Mortgages 101

David Reed

• Publisher: AMACOM
• Year: 2018
• ISBN:
  9780814438756
• Edition: 3
• Topic: Negocios y empresa
• Subtopic: Propiedad inmobiliaria

Questions about the mortgage process seem so complex and intimidating, yet they must be worked through achieve the American Dream of home ownership. Thankfully, this guide eliminates the confusion and stress with clear-cut answers to all your questions.

How much house can you afford (or not afford)? Is every mortgage loan the same, or are there specifics to look for that meet your individual needs? How can you increase your chances of getting those almost unbelievable rates you see banks advertising? Is there any end to the paperwork? Because unless you're sitting on a pile of cash, chances are you'll need to take out a mortgage when you're ready to buy your next home.

In Mortgages 101, you will find the latest information on:

• Application procedures
• Online lenders
• New loan and government programs
• Qualifying requirements
• Zero-down options
• Guidelines for self-employed borrowers

In this one-stop reference, find everything you need to know from a wide range of mortgage topics. From negotiating the best deal to saving on closing costs, Mortgages 101 supplies the answers and assistance for everything you need until the day you walk through your new front door!

SECTION 1

MORTGAGE FUNDAMENTALS

CHAPTER 1

Introduction to Mortgages

There’s a lot more to buying a home than just picking one out and moving in. If you don’t have a wad of cash stuffed in your sofa cushions, chances are you’ll need a mortgage. Mortgage lending has been around for a long, long time, and some things haven’t changed, while other parts of the mortgage process are brand new. Knowing what you’re getting into can help you to make the right decisions.

1.1 HOW HAS THE MORTGAGE MARKET CHANGED SINCE THE LAST EDITION OF MORTGAGES 101?

Wow. A lot, and that’s what we’ll be covering in this new third edition. Yet we appear to have come somewhat full circle dating back to 2004 when the first Mortgages 101 was published. It’s really been interesting to watch, and very much so if you follow the mortgage market like I do.

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If we go back to 2004 and look at the mortgage market then, it was made primarily of two classes of mortgage loans, conventional and government-backed. Conventional loans are those underwritten to standards issued by Fannie Mae and Freddie Mac, while government-backed loans are those carrying a government guarantee and include VA, FHA, and USDA loans. We’ll explore in more detail these two mortgage types in Chapter 7.

Yet the subprime mortgage market was just getting started. Subprime loans, mortgages issued to those with damaged credit, began to enter the mortgage market with swagger. Lenders made a lot of money with subprime loans and soon new lenders entered the market going after the subprime borrower. Within a few years of this overheating subprime market, the foreclosure crisis began and lenders mostly stopped lending—at least those who were still in business.

The second edition of Mortgages 101 exposed these new players in the mortgage market, yet the mortgage landscape has changed dramatically since then. Today, lenders are offering a very tight range of mortgage products. The subprime loan has essentially vanished. And because mortgage lenders have the same basic set of loan programs, they can all make subtle changes in their own internal lending guidelines. Two lenders can offer the very same mortgage but due to the introduction of “overlays” (see Chapter 7) a borrower can be declined at one lender yet approved at another.

This third edition explains how the new lending landscape works and how it should continue to work in the future. The “cowboy” days of mortgage lending have long since ridden off into the sunset.

1.2 WHAT’S THE DIFFERENCE BETWEEN BUYING AND RENTING?

One way you own the roof over your head, and the other way, you don’t. If you’ve always rented or otherwise never owned a home, one of the things you’ll discover is that when things go wrong with your house there’s no landlord to yell at. There’s no superintendent to come fix your leaky faucet. If your hot-water heater is busted, you’re the one who has to make the trip to your appliance store to shell out another thousand bucks or so just so you can take a hot shower in the morning.

When you rent, you can pretty much walk away as long as your lease agreement has been fulfilled. Want a change of scenery? Pack up and move across town. Want a swimming pool and fitness center without the hassles of owning either? Rent. Want new carpet or drapes every year? Rent. Want your utility bills paid? Rent. Free cable? Ditto. You get the point. Renting has its perks. Much less responsibility and no hassles of ownership.

1.3 HOW DO I KNOW IF IT’S BETTER TO BUY A HOME OR CONTINUE RENTING?

Perhaps one of the easiest ways to determine if it’s better to buy or rent is to sit down and calculate the financial advantages of owning versus renting. This is commonly done online with a “rent versus buy” calculator found on the web.

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These calculators compare your current or probable rent situation with a projected home ownership number. They’re easy to find. I ran a Google search for the term “mortgage + calculator” and retrieved more than 56 million websites that had those two terms in combination.

But the kicker is that these calculators rarely will tell you, “No, it’s not a good idea to buy.” That’s because of the tax benefits of home ownership. The interest and property taxes associated with a mortgage are generally tax deductible. You can deduct them from your gross income when you file your taxes. With rent, you can’t.

Yeah, I know. When you’re a renter you don’t pay property taxes or mortgage payments. Instead you give money to someone else for the privilege of living there. But you can’t write off your rent. It’s just that. Rent.

When might a “rent versus buy” calculator suggest it’s better to rent? When you intend to own your next home for only a year or so. Buying a home incurs other expenses, such as money for the down payment, property taxes, and hazard insurance (which is much higher than a renter’s policy). Many apartment complexes pay your electric bills along with water and other utilities. When you own, you pay all these expenses. Owning a home with all its tax benefits doesn’t outweigh the acquisition costs to buy the home if you’re only going to own it for a short period. Short term, rent. Longer term, buy. Are your rent payments the same or less than what a mortgage payment would be? Depending upon where you live, they may be the same. Especially if interest rates are relatively low.

Let’s say you’re renting a nice 3,000-square-foot, three-bedroom home close to schools in a friendly neighborhood. You might be paying $1,800 each month in rent. A similar three-bedroom home might cost $150,000. If you put 5 percent down to buy the home, your monthly house payment, including taxes and insurance, would be close to $800 using a 30-year fixed rate at 4 percent.

If rent payments in the area in which you want to buy are near what a mortgage payment would be, it makes sense to buy. If you can save $1,000 per month and you also get to write off the mortgage interest and property taxes, then it’s truly a no-brainer.

Another reason buying is generally better than renting is simply a matter of appreciation and equity. When you rent and property values increase, your landlord will probably raise your rent again. And, of course, each time you make a rent payment you’re not increasing your equity in anything; you’re just helping your landlord increase his stake in your house or apartment. I’ll give you an example.

Your rent is currently $1,000 per month, and you’re thinking about buying a $150,000 home. If you put 20 percent down and borrow $120,000 at 4.50 percent on a 30-year fixed rate, your principal and interest payment are about $600 a month. Let’s also assume that property values are increasing in your area by about 5 percent per year. What’s the situation after two years?

If you rented, you paid someone else $24,000. But if you owned and itemized your federal income taxes, you likely deducted over $10,600 in mortgage interest on your income taxes. You also paid your loan down by over $4,000 while at the same time increasing your equity position in the house by nearly $20,000.

Now you see why those calculators always tell you to buy a home.

Through all of these calculations, remember the real reason for buying: You buy a home because you want to. Because you like the place. It’s your home. A home is one of the largest single financial commitments someone can make. And while I agree with that statement, let’s not go overboard here. Buy a house because you want to, not because some calculator told you so.

1.4 HOW SHOULD I SEARCH FOR A HOUSE?

That’s easy. Start doing some research on your own on the Internet, even before contacting a real estate agent. If the Internet was invented for any particular industry it has to have been for real estate. Before the World Wide Web was born, one could typically locate houses only in the newspaper on the weekend. If you saw a house that you liked, you’d contact the agent selling the home. Then came the endless cycle of driving around in a real estate agent’s car looking at houses until—finally, finally—you found a home you wanted to buy.

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The Internet has helped agents become more productive by letting consumers do a little shopping first before they get serious enough to use an agent. An agent who advertises a house is called the “listing” agent, because he puts the house for sale on the multiple listing service, or MLS.

The agent will show you the home and ask if you are using another agent. If you aren’t, the agent will ask if you would like to see other homes for sale. You of course say “yes,” and the agent then becomes a “buyer’s” agent as well, helping you find a home to buy and not just listing a house for sale. You give your agent your requirements for your dream home, such as four bedrooms on a cul-de-sac with a swimming pool. Your agent would then scour the MLS to search for such homes. After the search, you’d both get in the agent’s car and go see the homes.

Today, however, there seems to be no end to the ways you can search for homes. Too many, it seems, and it can be a bit overwhelming. But what all of these sites have in common is they access the very same database—the local multiple listing service.

For instance, Redfin, Zillow, and Trulia are all portals where prospective homebuyers can visit online to search for homes. Most people now find interesting homes on their own before even contacting an agent. This way, the agent’s not dragging you all over town to look at homes you’d never buy. Your agent spends more time selling or listing homes and less time driving all over the place.

You can start with www.realtor.com, or get their app for your mobile phone. At this official site of the National Association of Realtors, you can search for homes anywhere in the country or across town. It also has access to every single agent-sponsored multiple listing service database in the country. It is easy to log onto the site, select your desired location, preferences, like four bedrooms in this zip code in this price range with a pool or without, and so on. Many properties offer “virtual” tours showing video of different views of the house. All of the pricing info is there as well so you can see what homes are selling for and what’s generally available.

But don’t get too much further into the process without the help of a real estate agent. In fact, don’t even make contact with any sellers without an agent at your side.

1.4A WHY DO I NEED AN AGENT, ANYWAY?

For one, real estate agents do this full-time; it’s not something an agent does once every seven or eight years or so, typically the life cycle of owning a particular home. Real estate agents know the background of the neighborhood, appreciation, schools, and when homes are overpriced or when a home is a great bargain. Real estate agents are professionals and it doesn’t cost you anything to tap into that knowledge.

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Real estate agents work on a commission. When a homeowner decides it’s time to sell, or is at least thinking about it, they’ll contact a good real estate agent who will then prepare a Comparative Market Analysis, or CMA. The CMA is a report that pulls up recent sales in the area. This provides the agent with the data he or she needs to determine how long it will take to sell the home and how much it will sell for.

In return, the agent charges a commission payable when the home actually closes. The amount of the sales commission varies by locale but a 5 percent or 6 percent commission is common. When the agent who lists the home finds a buyer for that property, the agent gets the entire commission. However, when another real estate agent brings a buyer to the deal, the commission is split between both agents. In essence, it is the property owner who pays your real estate agent—you don’t. Essentially, it’s a free service. Can you think of any other industry where the professional works at no charge to you?

1.4B HOW DO I FIND A GOOD REAL ESTATE AGENT?

Once word gets out that you’re thinking about buying a home, you might soon discover there are more than a few agents who suddenly get wind of your intentions. There are a lot of real estate agents, many of them part-time, while a select few are full-time. You want the full-time agent with lots of experience. Top-notch real estate agents bring in lots of business, both from the buyer’s and seller’s side of the transaction. You want a successful agent, not just a referral from a coworker, family member, or friend.

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Every real estate agent you come across will typically tout how good they are. And that makes a lot of sense because who would advertise they’re not really very good and only work part-time? No one, really. So if every agent is “the best,” how do you sort through all the marketing? It’s really very easy—you look to see how many listings the agent has.

When someone agrees to list a home for sale with an agent, they want the best they can get. That means someone who is experienced with a solid track record. Sure, there are some real estate agents new to the industry who are also very motivated and hungry for business, but you must do everything you can to find the right one to help you find and buy your next home.

Top-level real estate agents have lots of listings. They’ve built a reputation in the community, and with lots of listings that means a lot of other people have chosen that very same agent. If there are three agents you’re considering and two of them have just one active listing while the third has 10, who do you think you should choose? The heavy hitter. The one with the most listings.

1.5 WHEN IS A GOOD TIME TO BUY A HOME?

Have you ever heard a real estate agent say that it’s a bad time to buy? I haven’t. It’s either “The market’s hot, buy no...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Preface
• Section I: Mortgage Fundamentals
• Section II: The Right Mortgage
• Section III: The Right Lender and Rate
• Appendix: Monthly Payment Schedules
• Glossary
• Index