Wednesday, 20 January 2016
If you're seriously thinking about buying a home, you may be hearing advice from people who haven't purchased a home since the 1980s.
The mortgage landscape has changed dramatically in the last several years, so Jens Lovell, Executive Vice President, Mortgage Lending at BBVA Compass, offered to clear up misconceptions.
Lovell says that this confuses a lot of people. A pre-qualified customer has given what is essentially a financial snapshot to the bank so that they can get a general understanding of their home-purchasing power—but haven't been thoroughly vetted by a lender. "The pre-qualification really doesn't hold any water. That's just what a customer has told us. They've given us information," says Lovell.
Pre-approved buyers have filled out a loan application and the lender has underwritten it—usually before a home has been selected. "If we get a property that's within that range, that dollar amount that they've been pre-approved for, then we just need the contract to go ahead and continue on with the loan application."
This is a tricky one, and depends on your circumstance. "If you own a home, every month you make that payment, you're basically creating an asset. You're creating wealth," Lovell says. Even if you're in a rent-to-own scenario, he says, "in essence, you're actually still creating a down payment where you can purchase."
However, one recent study showed that in some circumstances, renting was more advantageous than buying. In some cities like Dallas-Forth Worth and Indianapolis, it's an easy decision to buy over rent if you can afford it. AARP has a calculator that can help you figure out your unique circumstances. Of course, the best way to wrestle with this question is to get the help of a financial planner.
Lovell says the down payment required on a home has varied wildly within the past ten years. Today, it's somewhere in the middle. "There were programs out there were you put zero down. We're now swinging back to where we were in the early '90s and late '80s where you typically have to put anywhere from 10 to 20 percent down."
However, there are also programs for first-time homebuyers that can help reduce the upfront costs. An FHA (Federal Housing Administration) loan, for example, can be as low as 3.5 percent down. Other programs might require five or ten percent. "With every one of these programs, anything over 80 percent loan to value, typically requires mortgage insurance. That's where things get tricky," Lovell says. "If you're going to put down 3.5 percent, you're going to be paying 16.5 percent in mortgage insurance. That can actually become expensive for somebody."
The best thing to do is to go over the options with your lender and real estate agent to make sure you're taking the best approach to your down payment.
For most people, this isn't even an option, Lovell says. "It's the largest investment you're going to make over your lifetime. Most Americans just don't have the ability to pay their mortgage off quickly, but there are ways for them to do that." However, as long as there are tax advantages associated with owning a home, Lovell suggests people take advantage of them. The tax implications will vary for each situation, so the best thing to do is to ask a financial planner about what makes the most sense for you.
Conventional financial wisdom says that if you have to make a choice between paying more on your mortgage, or putting more in your retirement account, you should add to your retirement savings. But even paying one extra mortgage payment per year can help cut down the interest, and you'll pay off your home sooner.
Even if you have your application together, your credit is unimpeachable, and you look perfect on paper, the mortgage process can be long and difficult. "People need to understand that they're going to have to document pretty much everything financially. It's going to seem like a very invasive process, which it is. It's not something to get offended about," Lovell says.
New regulations, referred to as Know Before You Owe, which went into effect in October 2015, may also slow the process down, Lovell says. The tradeoff for having more transparency in lending is that banks may pass the costs of compliance to the customers, and loans may be more expensive.
A lender can't charge an application fee, but most will charge a fee for the property appraisal and credit report, which can be around $400-$600, upon the customer's acceptance of the terms of the loan. In some cases of customer hardship, that can be wrapped into the loan, Lovell says, but beware that you'll pay interest on that, too. It may be better to do your research and truly understand the full costs of what you're getting into, rather than trying to negotiate after you've already agreed to something.
Lovell says that other fees—document prep, title services and inspections—are typically not negotiated because they need to be the same for each customer. However, the smaller the loan, the smaller those fees usually are.
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