| Financing Your Home |
 Most buyers today do not pay all cash to purchase a home, even if they have the money available to do so. This is because mortgage interest on a primary or secondary residence for most people is deductible for income tax purposes. | |
| Loan Preapproval: An Important First Step | Loan Interview Checklist: What's Needed for Pre-Approval |
| Financing Philosophy: Choosing Your Loan | Mortgage Loan Calculator: Figure Your Payment |
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| An Important First Step |
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Why Loan Pre-Approval is Important No one will be happy if your investment in home ownership greatly exceeds your budget's comfort level, so it's important that your first official step be a chat with a reliable lender to discuss the type and amount of loan that's right for you. This will determine the price range of our home search. |
The lender will estimate the funds you'll need for your initial investment (down payment and closing costs) and your monthly payment. Be sure to bring your financial documentation to the loan interview (see Loan Interview Checklist). The lender will review your income and assets, factor in your current debt payment obligations, run a credit report and confirm your "buying power." With most lenders, there is no charge for this process. It is extremely important that you do not shop for a loan at this point. Every lender will want to run a credit report, and each time your report is pulled, it lowers your credit score. Email me or call me at 818-547-4529 to discuss the best lender to issue your preapproval letter. You can actually "shop" for a loan after you're in escrow. Click for more information on credit scores, which are also known as FICO Scores. It's very important that the lender you do talk to provides a preapproval letter (not just a prequalification letter) for us to use when I present your offer on the home you want to buy. Every home seller's biggest fear is taking their house off the market, then finding out the buyer doesn't qualify for a loan. Particularly if I'm representing you in a "multiple offer" situation, I need documentation that obtaining your loan will not be an issue. The strongest preapproval letter is one issued by a direct lender, not a mortgage broker, because sellers and sellers' agents know a mortgage broker really does not have the power to confirm preapproval and ultimately must obtain it from an outside investor after your offer is accepted. |
| What's Needed for Pre-Approval |
| What's Needed for Loan Approval Items you should plan to send to the lender or bring with you to your loan interview are listed below. Some of the items may not apply to you. For borrowers with very high credit scores, some lenders require little if any of this documentation for a conventional loan, but it's best to be prepared. In other words, don't let the movers pack up these items and ship them off to storage. |
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Documentation:
For Self-Employed Buyers:
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| Choosing Your Loan |
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Maximizing Your Mortgage Loan Depending on budget, philosophy and tax bracket, some buyers finance as much of their home purchase as possible so they can retain cash for other things. |
These are buyers who believe in leveraging their property. They reason that they'll get the best rate and terms on a loan at time of purchase, mortgage interest is lower than other types of loans which are not deductible, terms of repayment are longer (30 years average) and they can prepay on their mortgage without penalty if they wish. Note: Some home loans today do have prepayment penalties so be sure to ask. When Bigger Is Not Better A loan for more than 80 percent of the purchase price (or the home's appraised value, whichever is less) usually carries an extra monthly cost for PMI (private mortgage insurance) to insure the lender's smaller equity position against loss in the event of a foreclosure. Over the years, PMI has allowed many people with a down payment of less than 20 percent to buy a home anyway. But PMI is not tax deductible and, once on the loan, it can't be eliminated until the borrower has made timely payments and the loan-to-value ratio has dropped to 78%, either through an increase in value as confirmed by an appraisal, or by additional payments to principal. In recent years, lenders have devised some creative ways for home buyers who have excellent credit histories but less than a 20 percent down payment to avoid PMI from the beginning. When Two Loans May Be Better Than One One way to avoid PMI is through piggyback loans (also known as 80-10-10 and 75-15-10 loans). These consist of two independent mortgages, a first mortgage for 75 or 80 percent of the value and a second mortgage for 10 or 15 percent. The home buyer makes a down payment of only 10 percent yet avoids PMI. The interest on both loans is deductible, and the combined payments often are less than a 90 percent first mortgage with PMI. Depending on an applicant's credit score (which must be extremely high), income, employment history and the property being purchased, some lenders offer an 80-20 piggyback loan, enabling a purchase without a down payment. There will be closing costs, of course, but this type of loan allows the least initial investment in a home purchase. Most second mortgages that are obtained concurrently with a first mortgage have very few up-front fees (usually a small cost for lender's title insurance to extend coverage to the second mortgage and for the county recorder to record the mortgage instrument). Because of this, some home buyers anticipate future borrowing needs that, by themselves, would not be tax deductible. Even though they may have the cash to avoid a second mortgage, they opt to obtain a piggyback loan with an adjustable rate second mortgage that becomes an ongoing equity line of credit. For most taxpayers, interest paid on the purchase money equity line will be tax deductible. Some home buyers use a piggyback loan to close on a home purchase before receiving proceeds from the sale of a prior home. When a Higher Interest Rate May Be a Good Option Although not as popular as the piggyback loan, another way to avoid PMI when you have only a 10 to 19 percent down payment is to get a tax advantage mortgage loan. This type of loan carries a higher interest rate because the lender's risk is greater without PMI coverage. The advantage to the borrower, of course, is that the interest is deductible. The disadvantage is that the higher rate is there for the life of the loan. Fixed Rate vs Adjustable When interest rates are low, the desirability of an adjustable rate mortgage (ARM) vs a fixed rate loan diminishes. Since the initial rate of an ARM is artificially low, expect the rate to increase in the first few years. If you intend to sell your property or pay off your loan in the first five years or so, however, an ARM at its worst case scenario may still cost you less than a fixed rate. Hybrid "Fixed/Adjustable Rate" Loan Combinations There are combination fixed rate/adjustable loans that allow you to pay a fixed rate for a certain number of years and then the loan automatically converts to an adjustable. This type of loan basically allows you to hedge your bets. If you think there's more than a 50-50 chance you'll move in a certain number of years, this loan could be for you. For instance, a 5/1 ARM is fixed at a rate lower than a conventional loan for five years then automatically becomes an adjustable. A 10/1 ARM is fixed at a rate lower than a conventional loan (but higher than a 5/1 ARM) for 10 years then automatically converts to an adjustable. Outwitting a "Jumbo Loan" The maximum "conforming" loan for a single family home beginning in December 2001 is $300,700. A loan for more is referred to as a "jumbo" loan and has a higher interest rate. If your mortgage will be slightly above the conforming loan limit, have your lender compute a conforming first mortgage and a piggyback second for comparison. It could save you some money over time.
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| Figure Your Payment |
Click here to use a handy loan calculator. |
 You'll likely need to budget for a few other items besides principal and interest in your monthly payment. To fine tune your figures, email me so I can help you factor in your real estate taxes, your homeowners insurance premium, and your PMI (if applicable). |