10 Home Loan Tips for 1st Time Home Buyers

After years of declining home values, there are many new affordable opportunities for first time homebuyers to finance a new home.  If you are looking to make the move from a rented apartment to a home of your own, you are not alone. The convergence of low home prices, still-low mortgage rates and appealing tax incentives makes 2009 a good time to buy a home for many people. If you are looking to buy, here is what you need to know:

Home prices are low. Home prices dropped at a record annual pace of 18.7% this past March. That means discerning buyers can find real bargains. Mortgage interest rates are still good. While interest rates have risen from their historic lows earlier this year, they still are appealing. In mid-June, rates hovered around 5.70% for a 30-year fixed-rate mortgage.

Tax credits will help. 1^st time homebuyers can get money back from tax credits implemented as part of the 2009 American Recovery and Reinvestment Act. An $8,000 credit is available to first-time buyers for homes purchased before December 1, 2009. Home financing legislators are considering increasing the credit to $15,000 and expanding it to include other home buyers

Credit scores matter. While houses are widely available, home financing is limited to those with good credit. Credit scores range from 300 to 850, with the median U.S. credit score about 725. A score below 680 usually results in a higher interest rate or denial of credit. Check your credit score before you make any home buying decisions. If your score is lagging, wait a few months and work to improve the score by paying every bill on time, paying down as much debt as possible and disputing any erroneous information on your report. Note that it can pay to do your homework researching FHA mortgage rates and lenders — credit scores do not decline if multiple similar credit report requests are submitted within a close time period (usually a few weeks).

You must have savings. A down payment is essential today. Ideally, you can put down 20% of the purchase price (see #7 regarding PMI). If not, talk to your mortgage lender about your options.  Do not stretch too far. Standard underwriting guidelines call for keeping housing expenses below 35% of total income. Breathing room in your budget will help you keep your home even if something unplanned does occur. If you are uncertain, wait to buy.

Understand private mortgage insurance (PMI). Home mortgages with less than 20% home equity (which means a 20% down payment for those purchasing a home) require PMI in case the owner defaults on the home loan. When the home owner pays a conventional home mortgage down to 80% or less of the home’s value, the home owner can request the home lender to cancel the PMI and then be able to stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.

Know the real costs of buying. The principal and interest on a mortgage payment are only the beginning of home-related costs. Escrow payments - the funds withdrawn to cover home insurance and taxes - and PMI can add a few hundred dollars per month to a mortgage payment. In addition, home owners must pay for repairs and maintenance. A rule of thumb is to budget 1% of the home’s purchase price per year for upkeep.

Know whether you can pay off early. If the mortgage loan has a prepayment penalty, borrowers face hefty charges if they pay it off early. This provision also can apply to future mortgage refinancing, so be forewarned. Review Truth in Lending disclosures to find out.

Buyer beware. Some of the lowest prices on homes today are “fixer-uppers” or homes sold “as is” because of foreclosure. Invest in a home inspection before agreeing to purchase any home. The inspection will inform you of any faults in the home and help you determine the approximate cost to remedy those problems.

For many Americans, the time is right to take advantage of today’s excellent home buying opportunities. If you are among

Short Sided Mortgage Reform Bill

Freddie Mac’s most recent mortgage market survey shows that a thirty-year home loan with fixed interest rates that dropped to 4.80% this week.  At the same time, congress is putting their finishing touches on HR 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009 that claims to address several aspects of the mortgaged origination, loan securitization and servicing process. The mortgage bill was debated Thursday at a House Financial Services Committee hearing.  HR 1728 would require loan officers to determine a borrower’s ability to pay back a home loan, and only extend mortgage refinancing when there is a “net tangible benefit” to the borrower. Loan officers would no longer be able to collect yield-spread premiums or other compensation that many critics say served as incentives to steer borrowers into higher risk home mortgages that cost the consumer higher fees and terms that benefit the mortgage lender.

Last week, Fed Chief, Ben Bernanke talked about the need for government regulation to protect homeowners and American consumers. The central bank had approved new home financing regulations aimed at curbing abuses on home mortgages. The mortgage lending revisions would restrict mortgage lenders from offering home mortgages without proof of a borrower’s income and would require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.  As FHA loan market-share grows, so does the risk for defaults, foreclosures and more “egg on the face” for mortgage companies that originate FHA mortgage loans.

The mortgage reform bill would also drop the trigger for mortgages to be considered “high cost” and subject to the more stringent requirements of the Home Ownership and Equity Protection Act (HOEPA). Mortgage lending companies remain adamant that home loans subjected to HOEPA are difficult or impossible to securitize and sell to secondary-market investors.  To encourage responsible lending, the bill would also create a limited “safe harbor” from lawsuits for “qualified mortgages” prime, fully documented, thirty-year mortgage loans. Those mortgages would be exempt from some of the bill’s requirements.  I find that “exemption” very interesting.  Let me tell you this smells like a short-sided mess that enables the politicians to pat themselves on the back while enhancing their image as “tough” on mortgage crooks.  From a distance it looks great, but they appear to be tacking this bill on poor legislation that lacks the foundation we need for fair and responsible lending.  - Commentary written by

HUD Updates FHA Mortgage Letter and Cracks Down on Lenders

The Dept. of Housing and Urban Development recently released an important FHA Mortgagee Letter that is imperative for mortgage brokers, lenders and finance companies that plan to see FHA loans in their future.  In an effort to protect the public trust and the FHA Insurance Fund, HUD is enforcing that mortgagees are accountable for their lending practices. FHA expects each mortgagee to exercise the same level of care in originating, underwriting and servicing an FHA insured home loan as it would for home financing in which the mortgagee would be entirely dependent on the property as security to protect its investment.  When a mortgagee fails to comply with HUD’s policies and procedures, HUD will take the appropriate action.  For example, brokers or lenders that materially violate FHA program statutes, regulations and handbook requirements may be referred to the Mortgagee Review Board for appropriate sanctions, which may include termination of mortgagee approval.

HUD believes that many lenders have not lived up to the ethic codes and high standards required with FHA underwriting guidelines. HUD believes that many FHA lenders have not lived up to the ethic codes and high standards required with FHA underwriting guidelines.  That could become a problem because home mortgages that do not meet FHA mortgage lending standards to the letter are likely to result in foreclosure or a home loan default that cause FHA insurance to rise. Assistant Secretary for Housing, Brian D. Montgomery recommends that if you have questions regarding this Mortgagee Letter, please call the FHA Resource Center at 1-800-CALL-FHA (1-800-225-5342).  Read the complete FHA lending article > FHA Mortgage Loans Update with New HUD Rules for Lenders.