Mortgage Minute: Do I Want to Buy a Home?

This is the first of a series of articles from our guest blogger, Cynthia Carr of Stearns Lending.

I am a big believer that people should be informed and educated on mortgage loans. This is the single largest purchase of your life and you only get one chance to do it right the first time. Home ownership is one of life’s major events, and it provides some unique personal and financial rewards. It can provide lasting stability and security and a great place to relax at the end of the day.

Here are a few things to consider if you’re still undecided about taking that leap:

• Home ownership may offer you important tax benefits.
• You’ll have the potential to build equity. This is the portion of your home that you’ve paid for, plus any rise in its value.
• You can decorate and remodel your home to suit your personal tastes.
• It’s a potential investment, since your home’s value may appreciate over the years.
• You won’t have to worry about your rent going up when your lease expires, or having to move if your rental property is no longer available or affordable.

Now that we have giving you the reasons why you should consider purchasing your new home, let’s discuss the first steps. It can be overwhelming! What do I do first? Do I get a Realtor? How do I get a Realtor? Can I qualify for a mortgage? If so, what does that mean in terms of purchase price of a property? How much money do I need? If you haven’t considered these questions, you should now. This blog series is going to guide you and prepare you for home ownership and all that comes with that from those questions to the final signature on the loan documents and getting the keys to your new home.

This month we will discuss this very important step: Do I want to purchase a home?

Let’s think about that for just a second. The knee-jerk reaction is “of course I do," but in reality you have no idea how or where to start. The very first thing you should do is to find a mortgage lender. You can ask friends, family, or colleagues for the name of the lender they worked with when they purchased a home. Please know that it is important to feel informed and confident with your lender. Getting more than one option and talking to more than one lender is absolutely the right thing to do. I know, I know, I am a lender and other lenders will not be happy that I tell you to do that. The truth is that when you have your credit pulled for a mortgage within a 14-day period, it is very unlikely that your credit score will be impacted any more than if it were only one lender checking it. Do not have more than three lenders pull it because rates are rates and all lenders are very close in that area and when you have more than three options it becomes less helpful and more confusing.

Avoid online lenders. They are not familiar with all markets and central Ohio has its own quirks when it comes to who pays for what and what credits the buyer receives from the seller. You need to feel confident in your decision. You will feel like you are going to a financial therapist when you start talking to a lender. We ask questions that have always been “taboo” to talk about: How much money you make, the debts on your credit report, and how much money you have in the bank. These are all serious questions and are a requirement for your lender to know. This confidential information is not shared with anyone unless you as the borrower provide us with the permission to do so.

Let’s wrap this month’s discussion up with a final thought. Before you start house hunting, find a lender who cares about you, one you trust, and who has the knowledge to help you with purchasing the place you call home.

Cynthia is the Branch Manager at the Stearns Lending, 1900 Polaris Parkway in Columbus and can be reached at CCarr@Stearns.com.

Baby Boomers Staying Put

In the past, many empty-nesters downsized upon sending their children away for school and growing older. However, the Baby Boomers are defying this traditional pattern. With roughly 10,000 people reaching age 65 each day for the next 15 years, and 17% of the 76 million Boomers already in retirement, the decisions this generation makes are central to the housing market.  63% of Baby Boomers plan to stay in their current home once they retire, according to a survey of 4,000 Baby Boomer households conducted by the non-profit Demand Institute. Why? Many simply are not financially ready, with a substantial amount of equity tied up in their homes. The financial crisis caused the average Boomer household's net worth to drop from $200,000 in 2007 to $143,000 in 2013 according to Federal Reserve data. Additionally, the median outstanding mortgage balance for 50- to 69-year olds more than doubled from $48,743 in 1992 to $118,000 in 2013.

The financial situation is particularly tough for those also in the sandwich generation--middle aged people who find themselves supporting both aging parents and their children. This recent phenomenon can be explained by an increase in the average life expectancy in conjunction with an increased number of "adult children" living at home. A 2013 Pew Foundation survey of 2,511 U.S. adults revealed that at least 15 percent of middle-aged adults are financially supporting both their parents and children.

The Baby Boomers surveyed placed little weight on "aging-friendly" homes, with only 1/5 planning to live in a senior housing. This is despite the fact that roughly 75% reported serious health issues such as arthritis or high blood pressure.

Refinancing 101

Refinancing is the process of replacing your original mortgage with a new mortgage that has a more favorable interest rate and term. Many people choose to refinance when they have home equity (the difference between the amount owed to the mortgage company and the home's value). In other words, refinancing is paying off an existing loan with the proceeds from a new loan. Refinancing lenders typically require a percentage of the total loan amount, in the form of "points," as an upfront payment. One point equals 1 percent of the total loan amount. The more points, the better, because a larger payment upfront results in a lower interest rate.

Pros
Refinancing can reduce monthly payments and interest rates, and allow people to choose a different mortgage company or take cash out of their home preceding a large purchase. Homeowners can also cancel their private mortgage insurance (PMI) with a mortgage refinance loan, as the home's value increases and the balance on the home declines. Some people refinance to switch between an adjustable rate mortgage and a fixed one. For those with balloon programs such as ARMs, refinancing allows someone to switch to a new, fixed rate before the entire mortgage balance is due at the end of the term (usually five to seven years). One other reason for refinancing is to consolidate other debts into one loan.

Cons
However, there are risks involved. People may incur penalties that can amount to $1000+ for paying down their existing mortgage with home equity credit. Make sure you have an understanding of the fees involved before committing to refinancing. Fees can account for 3-6 percent of your outstanding principal and include the application fee, title insurance and title search, the lender's attorney review fees, homeowner's insurance, the appraisal fee, and points and fees incurred in loan origination. Your savings in interest must exceed refinancing fees in order for refinancing to be worthwhile.

Interested in refinancing? Experiment with the home refinance calculator. To learn more about refinancing a home, watch the short video below:

Pre-Qualify for a Loan

House hunting is exciting, but the idea of financing a home is not. Meet with a mortgage officer to pre-qualify for a home loan. A pre-qualification, AKA prequal, illustrates a borrower's ability to get a loan. It's easier to obtain than a pre-approval because someone can get a pre-qualifcation online or over the phone; however, it is not as in depth as a pre-approval, which requires paperwork to back up your claims. Ideally, homebuyers should 1) get pre-qualified, 2) get pre-approved, 3) shop for a home based on their pre-approval, and 3) apply for the home loan. If your pre-qualification application isn't accepted the first time around, follow these three steps to improve your situation:

• Increase your credit score. You can improve your credit score in a number of ways. Order a copy of your credit history from TransUnion, Equifax, or Experian. Dispute any errors you come across--they will be removed within 30 days. Paying down your debt also helps, as debt accounts for 30% of your FICO credit score. Finally, pay your bills on time to slowly but steadily increase your score. 

• Don't change jobs. Lenders like to see that you've been with the same employer for at least two years, because this gives them confidence that you are stable and able to repay your mortgage. 

• Build income and financial assets. The simplest ways to afford the home you want are to get a pay raise and search for a lower priced home. Perhaps less obvious, you can find a co-borrower with good credit, hoping that your combined incomes will make the loan feasible. Build your assets by keeping a contingency fund--money reserved for emergencies with unexpected cash outflows. The fund should equal two or three months of your mortgage payments, and you must be able to prove (with bank statements) that this money has been in your account for at least 60 days prior to pre-qualification. 

Want to see if you will be approved before you visit a lender? Visit Bankrate.com's free online loan pre-qualification calculator. If you prefer to do the math yourself, the first step is the same--get your credit score. lenders prefer credit scores of 680+. Next, you should calculate the front-end ratio and the back-end ratio.

• Front-end ratio: proposed monthly mortgage payment / gross monthly income before taxes. This tells you how much of your monthly income goes toward mortgage payments and is not recommended to exceed 28%.
• Back-end ratio: total monthly debt obligations / gross monthly income. This tells you how much of your monthly income goes toward paying debts and is not recommended to exceed 36%. Note: debt obligations include credit cards, student loans, car loans, etc.

Finally, ensure that you have enough money for a down payment. As with contingency money, lenders like to see down payment funds in your bank account for a least 60 days. They also like for people to have their own money saved for a down payment--not the money of their friends or family.

As of July 2014, the average 30-year fixed rate mortgage was 4.13%

Bad Credit? Don't Panic

Your credit score is important—it’s what lenders use to determine your qualifications for a home loan. You can request a free credit report here.  Then meet with a lender, who can help you come up with a game plan to strengthen it. Keep in mind it can takes months, or even a year, for your credit score to rise after you improve your finances. The illustration below breaks down how your credit score is determined:

If you have excellent or good credit (a score of 700+ according to credit.com), you’re in good shape. But what if you’ve got poor or bad credit, at 649 and below? Conventional loans may not be able to help. Instead, talk to a lender about the Federal Housing Administration’s loan program, which requires a credit score minimum of only 580 (most lenders, however, require 620 or 640) for a loan with a down payment of 3.5%. Lenders will also want to see documentation of your income and assets to calculate your debt-to-income ratio, which, as a rule of thumb, should not exceed 41% of your monthly gross income. The FHA insures lenders against default and offers mortgage rates comparable to those of conventional loans. However, FHA loans do have higher mortgage insurance requirements than conventional loans, as mortgage insurance payments must be made for the entire life of the loan unless you make a bigger down payment. Remember, a lender can always help you determine which type of loan is best for you.

Co-Signing a Mortgage? Beware

Jim Weiker, writer for The Columbus Dispatch, warns against the danger of co-signing a mortgage. The co-signer assumes all the risks of the loan but receives none of the benefits. The lender is just as responsible, and this can amount to taking on a second mortgage. A co-signer is responsible for making a payment if the other person defaults. Ask yourself if you can afford that—as many as 3/5 co-signers end up paying the loan as reported by the Federal Trade Commission.

Even worse, some theorize that co-signers are pursued when lenders face delinquent funds. A lender could sue you, especially if you have better credit than the other signee. Thus, it could limit the co-signer’s ability to borrow money him/herself.

Finally, co-signing for a friend or family member could put a strain on your relationship. Would you judge they way someone spent that money that you co-signed for? If you want to financially help someone you care about, consider giving money towards the down payment (up to $13,000/year without paying a gift tax, or $26,000 filing jointly).

So before you co-sign a mortgage, think twice before you agree. Read the full article here.