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10
Do's and Don'ts for Getting an Ideal Mortgage
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| By
Michael D. Larson |
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| Here's
the good news: More people than ever can buy a home. |
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| Now
for the bad: It's going to take a lot of patience, restraint
and some careful planning to get there. That loan officer
sitting across the table won't look kindly on the new
Lexus you bought or the stack of credit card bills on
the kitchen counter. And if you've only managed to put
away $1,000 in savings by then, it'll be time to forget
about the $300,000 beach house. |
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| To
pull the purchase off, try heeding some of the guidelines
below that our experts suggest. It may not always be fun,
but doing so will help get you where you want to go. |
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| Pay
your bills and start saving |
| "No.
1, pay your bills on time. There is no single element
that can so dramatically impact the success of an application
as your credit history," says Brian Israel, vice president
of Chicago-based Harris Trust and Savings Bank's residential
mortgage division. "Another thing, of course, is savings.
People should have a good disciplined savings pattern."
"That's the kind of behavior that's going to make them
a successful homeowner." |
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| Everybody
comes into the real estate market with a different perspective
and level of experience. The fact that online mortgage
applications, new loan products and rising interest rates
are competing for attention these days makes it all the
more difficult to give foolproof advice. But some general
rules apply to pretty much anybody when it comes to getting
the money to buy a home. So here are some of the do's
and don'ts that buyers will want to consider. |
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| Five
do's |
| 1.
Make loan and other debt payments on time, especially
over the months leading up to the filing of your mortgage
application. It sounds simple, but every 30-, 60- or 90-day
delinquency on a loan or credit card is going to reduce
the credit score the lender ends up considering as part
of the loan file. That score, in turn, will determine
how good a loan you get -- if you get one at all. |
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| 2.
If something has to be missed, miss the credit card payment
first, followed by the payment on any installment loan
you might have and finally, the payment for an existing
mortgage. That's because credit scoring systems look at
the performance of similar loans first when deciding what
type of score to assign. It will give the most weight
to the performance of another mortgage, for example, then
the performance of something like an auto loan, which
features fixed payments and a fixed rate the way many
mortgages do. Lastly, it would evaluate the payment performance
of so-called "revolving" loans, like credit cards, which
feature variable payments that fluctuate with the outstanding
balance. |
| "If
you had to prioritize -- and we would hope you wouldn't
be in that situation -- pay your mortgage loans, pay your
installment loans, pay your revolving loans," Israel says. |
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| 3.
Consider paying off more debt and putting down a smaller
amount at closing. The move leaves borrowers with larger
mortgages, but it will allow them to replace non tax-deductible,
high-interest rate debt with lower-rate mortgage debt
that features deductible interest. |
| "We
see that trend in the marketplace, whether it's a refinance
transaction or a purchase transaction," says Larry Hamilton,
chief executive officer of SouthTrust Corp's mortgage
lending division in Birmingham, Ala. "They are putting
less equity in their homes, borrowing more against the
homes and they're paying off consumer debt, at least for
a while." |
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| 4.
Get the mortgage first if multiple financial obligations
are going to pop up in the near future. Numerous credit
inquiries, such as new applications for credit cards,
can hurt a borrower's credit score, especially if they're
filed in the months prior to the home loan review process. |
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| 5.
Increase the size of the down payment you're able to make
by saving as much as possible, as often as possible. Don't
put the savings into something volatile, such as an individual
stock. But evaluate money market or other accounts that
offer reasonable rates of return, automatic payroll deductions
or other financial incentives to save. |
| "It
depends on how much you have saved already, but I think
it's important to take a portion of each month's income
and set it aside for the down payment," says Brad Blackwell,
senior vice president for retail mortgage banking at Seattle-based
Washington Mutual Inc. |
| While
these are all good steps to follow, borrowers have to
think of what they shouldn't do as well. Resisting the
temptation to splurge or slip-up in the credit arena are
at the top of the list. |
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| Five
don'ts |
| 1.
First off, don't make any big purchases over the next
couple of months. Besides the obvious fact that it makes
less money available for the down payment, it might require
you to get yet another loan. A significant debt such as
a $15,000 auto loan will look bad to the mortgage lender's
credit scoring systems. Plus, the human underwriter won't
want to see you adding a couple of hundred dollars per
month to your monthly expenses. |
| "Generally,
as a rule of thumb, you want your total debt obligation
to be no more than 36 percent of your gross monthly income,"
says SouthTrust's Hamilton. "You certainly don't want
to load up on consumer debt if you're anticipating purchasing
a home and you're unsure of what your mortgage payment
is going to be and if you think you're within the range
of exceeding that 36 percent requirement." |
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| 2.
Don't try shooting for that six-bedroom house in the Hamptons
if it's going to be too much of a stretch in your current
budget. Lenders consider what's known in the industry
as "payment shock" when approving loans. Somebody who
goes from a relatively small monthly housing payment to
a huge one either won't qualify for a mortgage or will
end up having to cover too much loan with too little money.
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| "If
you've paid all your bills on time, but you've been paying
$450 in rent with a roommate and now you're going to have
a $1,650 principal and interest and insurance payment
on a house, how would you handle your monthly payment?"
asks Israel of Harris Bank. "You have to make sure you're
comfortable about that kind of a debt load." |
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| 3.
Don't just get prequalified for a mortgage, get preapproved.
To get prequalified, a borrower need only submit credit,
income and debt information voluntarily to a mortgage
broker or lender. That means the resulting estimate of
the maximum mortgage and home that's affordable is exactly
that -- an estimate. Before they can get preapproved,
however, home buyers must allow their lenders to pull
credit reports, check debt-to-income ratios and perform
other underwriting steps. That puts a borrower much closer
to obtaining a loan and locking in a rate and term. |
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| 4.
Don't forget what kind of money personality you have when
getting a mortgage. By taking out a 30-year fixed rate
loan rather than a 15-year mortgage and investing the
money saved on monthly payments, you might earn a higher
return on your money in the long run. But that approach
won't work for people who spend any extra cash laying
around on dinner and a movie twice a week. They can force
themselves into saving and accumulating equity faster
by going with the shorter term and higher payment. |
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| 5.
Last but not least, don't forget that homeownership brings
with it many burdens. The cost of defaulting on a loan
is much greater than the penalty of missing a rent payment.
Too many black marks on the financial history and it will
be 23 percent interest credit card mailers that show up
in the mailbox rather than the 9.9 percent ones your neighbor
gets. |
