Cleveland Mortgages 101

Buying (or selling) your home has become somewhat complex. I'll tell you a little of my ideas and philosophy and then list a few other interesting Web Sites that can add to your store of knowledge.

The following offers a strategic approach to saving time and money in the home buying process.

Whether you plan to buy immediately, in a while, or not yet sure, follow these steps. You won't spend a dime until after the house is found, and the little up front planning time will save hours of wandering. This is not a substitute for professional help and not all items will apply to you

If buying a house isn't right for you, this is the fastest way to find out. If it is, following these concise tips should make your process faster, easier and more fruitful.

Deciding whether to rent or buy may not be purely a financial decision, as there may be other factors (like pride of ownership) involved. However, before deciding to buy, you may want to compare costs with renting. The economics usually vary greatly depending on a quality of house versus apartment (try to keep the purchase and rental home about the same for a fair comparison)

Most people have a sense that if prices are going up, it's a good idea to buy. This instinct is correct and it can be quantified by studying a few items like house price, comparable rent, and how much prices are increasing.

Buying is more expensive in the short run due to buying and selling costs With almost any appreciation, buying is less expensive (and eventually profitable) in the long run.

Nothing will speed your home hunt more than you having a clear idea of the home you want. Start by completing a home requirements sheet. Make a list of the features you want in a home and rank them. Look only at homes with features on top of your list and be willing to compromise on those further down

Establish your target neighborhoods. As a rule, buy in the best neighborhood you can. You get a better return on your improvement dollars, you'll probably enjoy living there more, and you’ll reduce the risk of declining prices in better neighborhoods.

If looking at the fixer option, look in neighborhoods with other recently renovated homes. You don't want to be a pioneer in turning around a neighborhood.

To afford more, you may want to consider property types other than the single family home (since it is generally the highest price). Other choices include:

1. condominium, co-op, or townhouse
2. duplex, triplex, or fourplex where you can generate income
3. a vacant lot where you can build

Getting financially prepared allows you to save time by not looking at houses you can't afford and helps to negotiate harder with sellers since you can close sooner and with greater certainty.

Many people waste a great deal of time looking at inappropriate houses, and then miss the ones they really want because they're not prepared. If you already own a house, you should sell it first before buying another. Then you won't be pressured into accepting a low price or have to make a weak offer on a new house 'contingent' on selling your old house or pay on two mortgages if you are able to afford them. Of course you should scout a little to ensure you'll be able to find something you like, but selling first is almost always most prudent. If you're relocating, consider renting in the new town first to give you adequate time to look and negotiate for a new home. The pressure of having to buy quickly puts you at a disadvantage.

Being financially prepared means to have identified where you're going to get the down payment and having a pre-qualification letter from a lender. The easiest way to get started is by using our buyer qualifier (see calculator) to get your approximate borrowing power. To refine and strengthen this estimate, send us your financial information so we can effectively communicate with you. Then we can issue you a "pre-qualification" letter. The next step is to fully apply to finance your loan using the full application in our Getting Started Section.

Should you use a real estate agent? Some advantages of working with an agent are:

1. access to the Multiple Listing Service (MLS)
2. 'in-house' or 'pocket' listings not yet on the market
3. leg work
4. experience
5. improving your negotiating position
6. referrals to other professionals, like lenders and property inspectors
7. no cost to you

If you don't use an agent, you typically will not reduce the commission or the selling price. The commission amount has already been set between the seller and listing agent. The listing agent is not obliged (and doubtfully would) reduce her commission, just because you don't have an agent. Get your own professional agent on your side, and avoid costly mistakes.

In general, the commission is a percentage of the selling price (5%, 6% or7% or sometimes higher particularly for land) paid to the agent representing the seller. The agent representing the seller (known as the 'listing' agent) may split the commission (known as 'cooperate') with an agent representing the buyer (known as the 'selling' agent). Agents have a duty to be fair, honest, deal in good faith, and disclose material facts to both buyer and seller. However they have an added duty of utmost care, integrity, honesty, and loyalty in dealings with buyer or seller they represent.

The most desirable relationship for you is a buyer's agent, then a dual agent. If at all possible, don't use a seller's agency relationship. If you use the seller's agent, make sure the relationship is dual agency.

When looking for an agent, do not broadcast that you're desperate, so you end up in the awkward position of declining or working with an associate at work who may not be professional. Deciding to use an agent is easy. Deciding which agent to use is more difficult. Here are some ideas to help you:

1. Visit open houses, meeting and speaking with agents (asking them the questions below).
2. Speak directly with friends and associates who recently purchased homes.
3. Drive in desired neighborhoods looking at for sale signs. It's a good indicator if a firm or has other homes for sale in your favorite area.
4. Ask for referrals from title companies.

Questions to ask an agent:

1. In what neighborhoods do you focus?
2. How long have you been in this business, and at this firm?
3. Are you a full-time or part-time agent?
4. Are you a Realtor? (Realtors are members of the National Association of Realtors and agree to conform to a certain code of ethics.)
5. In what type of home and price range do you focus?

What you want (but hard to ask) in an agent (in addition to being a veteran full-time Realtor focusing on your type and area of home):

1. Integrity.
2. Business savvy.
3. Sensitive to your tastes and needs.
4. Easy to get along with and someone with whom you can communicate freely about what you love and hate about homes before and after you see them.

Don't be shy about getting started because. Even if the first agent doesn't work out, you aren't bound to continue using them (unless some specific agreement was made). If you aren't going to continue working with an agent, it's proper to let them know. Remember to use your agent if you find a house being sold by the owner (For Sale By Owner, abbreviated FSBO, pronounced 'fizzbow') or in a new development. This is where a cross trained loan officer/ Realtor can help you most from assistance in creation of your agreement with the seller to your loan closing.

1. Assemble your financial information, which is typically
2. W-2 forms for two years
3. Current pay stubs showing 30 days' income,

OR if self-employed, two year's tax returns instead of (1) and (2),

4. Accounts where down payment is held
5. Accounts of outstanding loans (e.g., car) and credit cards
6. If any, rental property info (as a rule, 75% of rental income is considered, so it's OK to have a large mortgage as long as the rents are large too). Lenders may ask for more, but this is a good start.
7. Get a pre-qualification letter. It separates you from most other buyers. You're serious, ready and qualified. It also gives you confidence that you're looking at houses in the right price range.

If possible, it is best to look for homes in the fall and winter when the market is slow, gardens look their worst, and it's cold and dreary outside. It's best to look whenever it's a 'buyers market'. That is, whenever there are more sellers than buyers for your area or type of house. This can occur after some local bad news like a plant or military base closing, or severe weather.

Waiting for interest rates to drop is usually not a good idea. Lower rates are usually accompanied by higher prices caused by more buyers (increased demand). Higher prices, even if the monthly payment stays the same (because of the lower rate) result in higher down payments. The down payment is often the only reason people can't afford to buy.

Most of all, be patient. Finding the right house at a fair price takes time. If you have to buy right away, be as diligent and efficient as possible. The best deals come when a seller needs to sell quickly and you're ready to buy.

Be open to as many areas as reasonable and as a rule, look in the best neighborhood you can afford. If you're new to the area and need help selecting appropriate neighborhoods, ask your real estate agent, homeowners in prospective neighborhoods, lenders and even city hall, or the chamber of commerce.

Following is a list of resources to assist your search. Some of these are very easy; you only need to sit back and wait for them to come to you. It's a good idea to start with the fastest, most effective way first and work to the more difficult ways later. Keep in mind, if it's hard for you, it's probably hard for other homebuyers too, so you're more likely to find a hidden treasure.

1. Start by giving your agent your home requirements sheet and your pre-qualification letter (or at least your price range). Have them use the Multiple Listing Service on computer, if available, or use MLS books.
2. Look in the real estate classified ads for homes for sale by owner, or other new listings your agent may not have told you about.
3. Visit open houses.
4. Drive around yourself in desired areas.
5. Ask your agent to look at homes which were for sale and didn't sell (expired listings) which meet your criteria.
6. Look at old classified ads for properties that didn't sell. They may no longer be listed with an agent; the seller may be willing to reduce the price.
7. Put up a sign on the bulletin board at your supermarket.
8. Run a classified ad stating your specific wants and needs.
9. Search the 'Homes for Rent' classified ads. Call on homes that meet your needs, as the owners just may be receptive to selling.
10. Use on-line services to both search for houses and advertise your wants
11. Ask friends and contacts about off market homes, people being transferred, or leaving the area.
12. Contact lenders for foreclosures. Ask for the REO (Real Estate Owned) department, and they'll be happy to send you a list. Don't be too hopeful as these properties have usually had a fair amount of exposure before (and after) they came back to the lender and are often distressed
13. Watch the real estate TV shows; there are several in Cleveland Area.
14. Get a 'reverse directory' (sorted by address, not last name) and send letters to homeowners in desired areas. Be sure to be courteous (never pushy) when approaching homeowners this way. They may feel you're trying to steal their home from them.
15. You will soon become an expert on values in the area of your choice

Start by getting a good map of your target areas. This will help you keep perspective and distance from things like recreational facilities and work. Be diligent about only looking at homes that meet most, if not all of your needs. Don't waste valuable hunting time on homes that are too expensive or otherwise don't meet your needs. Only after you've canvassed everything in your area should you start to relax your criteria. If possible, leave the kids at home so you can concentrate

Before visiting a property, speak with the seller or agent to ensure that it's worth the trip. Pace your self by not looking at all houses on the weekends. Use some evenings or lunch hours, so you won't be frantic on the weekends. Discuss with your agent early on, the best times for you to look at homes. Ask your agent for a list of property addresses which meet your needs, that you may be able to eliminate by driving by. It's a lot faster to drive by than to arrange a meeting and inspect the inside. But be careful not to miss a hidden beauty which just needs a face lift.

Keep track of all the homes you've seen using the home prospect list. The very serious may want to bring a tape measure, camera, calculator, and scratch paper. Keep only your three favorite homes in mind. Forget about the others, unless the problem was price, since it may be lowered later. Be sure to express your likes and dislikes to your agent, so she can focus on your desires. When re-visiting a home, try to go at different times of the day night and days of the week notice the light (natural and neighbors) noise (traffic and neighbors) and feel of the area. Some areas change a lot at night and on weekends.

Negotiations begin when the seller and neighbors first look at you. The neighbors will talk with the seller and the seller loves her house. She wants it to go to someone nice who will enjoy and love it as she does. Have the seller like you. Your goals are to fully understand the seller's needs, and to convince the seller you are capable of buying the house (pre-qualification is helpful here) and reasonable to work with. Other than that, don't give up anything about yourself or your motivations to buy. Know the market cold. You should know every comparable house sold in the area for the past year, and every house on the market now. This is easy for your agent to prepare. You can bet the seller will try to use some of these houses to her advantage. Get as much information about the house as possible. You can get valuable information from the seller, neighbors, and the real estate disclosures. At minimum you should know:

1. Why it is for sale
2. How long it's been for sale
3. When the seller bought, and how much she paid
4. The approximate loan balance.

Items (B), (C), and (D) are public information, easy for your agent to get. If this is a new house, you need to know the reputation of the builder (get referrals and know how long they've been in business) and how many unsold houses and vacant lots they have. Your visits to homes should be casual and friendly. This is not the time for an official contractor inspection. If there is some glaring flaw, mention it in the offer. Otherwise leave it to the third party experts to determine what should be fixed. The presumption is the comparable homes (on which you based your offer) were all in good working order, and you expect the same. If after your offer is accepted, some unbiased inspector finds a flaw, it is up to the seller to make the repair. The more flaws you find early on, the less bargaining room you will have later.

Buying a house is not like buying an item at the supermarket. It's much more like buying art. Each house is unique, and its value is determined by the seller and buyer. Professional appraisers can give estimates of value, but they aren't buying your house, you are. Only you and the seller determine the price. Price isn't everything. You may pay more to reduce your down payment and the seller may take less to hasten the close, increase the rate on her second, or get favorable lease back terms. There may be significant factors other than price. Don't rely on an attorney for price and market information. It's not her job. She may want to comment, but she usually won't have the background or information to be helpful at all. Use her for legal advice.

The asking price is not a strong indicator of value. The seller can choose ANY price she chooses. Some seller's are informed, realistic, and motivated while others are not. Because of this, the asking price may be dramatically high or low. Even if the house is worth the asking price to someone else, it may not be to you.

If you make an offer substantially below the asking price, be prepared to show comparable houses which recently sold in the same area indicating your price. Let the market be your guide. The seller (and her agent) needs to be convinced you aren't stealing her home, but rather you're paying full market value.

If you think the asking price is low, it is probably a good idea to make a strong offer quickly. Good houses at low prices sell quickly in every market. Not only is there likely to be competition, but the seller's motivation may change. (The bank may repossess the house before you can buy it, for example.)

A full price offer is a preemptive offer hoping to get the house 'in contract' before other buyers notice the good deal you made. Most sellers are willing to come down at least a little in their price. Other than this, don't make any offer based on some percentage of the asking price. The asking price is not a strong indicator of value. The price in the contract is the most you will pay, and the savvy seller (and certainly her agent) knows this. As you perform inspections and learn more about the property, the price may decrease. The seller is bound to sell you the property for the contract price, but you aren't bound to pay this until you remove all of your contingencies. The seller doesn't have to reduce the price if you find problems with the house, but you can walk from the deal, and the seller will have to disclose the problems you found to the next potential buyer.

Get as many professional inspections as reasonable. The few hundred dollars spent either gives you thousands in price reduction, or even more valuable peace of mind. Do not perform your own inspections (even if you are qualified) as you are not perceived as impartial. After an unbiased professional finds flaws, it is much easier for the seller to correct them, either by price reduction or actually performing the work. For a list of inspectors, you may call the American Society of Home Inspectors at 800-743-2744.

Leave some room for negotiation in your offer, but be reasonable. Unreasonably low offers may create hostility.

Factors influencing price (in rough order of importance) include the following:

1. How much you're willing to pay and what you can afford.
2. Asking price
3. General market conditions (buyer's or seller's market).
4. Comparable sales in the same area (agent, title companies & recorder)
5. Is the house hot or cold (time on market, price drops, structural/other problems needing money)? .
6. The Sellers motivation for the sale.

You should already have a good understanding of factors 1 to 4. It's your job to find out as much as possible about 5 and 6.

If this were a purchase at the supermarket, you'd select the item and then pay for it. Done. When buying a house, price is not the only item determined by negotiation. How and when you're going to pay is also very important. After finding a good house, you (and your agent, attorney or cross trained loan officer) then write up an offer to purchase it, if certain conditions are met. You may include any conditions (often called 'contingencies') you choose. Of course, the more difficult or time consuming the conditions, the less likely the seller will want to deal with you.

Following are some important considerations of your offer.

1. What is to be purchased. In addition to the house, list all fixtures (or indicate none are to be excluded) and personal property (like the refrigerator and washing machine) to be included in the sale.
2. Your 'earnest money' deposit. Being a little more generous than the local custom (your agent will know) makes you appear like a stronger buyer, even though this is typically refundable, if all of your conditions aren't met.
3. Financing contingency is mandatory if you're getting a loan, even with a pre-qualification letter. Seller's want to see loans which are easy to get (i.e., large down payment, high interest rates and points). Offer to let the seller speak with the lender you've been working with to assure her that you are legitimate.

1. it reduces your down payment
2. provides insurance against defects and misrepresentations
3. will be less expensive than an outside secondary market loan.

1. generate higher than money market interest rates
2. defer some of the capital gains from the sale.

4. Inspections. Be sure to have the right to perform all reasonable inspections (at least contractor and pests). Offer to perform them in no longer than the customary time (typically 7-14 days). Faster looks better to the seller who hopes you won't get around to looking very hard. If an inspection turns up something which requires more time, ask for it later. Once you are showing good faith toward making the purchase, the seller is likely to be much more accommodating.

5. Closing date. A fast close (30 days) is usually worth something to a seller because

Most sellers are willing to give up some price for certainty.

6. Transaction costs. It's generally a good idea to follow custom as to who pays for title insurance (don't buy a home without it) escrow charges and other fees, unless there are special circumstances. Don't negotiate too hard over a few hundred dollars and it sometimes can confuse the loan and escrow people handling your transaction.

7. Possession. Usually, you can move in a stated time after close of escrow. If the seller wants to stay past close of escrow be accommodating, if possible. However, she should pay at least the greater of market rent or principal, interest, taxes, insurance, and maintenance charges. If she stays, she'll have all your (and the bank's) money, and be living in your house. Get a strict rental agreement.

8. Review of documents. For example, title report, lease (if rented) Declaration of Condominium (if a condominium) loan (if assuming existing loan) seller and agent disclosures, and any recent inspections (from seller or previous potential buyers). If you don't approve of each document, either the deal is off or you get compensated in some other way.

9. Liquidated damages. This clause allows the seller to get your deposit in the event you default on the purchase agreement. It doesn't mean you lose the deposit if you don't buy the house; you have to default. If your inspections or review of documents turns up something and you want compensation but the seller doesn't want to pay, the deal is off and you are entitled to your deposit. However, if you remove your contingencies, and then change your mind about buying, the seller is entitled to your deposit, in lieu of forcing you to buy the house.

10. Duration of the offer. Unless there are unusual circumstances (out of town seller) your offer should expire after one day, two at the outside. You want to avoid the seller 'shopping your offer' to see if she can do better.

11. Home warranty. You can usually buy insurance against some home defects. Sellers are often willing to pay to avoid hassles after closing. It's a good idea, even when the seller won't pay for it.

12. Try to keep other items to a minimum, so you're making a 'clean' offer.

Your offer will contain many other terms and conditions. Read them all, don't assume you are covered by the 'standard' language. As a rule make your offer as 'vanilla' as possible by using the form most often used by your local real estate agents. Avoid unusual conditions, which are likely to make your offer less attractive. However, if you have some particular issue, state it early. Sellers tend to be accepting of your situation in the beginning of the negotiations, but after an agreement is made, tend to battle over very small items.

Be patient in waiting for a seller who needs to sell quickly, and be ready. When you find a house you like, learn as much about the house and seller as possible, while not disclosing anything except your pleasant interest, and ability to purchase (if you choose).

There are two different approaches to your offer.

1. Wait for the house to become 'stale' and the seller thrilled to get your meager offer. Of course, with a great house, it may not have time to get stale, but the general rule applies: the longer on the market, the softer the seller.

2. Make an offer right away, to deter other interest in the house.

In most cases, make an offer right away. It doesn't cost anything and you don't want to be bidding against (or even hearing about) anyone else. Waiting is preferable if the asking price is much higher than your valuation or what you can afford, since it's unlikely the seller will accept a low offer just after listing. Your negotiation power is directly related to your willingness to walk away. Keep the pressure on the seller by looking at houses even after you begin negotiations. At minimum, have your agent keep you appraised of similar homes freshly on the market. Don't let emotions blind this huge investment.

Here are some strong reasons to use an agent to negotiate for you. They provide:

1. a way for you to test the waters, without actually having to commit
2. a buffer, to diplomatically present your position
3. a scapegoat, in the event you want or need to change your mind
4. help in developing your strategy
5. an experienced advocate.

If no one else is interested in the house, strongly consider making a counter offer to whatever proposal the seller suggests. You're her only bidder. For each concession you make, try to get something in return. For example, if the seller wants a higher price and you're willing to accept, counter by agreeing to the price if she gives you the refrigerator.

Get the seller to invest as much time as possible in you, so it will be more painful to lose you. Get the seller to provide some of the financing for the purchase (carry back a note). This may offer protection against defects or misrepresentations. If she lied to you about the house, you can make it difficult for her to collect the money you owe her.

Get a signed agreement with the seller before performing inspections to introduce defects found in the inspections as new evidence for a price reduction and to avoid spending money (for inspections) on a house you may not own. Don't bid against yourself, get a written counter offer.

If you lose on a great house, stay in touch and consider a back up offer. You may save money on the reports and the seller should be a little more flexible after losing the previous buyer.

The later in the month you close the less prepaid interest you pay, since lenders typically require prepayment until the first day of the month following closing. Get the closing statement before closing. You will be under a lot of pressure from all sides to close, and you should review this calmly before signing.

Caveat emptor (let the buyer beware); ABC- Always Be Careful. While homes are more expensive than decades ago buyers have more tools available to even the field of negotiations with sellers, even tilt it toward the buyer.

The money to buy your house comes from two sources: you and a lender. Your money is called down payment or equity.

Lenders generally have two limits on the amount of money they will lend.

1. Loan-To-Value (LTV) limit. This is the amount of money the investor will lend expressed as a percentage of the house's value (determined as the lower of your purchase price or the bank's appraisal). For example, you agree to pay $250,000 for a house which is appraised for $240,000 and the maximum LTV is 80%. The bank will make a loan of $192,000 (which is .8 times $240,000).
2. Dollar limit. Regardless of the purchase price or appraisal, certain loans cannot be over a set dollar limit. All 'conforming' loans are no larger than $240,000. These get favorable terms, because lenders can sell them to investors easily. Larger loans (called 'jumbo') have breakpoints too. Lenders set their limits usually at $400,000 to $650,000 and sometimes larger. Generally, all loans below the dollar limit get better terms than those above.

The 'cost' of your loan is based on supply and demand. When there are a lot of borrowers, lenders raise their fees, and become more stringent in their requirements. When there are fewer borrowers, lenders may offer better rates, and become more lenient in their policies. The interest rate, however, is set chiefly by the world wide supply and demand for the securities created by lenders for borrowers like you

Lenders are looking for borrowers with (a) large down payment (b) sufficient income to make the payments (c) long credit history (d) on time repayment (e) cash reserves.

Lenders evaluate your income using two measures.

1. Front ratio. This is the percentage of your income used for housing. Specifically it is the loan payment plus taxes and insurance divided by your income. For example, if your monthly loan payment is going to be $1,300, taxes are $150 and insurance is $50 for a monthly expense of $1,500, and your monthly income is $5,000, then your front ratio is 30% ($1,500 divided by $5,000).
2. Back ratio. This is the percentage of your income used for housing and debts. It's your recurring monthly payments (like car and credit cards) plus your housing expenses listed above (loan, taxes, insurance) divided by your income. Using the same example as above with a $400 car payment, the back ratio is 38% ($1,900 divided by $5,000).

Each lender sets their own front and back ratio limits. Higher limits mean larger loans (more liberal policy). Conforming loans have the guidelines of 28% Front Ratio and 36% Back End Ratio. These are exceeded on a case by case basis when the lender believes the strengths of the case outweigh the weaknesses and whether it is believed the loan can be sold into the securitization system

Lenders make money from borrowers in three ways.

1. Origination: A fee for setting up the loan. This is usually a fixed dollar amount plus a percentage of the loan. Each one percent of the loan is called a 'point'. For example, if the loan charges for a $200,000 loan are 1.5 points plus $250, then the charge is $3,250.
2. Spread. This is the difference between the interest rate the lender charges the borrower and the lender's cost of funds.
3. Servicing. This is a fixed monthly fee for sending notices and collecting payments.

Lenders negotiate on origination and spread. You may usually trade one for the other. For example, you may get a loan with a 7% interest rate and pay one point or get a 6.5% loan for two points.

Use our daily rate update to tell you where rates are. You can reduce points by raising the rate and reduce the rate by paying more points. Or reduce initial rate with a buydown for lower payments in the early time of your loan. Our cross-trained loan officers will help you find the loan that best suits your needs.

The main terms of a loan are:

1. Loan amount. Original principal balance. Sometimes fees are deducted before proceeds are disbursed.
2. Origination charge. Up front fee, the largest of which is usually 'points' (where one point is one percent of the loan amount). As a rule, you want loans with fewer points if you plan to sell in a short period (1-5 years).
3. Interest rate. Amount multiplied by the loan balance (amount due) to determine interest charge. May be fixed (never changes) or adjustable (set by some index, like 1-Year Treasury rate).
4. Due date. How long you get to keep the money before repaying the balance. May be different from the amortization period. If it's different, there is a balloon (single large) payment due.
5. Amortization period. How long it will take to repay the loan in even payments (typically 30 years). Loans with longer amortization periods have lower monthly payments but higher total finance charges.

Other terms are:

1. Assumable. Ability for someone else to take responsibility for this loan from you (usually for a fee). This is common for adjustable loans and rare for fixed rate loans.
2. Prepayment penalty. Charge for paying principal before it is due. Most conventional loans sold to the worldwide market do not have a pre payment penalty. In Ohio the law states 1% but you must be careful when you pay off your loan early. So make sure you aren't going to sell during the prepayment penalty period (early years of loan)
3. PMI. Private Mortgage Insurance protects lender from non-payment, and is paid for by you (the borrower). This can be costly and should be avoided if possible. However it does provide you with the opportunity to make a lower down payment.
4. Late charges. The penalty for not paying on time, and when it starts. The penalty is usually 5% of the payment amount with some grace period (10-15 days) before it applies.

Adjustable loans have the following additional terms:

1. Index. Published interest rate to which an adjustable rate loan is tied. Examples include, Eleventh District Cost of Funds Index (called COFI, pronounced 'coffee') 6 month CD rate, One year Treasury rate.
2. Margin. Amount added to the index to determine the interest rate. For example, the interest rate may be COFI plus 2.5% (where 2.5% is the spread). If COFI is 5%, then the interest rate is 7.5%.
3. Interest rate changes. There is usually a limit on how much and how often the interest rate can change. A typical limit is the interest rate can change (up or down) no more than 1% every six months. So even if the index increases by 3%, the interest rate can only increase by 1%.
4. Payment changes. There may also be a limit on the amount the payment may change in a given period. A typical limit is 7.5% higher or lower than the previous payment (not 7.5% interest rate change). For example, if your payment is $1,000 this year, it may not be more than $1,075 next year, even if the interest rate increases so much that the payment would otherwise be substantially higher. Payment change limits create the
5. Possibility that your payment is not even big enough to pay for the interest due (let alone paying down principal). This unpaid (deferred) interest is added to the principal and called 'negative amortization' since normally principal is reduced.

Loans are usually 'secured' by the property with a mortgage deed. You pledge the property to the lender on the condition should you not make the payments as due the lender can foreclose. This means that if you don't abide by the loan terms, then the lender may get ownership of the property.

Loans have other terms, features, and conditions. Those listed above are usually the most financially significant. If you don't understand some of these terms, ask for help from your lender, agent, or lawyer.

Banks, saving banks, and credit unions (conventional lenders) make two types of loans:

1. loans which they plan to re-sell (often called 'conforming') and
2. loans they plan to hold or 'portfolio'.

Most lenders (re-) sell their loans on the 'secondary market' to replenish their cash and make more loans. The biggest secondary market buyers are Federal National Mortgage Association (FNMA, called 'Fannie Mae') and Federal Home Loan Mortgage Corporation (FHLMC, called 'Freddie Mac'). These buyers have standards which the loans must 'conform' to before they will be considered for purchase. Standards include borrower qualifications and loan size ($240,000 maximum). For loans over $240,000 (called 'jumbo' and 'non-conforming') lenders often keep them in their portfolio. This gives lenders more flexibility in determining qualifications and size of loan, however jumbos typically are more expensive (about .5%) for the borrower.

Conforming loans have the 28/36% guidelines. As you expect, ratio guideline interpretations are stricter with less down payment.

Mortgage Bankers and Mortgage Brokers originate the above loans, and in addition, most have a selection of Alternative (or Sub Prime) loans.

The goal of most government programs is to assist buyers in the purchase of a modest home. Here are a few programs:

1. The Federal Housing Administration (FHA), by providing Government Mortgage Insurance, insures loans against borrower default, which makes them more attractive to lenders. This allows you (the borrower) to put down as little as between 5% to 7% of the purchase price. However, the loan sizes are generally small, mortgage insurance is required to be purchased, properties must be in good condition, and there may be some red tape. FHA loans usually require a front-end ratio of between 29% to 34% and a back end ratio of not more than 41%.
2. The U.S. Department of Veteran Affairs (VA) insures loans made to qualified veterans. If you might be eligible, contact your VA office for details. The VA guarantees 25% of the loan amount (up to $50,750) on loans over $144,000 and $36,000 on loans under $144,000. VA loans have become much easier to get now that points and interest rates are negotiable.
3. The Farmers Home Administration (FmHA) assists low- and moderate-income rural borrowers obtain housing. Qualified borrowers may finance single family homes with 0% down with lower than market interest rates. Contact your FmHA office to see if you qualify.

There are many other federal, state, and local programs designed to encourage home ownership by helping borrowers. You may uncover some helpful programs from your real estate agent, newspaper, or telephone directory.

We use private mortgage insurance PMI to provide adequate insurance so loans can be made at competitive rates with as little as 3% down and in many cases this 3% can be borrowed when your total debt load is not excessive. This and other alternative programs effectively compete with the above mentioned government insurance programs and with much less "red tape"

You may be able to improve how you look to a lender by the following.

1. Pay off revolving credit cards. This is high non-deductible interest which cripples your borrowing capacity.
2. Check and clean up your credit rating. Establish good credit by borrowing from a bank, getting a credit card (secured, if necessary) or gas company or department store card and borrowing from a local merchant to purchase furniture or jewelry. (If you need to establish credit, start early because this takes time and you'll want to pay most debts off before getting your home loan.)
3. Pay off long term debts (student loans and car loan). These inhibit your borrowing ability and the interest is not tax deductible (as it would be on your home loan).
4. Convert assets to cash, by selling old furniture, cars, etc.
5. Emphasize future income, with a letter indicating pending promotion, bonus, or raise. (Can make an approval when last 2 years income is short)
6. If self-employed, show a big profit. You need to weigh the cost of increased income taxes with your increase in borrowing ability.
7. Get a co-signer.

Call 440-949-5288 for a free loan consultation, and for access to hundreds of loans.

Some reasons to use me as your loan consultant:

1. access to numerous lenders and loan programs
2. get you the best loan, fast
3. review and counsel you on your financial profile
4. inside information about loans
5. provide information about lenders
6. help prepare your loan documents
7. present and sell your application to the lender.

One of the most important factors determining which loan is best, is how long you plan to borrow the money (i.e., when do you plan to sell?). Another important consideration is what happens to interest rates. However, interest rate changes may have only a small impact on costs and payments if you plan to sell soon. Compare loans using our consultation services. To get a home with a small down payment consider

1. 3% down (If your debts are small you may be eligible to borrow the down payment creating a zero down loan at conventional rates)
2. VA zero down
3. conventional loan with PMI
4. conventional loan with a Line of Credit
5. getting the seller to carry a second
6. Getting a gift from family. You need 5% in bank, or if gift is 20% or more you can buy with virtually no down payment

Reasons to consider a small down payment

1. larger tax deduction
2. more cash for improvements.
3. reasons for a large down payment
4. lower monthly payment
5. substantially lower finance cost over the life of the loan
6. avoid PMI costs
7. get better loan terms
8. you are more quickly qualified in the approval process
9. forced savings (equity)
10. may be able to pay off before retiring or before college payments begin.

You may borrow half the value from your 401(k) up to $50,000.

A co-borrower may help you qualify. You can give the co-borrower benefits of

1. tax savings
2. rental income
3. appreciation at sale.

In a new development, be wary of paying all cash before all of the improvements are completed.

If your appraisal is low, check it carefully. It may be from

1. improper comparable sales
2. overlooked feature (fireplace, garage)

The appraisal is for the lender, it does not:

1. determine market value
2. include a thorough inspection
3. guarantee the condition of the property

Be careful when selecting a loan with balloon payments and negative amortization. Both have advantages for you, but should be used cautiously.

1. Balloon payments occur when the due date comes before the loan is fully amortized. For example, your loan may be amortized over 30 years but the unpaid principal is due in 7 years (called '30 due in 7'). This means that you will likely have to refinance or sell your home before the seven year due date. This may be difficult if interest rates are high or if the value of your home declines. The good news is that these loans are priced lower (points, interest rate, and/or margin) than the typical loan due in 30 years. If you plan to sell in 5 years, these may be a good idea, but be careful.
2. Deferred Interest (also called 'negative amortization') can occur when there is a limit on the amount your payment can increase. If interest rates go up faster than your payments, your unpaid balance may be increasing (instead of the typical decreasing). You may be surprised to find that you owe more than you borrowed, even after making all of the payments. You may almost always make the fully amortized payment (which is higher than the payment limited by your payment cap) if you choose, thereby giving you an option not available without the payment limit. Without the payment limit, you have no choice but to make the fully indexed payment. This option may save cash in the short run, but if you keep choosing to make the lower payment, your loan balance (and accompanying interest charges) are increasing. Loans with negative amortization are preferred to those without this option, but you need discipline to make the fully amortized payment, unless it is necessary to conserve your cash.

For more information on mortgages visit: Home Path & Home Advisor