy a house, there are several things you absolutely must not do.  The best way to know what not to do is to put yourself in the sellers shoes.

Here are a few surefire ways to lose the deal and quite possibly your dream home

• Do not make an extremely low or unjustified offer.  Yes, you do have the upper hand because it is a buyers’ market right now; however, no one can afford to give your their home  below market value.  The seller will see you as someone that is wasting their time.  They will turn down your offer and will not even consider a counteroffer.  Talk to your realtor to determine the fair market value for the area – before you make an offer.   It’s ok to make an offer below the asking price if you have the market data to support your request.

• Get your financing in order before making an offer.  It is not uncommon for people to start arranging their financing  as far in advance as six months or more.   People assume because they have decent credit and some money saved for their new home that they will automatically be approved.  However, in this economy, that is not always the case.  You may find the perfect home for you and your family but if you cannot show that you can be approved, you might just lose the deal.  The seller will not want to risk accepting your offer and then finding out months down the road that you cannot get approved for the purchase of their home.

• Do not walk into someone’s home and start trash talking their house or their neighborhood.  If you think this will get you a lower price, you are wrong.  You are only going to anger the seller and they will turn down your offer in no time flat.   A person’s home is a very personal thing.  Some people have lived in their homes for a very long time and the emotional attachment they have for it can run very deep.   So keep all negative comments to yourself.  You can talk to your realtor about your objections once you have left the sellers home and are in the privacy of your realtors office.

If you see a reason to make a lowball offer on a home, talk with your agent about respectfully voicing your concerns to the sellers agent.   Your realtor has years of experience dealing with this type of thing and there is a very good chance that your realtor may already know the sellers agent and can address your concerns in a constructive manner.

Remember, always put yourself in the sellers shoes before doing anything.  You don’t want to find the perfect home and then have it snatched away from you from an unwilling seller.  So play nice and let your agent guide you every step of the way.

 

What To Do If You Think Your House Hunting Is Taking Too Long

by Millie Gil

If you have ever gone house hunting then you know how easy it is to get overwhelmed by the hundreds of available homes on the market.  So what should you do?  Your head is telling you to look at everything because you might miss out on that perfect deal.  But your heart is telling you to hurry up and find your dream home so that you can finally get relocated.

Here are a few tips and tricks that will help you narrow down your summer home search

• How long have you been looking for a new home?  Five weeks, five months, five years? How do you know how long is too long?  Well, if you have money saved and you have gotten your credit report in tip top shape, then now is the time to buy.  But sometimes it takes viewing several dozen homes and getting several offers rejected before you finally get the perfect deal.  This is completely normal so relax and enjoy the ride

• Re-evaluate your expectations.  If you keep looking at homes and are not finding anything that will work for you and your family, then talk to your realtor.  Schedule a meeting with your agent to discuss exactly what it is you are looking for and they will be able to get you back on track

• It’s time to compromise.  You will more than likely not find a house with 100% of everything you want.  So make a list of the most important “must haves” and then pick the home that is the closest to having everything on your list.  Then anything else that comes after that is just gravy!

• Tune out the nay sayers! Everyone has an opinion about which house is best for you; how bad the repair issues are, how to negotiate the best deal, deciding for you what you can afford, telling you that you should be buying one of those dirt cheap foreclosures and how desperate the banks are to get rid of all those homes.  So what should you do with all of that advice?  Ignore it!  People who have not purchased a home in that neighborhood or perhaps have not bought a home in years are not the best authority on what is best for you.  Although they have good intentions, friends and family can unwittingly keep you from making your own decisions about what is best for you and your family and ultimately keep you from becoming a home owner

The best thing you can do to help your summer house hunting routine is to talk to your realtor.  Involve your realtor as much as possible.  Let your agent know exactly what you are looking for and they will give you a selection of homes to choose from that will meet your specifications.  Your realtor knows the area neighborhoods and the homes in those neighborhoods and they will be more than happy to point you in the right direction and help keep you on track.

 

Getting the Best Mortgage Rates in the New Economy

by Brandon Cornett

All home buyers want the lowest mortgage rate possible when applying for a home loan, because it directly translates to a smaller payment each month. And who doesn’t want to shrink their monthly expenses?

But how does one obtain a low rate on a mortgage loan and, for that matter, why is it important in the first place? These are the subjects we will discuss in this tutorial for first-time home buyers.

How Your Credit Score Relates

When you apply for a home loan, you be sure that the lender will request your credit reports and scores from all three of the reporting companies (Experian, Equifax and TransUnion). Lenders also reserve the best rates for borrowers who fall into a certain credit category.

What score you need to qualify for this category will vary from one lender to another, but it’s safe to say that the better (higher) your credit score, the lower the mortgage rate you’ll receive. This in turn translates into a lower payment each month, which is the whole point to all of this.

Here’s something not many home buyers realize. Over the last few years, the score needed to qualify for the best rates on a loan has risen. This is largely due to tougher restrictions on lending institutions (as a result of the subprime loan crisis of 2007 - 2008).

In fact, I saw Jean Chatzky (financial editor for the Today Show) on TV not long ago, talking about this very subject. She said that in May of 2008, borrowers needed a score of at least 620 to qualify for the best rates. By May 2008, however, that requirement had increased to 760 … an increase of 140 points! Today, in 2010, those higher standards are still in effect.

How You Can Improve Your Score

This is a good time to introduce you to another acronym related to home loans, a term you’ve probably heard before on television. The acronym if FICO (pronounced fie-coh). It stands for Fair Isaac Corporation. This is the company that created the scoring model that is used today. Basically, it’s a computerized scoring model that turns your financial history into a numerical score between 300 and 850 (with higher being better).

So with all things being equal, a higher FICO number means that you’ll be offered a better rate on your loan. That’s because a higher number tells lenders you know how to manage your finances, and that you’re responsible when it comes to paying bills.

You can maintain a good score by paying all of your bills on time. This includes credit card balances, car payments, rent, utilities, etc. It also helps to reduce your overall debt, starting with those credit cards. These are the keys to being a successful home buyer in the new economy.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at www.HomeBuyingInstitute.com to learn more about this topic.

Top 5 Mortgage Questions Among First-Time Home Buyers

by Brandon Cornett

Here’s what we did. We reviewed all of the questions emailed to the Home Buying Institute over the last six months. We made a list of the most common mortgage-related questions sent in by home buyers, and we answered them below. What’s the result? A must-read article for first-time home buyers!

So here they are, starting with the most common mortgage question we receive…

1. What credit score do I need to get a mortgage?

In the past, we did not get this question as much as we do today. Yet, it has quickly risen to #1 in terms of frequency. There are two reasons for this — economic recession and media coverage. The housing crisis of 2008 led to a full-scale economic recession in 2009. Long story short, it’s harder to qualify for a mortgage loan in the current economy. Lenders today are more strict with their lending criteria, including credit scores. There has been plenty of media coverage about all of this, and that’s why so many home buyers are asking this question. So let’s answer it.

First, you need to realize that the numbers I’m about to give you are only averages. Every lender has its own standards and criteria, and they vary a lot. Lenders will also review other criteria, in addition to your credit score (income, debt, affordability, etc.). In the current economy, you’ll probably need a credit score of at least 670 to qualify for a mortgage loan. In order to get the best rates on a mortgage, you’ll need a score of 750 or higher. Again, these numbers are not set in stone. They are merely averages taken from recent surveys.

2. How much of a mortgage loan can I afford?

The most important thing to understand is that you must answer this question for yourself. A mortgage lender cannot tell you how much you can afford to pay each month — they can only tell you what they’re willing to lend you. It’s possible to get approved for a mortgage that’s too big for you. It happens all the time, and it often ends up with a foreclosure situation. So you need to set your home buying budget early on in the process, before you start talking to lenders.

This is a relatively simple process. All you need to do is subtract your monthly expenses from your net monthly income (after taxes), and you’ll have a rough idea of what you afford to pay toward a mortgage each month. When you add up your monthly expenses, include everything but your current rent payments — you won’t have a rent when you buy a home. Be sure to account for entertainment / leisure expenses, retirement and savings contributions, and whatever debts you currently have. Subtract these expenses from your monthly income, and use that figure as a monthly limit for your mortgage. Do not exceed that maximum amount, even if a lender approves you for more. Stay within your budget!

3. How do I apply for an FHA loan?

Let’s start with a quick definition. An FHA loan is any home loan that’s insured by the Federal Housing Administration, which is part of the Department of Housing and Urban Development / HUD. The FHA does not actually make loans to consumers — rather, they insure the loans made by primary lenders.

These loans offer certain benefits to first-time home buyers. Lenders receive guaranteed repayment from the federal government, even if the homeowner ends up defaulting on the loan. This government backing makes it easier for home buyers to qualify for FHA loans. You don’t have to put as much money down (as little as 3.5%), and your credit score doesn’t have to be perfect. That’s the primary appeal of FHA home loans.

To apply for an FHA loan, you would need to start on the FHA website. From there, you can find a list of FHA-approved lenders in your area, and you can apply for the program directly through those lenders. You can actually start this process through either the HUD or the FHA websites. Here are the links:

After you submit an application with an FHA-approved lender, they will review your financial situation and tell you (A) if you’re qualified for the program and (B) what kind of rate / terms you might get.

4. How do I get pre-approved for a mortgage loan?

It’s wise to get pre-approved for a mortgage loan before you start house hunting. It helps you limit your search to the types of homes you can actually afford. Sellers will also take your offer more seriously if you have your financing lined up. Fortunately, it’s a straightforward process. Just contact your chosen lender and tell them you want to get pre-approved for a mortgage. They will set up an appointment and tell you what to bring (W-2 statements, bank statements, pay stubs, etc.).

Afterward, the lender will tell you how much they are willing to lend you, based on your financial situation. They’ll also give you a pre-approval letter with the same information.

5. Should I choose a fixed or adjustable-rate mortgage?

A fixed-rate mortgage keeps the same interest rate over the entire life of the loan. On the contrary, an adjustable-rate mortgage (ARM) has an interest rate that will adjust or “reset” every few years. These days, most ARM loans start with a fixed rate for a certain period of time, typically three to five years, and will start adjusting after that. During the initial fixed-rate period, an ARM loan will usually have a lower rate than a regular fixed-rate mortgage. This is why some home buyers choose ARM loans in the first place — to get a lower rate, and thus a smaller mortgage payment each month.

I generally recommend fixed-rate mortgages for people who are going to stay in a house for a long period of time, more than a few years. The only time I would even consider an adjustable / ARM loan would be a short-term residency, where I knew I would be selling the home within a few years. For example, I did my final military tour in Maryland, and I knew I’d be moving out of the state after two years. So I used an ARM loan to get a lower interest rate, and I sold the home long before the three-year point where it would start adjusting. This is the only type of situation where I recommend the ARM loan. For long-term residency, I recommend a fixed-rate mortgage for predictability.

You should learn everything you can about fixed and adjustable mortgages, and choose the one that best suits your needs. Once you learn about the various pros and cons of each option, and obvious choice will begin to emerge.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at www.HomeBuyingInstitute.com to learn more about this topic.

Mortgage Loan Rates - 5 Things a Home Buyer Should Know

by Brandon Cornett

Buying a home requires plenty of homework (no pun intended). There are new concepts to grasp, unfamiliar terminology to learn, and plenty of decisions to make along the way.

The mortgage loan interest rate is one of the topics that confuse a lot of home buyers, especially the first-time buyers who are new to the process. So in this article, I’ll explain how an interest rate gets applied to a home loan, and how it affects you as the borrower.

5 Things a Buyer Should Know

1. The rates offered by a lender will vary from one person to the next. It’s largely based on a borrower’s credit score. The higher your score, the better the rates you’ll be offered when applying for a loan. This is why you see so much fine print on the advertisements of mortgage companies — there’s a lot of variance involved. So when they offer a “teaser rate” in their marketing materials, it may or may not apply to you.

2. The interest rate is one of four factors that will determine the size of your monthly mortgage payment. Collectively, these factors are referred to with the acronym PITI. The ‘P’ stands for the principal amount you borrow. The first ‘I’ stands for the interest you pay on the loan. The ‘T’ is for taxes on the home. Lastly, the final ‘I’ is for insurance (i.e., the homeowner’s policy you are required to have before closing.)

3. In order to qualify for the best rates on a mortgage loan, borrowers need a higher credit score today than they needed just a few years ago (a 750 or higher in many cases). If you’ve been watching the news lately, you can probably guess why. The subprime mortgage mess of 2007 - 2008 has led to tougher restrictions on lenders. In turn, the lending institutions have tightened up on their loan criteria for qualification, rate assignments, etc.

4. Every buyer should study the key differences (and pros and cons) between adjustable and fixed-rate home loans. With an adjustable mortgage, or ARM, the interest rate will typically start out low for an introductory period. This period commonly lasts for three to five years, after which the loan will adjust or “reset” to a higher rate. In many cases, this increase can be significant and will therefore lead to a bigger mortgage payment each month.

5. For buyers who plan to remain in a house longer than three to five years, the fixed-rate mortgage is usually the best option. As the name suggests, this type of loan will carry the same level of interest for the entire time you’re paying it (regardless of what the economy does). This offers a level of financial certainty, which for many borrowers is all the reason they need to choose this option over the ARM.

Clearly there is much more to learn about interest rates, as they apply to buying a house. But I hope the points I’ve made above give you a better understanding of this subject. I recommend you learn more about each of the items covered above, particularly the pros and cons of adjustable versus fixed mortgages. Being an educated consumer is the first step toward success in the real estate world.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at www.HomeBuyingInstitute.com to learn more about this topic.

Getting Mortgage Quotes Online - Tips For Internet Security

by Brandon Cornett

Thanks to the Internet, the entire real estate process has gotten a lot easier. You can find homes and research prices online, and you can even request quotes from mortgage lenders with less time and effort than in the past.

And while these are certainly good things, you must also exercise a bit of caution when getting home loan quotes via the Web. You need to protect your personal information at all times, and you need to learn about the various companies that offer this kind of web-based service. This calls for some light “detective” work on your part, and that’s what I’m going to teach you in this article.

Before we get to the actual steps involved in this process, let me offer you some good news. With a little research and common sense, you can benefit from the convenience and efficiency of online mortgage quotes while protecting your identity at the same time. There are plenty of reputable companies that offer these services. Of course, there are some scams out there as well, but these will be fairly easy to spot once you read this article.

Without further ado, here are five ways to protect your identity while getting loan offers via the Web:

1. Go With the Names You Know

Generally speaking, it’s best to use a company you’ve heard of before when requesting mortgage quotes through the Internet. Here’s why. The fact that you’ve heard of them suggests that the company spends a lot of time, energy and money on their brand name. Such a company will go a long way to protect its reputation and brand, and they do this by providing a good service and looking after their customers. Personally, I would never offer sensitive information to an unknown company — too much of a wild card for my comfort. I recommend you do the same.

2. Look for the ‘S’ in the Web Address

A website that is truly secure have the letter ’s’ in the prefix of the website address / URL. This means the site is encrypted to keep hackers and identity thieves out, as much as possible anyway. When you visit a lender’s website — and before you transmit sensitive information through the site — check the web address that appears in your Internet browser. If it’s truly a secure website, there should be an “https://” prefix before the “www” part. Note the all-important letter ’s’ in that prefix. If the address starts with “http://www” (lacking the letter ’s’), then it’s not a secure site.

3. Look for Third-Party Verification

Reputable mortgage companies will go the extra mile to have ensure their websites are secure for visitors. This will often include the use of third-party verification of site security. In other words, the company will hire another company to test and verify the secure areas of their website. You’ve probably even seen the certification seals on financial websites in the past. A common one is the “TRUSTe” seal of approval. In most cases, you can actually click on the image / seal to check the security status of the site you’re on.

Conclusion and Going Forward

Using the Internet is a great way to get quotes for a home loans while saving time and energy in the process. You just have to exercise a little caution along the way. Follow the safety guidelines I’ve provided above when requesting mortgage offers via the Web, and you should be fine. And remember this mantra of Internet safety and security … when in doubt, back on out!

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at www.HomeBuyingInstitute.com to learn more about this topic.

When is the Adjustable-Rate Mortgage a Good Idea?

by Brandon Cornett

This is one of the most frequently asked questions we receive at the Home Buying Institute. But despite the frequency, I’m always happy to answer. A failure to understand the inner workings of the adjustable-rate mortgage loan is what got many homeowners into foreclosure trouble over the last few years.

Let’s start with a quick definition. The adjustable-rate mortgage (commonly known as the ARM loan) has an interest rate that will adjust or “reset” at a predetermined frequency — every three years, every five years, etc. This is very different from the fixed-rate mortgage loan, which holds the same interest rate over the entire life of the loan.

The interest rate is one of the factors that determines the size of your monthly mortgage payment, so when the rate increases or decreases the size of your monthly payment changes up or down with it.

Many of the adjustable-rate mortgages given out these days are actually “hybrid” in nature. They start with a fixed interest rate for a certain period of time. After that initial period, the rate will reset or adjust — and it will continue to adjust with regular frequency. This is where the uncertainty comes into the picture, because you never know exactly how the rate will adjust. It typically means an increase, but you don’t know how much of an increase.

ARM Loans, Bad Credit and Payment Shock — A Common Pattern

These types of loans were favored by the subprime lenders you’ve heard so much about lately. When a person has bad credit, they have trouble qualifying for a mortgage loan. And if they do get approved for a loan, they will usually end up paying a higher interest rate than somebody with good credit. This can make the mortgage payments unaffordable for the home buyer, unless … the lender can find a way to reduce the interest rate for the first few years.

And that’s where the ARM loan came in. Subprime lenders would often use some version of the adjustable-rate mortgage to minimize the interest rates for the first few years of the loan. This would make the loan payments seem more affordable to the borrower — at least initially. When you hear the phrase “teaser rate” used to describe mortgage loans, it usually refers to this type of lending practice.

So, John and Jane (both of whom have bad credit) purchase a home through an ARM loan. The rate is relatively low for the first three years, so everything seems fine. While the mortgage payment is a significant chunk of change for John and Jane, they can afford it for now.

After three years, the interest rate resets to a higher rate. And in the case of a subprime mortgage loan given to borrowers with bad credit, the rate usually increases significantly. The next thing John and Jane know, they are suddenly unable to afford their new payment. So they have three options — (1) refinance the loan, (2) sell the home, or (3) suck it up and try to manage the new / larger mortgage payment.

Many people in this situation over the last few years were unable to pursue option #1 (refinancing) because their property values dropped since the date of purchase. So their options were reduced to just two — sell the house or try to handle the new payment. We know from history that a lot of people took the latter route, whether it was by choice or not. We also know that this type of scenario contributed to the record-breaking numbers of home foreclosures we’ve seen over the last two years.

How to Safely Use an ARM Loan

The scenario described above is an example of how not to use an adjustable-rate mortgage / ARM loan. If you plan to keep the home for many years, the fixed-rate mortgage is usually your best bet. As we have seen, you cannot count on being able to refinance the loan before the interest rate adjusts. Nor can you predict how much larger the payment is going to be after the adjustment period.

But there is a smart way to use the ARM loan. I have used one myself in the past, and it worked out perfectly for my wife and I. It worked out well [and here's the key to all of this] because we knew we would only be in the home for three years, at the most. This was my last tour in the military, so we bought the house knowing we would be moving again in a few years. The ARM loan was ideal for this scenario. We saved money while we owned the home (because of the introductory period of low interest), and then we sold the home and moved before the rate adjusted.

This is not the only scenario where an adjustable-rate mortgage can be used wisely. But it is the most common scenario. The key here is that you (A) understand how this type of mortgage works and (B) choose the best loan type for your particular home-buying situation.

Do plenty of research before picking a type of home loan. This article is only the beginning of your research. Don’t let a mortgage lender tell you what’s best for you — take their advice, sure, but make your own decisions based on thorough research. It’s your financial future, after all.

© 2009, Cornett Communications.

About the Author: Brandon Cornett is a consumer advocate and publisher of the Home Buying Institute. You may visit the author's website at www.HomeBuyingInstitute.com to learn more about this topic.

 

Common Misconceptions About FHA Home Loans

by Brandon Cornett

FHA home loans are a popular financing strategy for home buyers. They’re especially popular with first-time buyers who don’t have much of a down payment saved up. But FHA loans are also commonly misunderstood. Here are some of the biggest misconceptions about these loans.

But first, a quick definition. An FHA loan is simply a mortgage loan that’s insured by the Federal Housing Administration. The FHA is part of the Department of Housing and Urban Development, better known as HUD. This government agency insures mortgage lenders against losses resulting from borrower default. This makes the lenders more inclined to use the program, and to give loans to people who might not otherwise qualify for a mortgage.

Myth #1: Anyone can qualify for an FHA loan.

Truth: Not everyone will qualify. Generally speaking, it’s easier to qualify for an FHA home loan than a conventional mortgage loan. But that doesn’t mean they’re available to everyone. In fact, the Department of Housing and Urban Development (HUD) has recently tightened up their lending standards for FHA loans. One of the changes affects people with low credit scores. If your credit score is below 580, you’ll have to make a larger down payment. If your score is way below 580, you probably won’t get approved for the loan. With good credit, you’ll still have to make a down payment of at least 3.5% to get approved. You’ll also need to document your income and expenses, to show that you can afford the monthly payments.

Myth #2: You can get an FHA loan with no money down.

Truth: In the current economy, you can’t get any kind of loan without making a down payment of some kind. The days of “easy credit” and “no money down” disappeared when the housing bubble burst. The minimum down payment for an FHA loan is currently 3.5%. And, as mentioned earlier, you’ll need a credit score of 580 or higher to qualify for the 3.5% down payment. If your score falls below that cutoff point, you’ll have to put 10% down.

Myth #3: FHA loans are safer, because the government will bail you out if you fall behind.

Truth: Wishful thinking. If you fall behind on an FHA home loan, you can be foreclosed upon — the same as any other type of loan. Remember, the FHA is not the one giving you the money. You must apply for one of these mortgages through an FHA-approved lender. The government just insures the lender against losses resulting from borrower default. So the lender can still foreclose on you, if you fail to make your payments. As an FHA borrower, you might have more workout solutions and modification options available, but that’s about it. The FHA will not “bail you out.” So make sure you buy an affordable house!

Where to learn more:

Federally insured loans offer certain advantages to home buyers. But they are not a risk-free path to homeownership. As a borrower, you are still responsible for making your payments on time. If you would like to learn more about FHA loans and how they work, refer to the resource links provided above.

Author's Note: The original version of this article was written by Brandon Cornett. Brandon is a consumer advocate and publisher of the Home Buying Institute. Visit the author's website at www.HomeBuyingInstitute.com to learn more.