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Mortgage Tips for Home Buyers in a Down Market

The real estate market has certainly changed drastically in just the last few years, going from red hot to arctic cold. Today, with huge inventory of homes for sale, continuous decline in homes prices, low mortgage interest rate, it has created an idea condition for buyers to buy a home now.

While this is certainly good news for buyers, but the home-buying landscape has changed since mortgage lenders began tightening their belts about a year ago. It hasn't been long since borrowers could secure a loan without having to meet stringent criteria. During that period, simply based on quotes from lenders, a real estate agent could tell a home buyer - even one without good credit - up front the mortgage rate they'd likely get. Now that's changed. Largely due to the crash of the subprime market and the fact that lenders are naturally more wary at the current time regarding the potential risk, lending restrictions are tighter than they were a couple of years ago.

If you are a buyer considering the purchase of a home in the current market, you should be aware when shopping around for a mortgage loan and make sure you understand the options that are currently available to you as well as how the current economy and mortgage market may affect your mortgage application.

For example, Freddie Mac has reported that the fixed rate mortgage rates for both 15 year and 30 year mortgages are at the lowest levels since the summer of 2005. That is certainly incentive for many home buyers who have been sitting on the fence regarding whether now is the right time to buy, to decide the time has finally arrived.

Take the time to make sure you understand what mortgage loans may be available to you. For example, make sure you do not overlook FHA loans. Recently, FHA loans have come back into vogue once again. They can be quite advantageous to buyers because the restrictions are often more lenient with these types of loans.

Given the crash of the subprime market, many buyers find themselves wondering whether they will still be able to get 100% financing or whether they will need to save for a large home down payment before shopping for a mortgage loan. The answer to this question is both yes and no. 100% financing mortgage loans are still available; however, buyers should be aware that they are not as widely available as they were before the market went south. Buyers with credit scores above 700 will find it easier to obtain 100% financing while those with credit scores below the 700 mark may find themselves subjected to more stringent requirements for mortgage loan approval.

Buyers should keep in mind that whenever possible it is always better to make some type of down payment. At a bare minimum, buyers should plan to save for a down payment amounting to at least 5% of the home's value. In addition, they should plan to put aside a minimum of two months of PITI, or principal, interest, taxes and insurance in a reserve account. Overall, putting down as much of a down payment as a buyer will not only grant them easier access to better mortgage loan terms and rates but will also save money over the duration over their mortgage loan.

Another common concern among many buyers is whether they should pay down their debt before applying for a mortgage loan. Given the current state of the economy, most lenders are actually paying more attention to credit scores than the actual amount of debt you are carrying; although that is certainly a consideration. The debt-to-income ratio used by lenders can vary; however, the standard ratio is 28/36. This means that your monthly mortgage payment should not exceed 28% of your total monthly income. Furthermore, your total debt payments should not exceed 36% of your total monthly income.

If your credit score is currently lower than 620, it is probably a good idea to give it a little time before you apply for a mortgage loan. During that time work on improving your credit score, paying your bills on time and clearing up any discrepancies that could be dragging down your credit score. Overall, you save around 1.5 percentage points if you have a credit score of at least 760, compared to a credit score of 640 or below. While that may not sound much, it could actually save you thousands of dollars per year on your mortgage interest. Over the lifetime of your mortgage loan, this could amount to significant savings.



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