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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