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The American Dream


The New Physician May-June 2000
Homeownership is often equated with the “American Dream,” and recent changes in the mortgage industry have made it easier for that dream to become a reality.

To Buy or Not to Buy -- Take the first step toward homeownership by conducting a “Rent vs. Buy” analysis. Compare net monthly costs of a satisfactory rental property with that of a home you would be interested in purchasing. Most first-time buyers don’t realize that they could have been buying a home for nearly as much as what they have been paying in rent. In part, this is possible because of homeownership’s tax benefits. The “after tax” monthly cost of owning a home is typically very near to what a person would pay to rent the same house, except now they are building equity for themselves vs. a landlord.

Don’t forget about the responsibilities, though -- Maintaining a home properly costs money. All first-time buyers should factor into their housing budget a monthly contribution to an emergency fund. This fund helps you be prepared when the refrigerator or the furnace breaks. It doesn’t take but a few costly repairs to put a new homeowner without reserves in jeopardy of default.

Credit History -- Once you’ve determined that you should buy, it’s time to make sure you can. Credit history and credit scores have never been more important for first-time buyers, especially for low down payment or no down payment mortgage programs. Contact a mortgage professional to have a preliminary credit report pulled or go online and request a copy of your report from one of many Web sites now offering these services. Either way, you need to make sure the report contains all three of your credit scores so you can determine the middle score or your “indicative” score. This will determine your ability to qualify for special programs. Many only require a score above 600, while others seek borrowers with scores above 680. Several select programs, which allow borrowers to purchase a home with no down payment, demand scores of 700 or higher. If you have had some credit troubles in the past or discover your scores are low, don’t worry—the great thing about the mortgage industry today is that there are literally hundreds of mortgage products. Your job is to find a professional who can help you determine which products best meet your specific needs.

Prequalification Interview -- Homeownership can be a rewarding experience if you plan properly and use a strategy to help you find the right home. That strategy starts with a mortgage professional conducting a detailed prequalification interview. That interview should begin with your initial thoughts and questions about homeownership. Know your target payment—the payment that you’ve budgeted for and feel most comfortable with—ahead of time.

Once a target payment is determined, the mortgage professional will ask you about available funds for the purchase. Available funds can come in many forms and all options should be explored. The amount and type of funds that are available will play a major role in determining the appropriate mortgage loan product. Several programs allow you to get some or all of your down payment in the form of a gift from a family member. Others allow you to avoid liquidation of funds for closing by pledging assets held in brokerage accounts. And the zero down payment programs are becoming very popular and more readily available.

Loan Programs -- After the prerequisite interview, you’re ready to shop for the mortgage product that best meets your needs.

The factors already discussed will guide you to the programs for which you qualify. In addition to those, your mortgage professional should be knowledgeable about local and federal programs that can work for you.

Generally speaking, mortgage insurance (MI) should be avoided if at all possible. Various programs have “No MI” options and can still offer you a lower monthly payment than traditional loan products with MI. When MI cannot be avoided, the Federal Housing Authority’s (FHA) 2.25 percent down payment loan or Fannie Mae’s Flex 3 percent down payment loan are excellent options. Both have significantly reduced MI and liberal qualifying guidelines, and partial or complete gifts of funds needed are allowed.

Loan amount limits vary with the FHA from one jurisdiction to the next. The limit in most major cities is $212,800. Fannie Mae’s Flex program allows a much higher loan amount of $252,700. Any reputable mortgage professional should have full access to both programs.

The Loan Application -- You should apply and get fully approved for a loan before beginning your home search. Under no circumstances should you have to pay your mortgage professional an up-front application fee. This is a big “no-no” and usually a harbinger of bad things to come. A reputable mortgage professional should be able to fully process your loan while only collecting a mortgage credit report fee from you. Ranging from $40–$60, the fee is non-refundable.

New to the mortgage industry is the online mortgage lender. Online mortgage companies are in their infancy, and homebuyers should be wary of them. Don’t trust the biggest financial transaction of your life to a “1-800” number or random e-mail address. You want someone there holding your hand and answering your questions every step of the way. Use your loan officer as a resource throughout the purchasing process whether it lasts 30 days or six months. They should be willing to invest time in you to ensure your complete satisfaction and understanding of the mortgage process.

The loan application itself is easy and usually takes about an hour if you have had prior discussions with the loan officer. You will be asked to provide bank and other asset account statements (usually one to three months’ worth), one month’s pay stubs and the last two years’ W2 forms or tax returns.

Once the application is completed, your mortgage lender swings into high gear verifying employment, assets, credit and program qualification. This processing phase usually takes 14 days and sometimes only 24 hours. During this phase you may be asked to explain any credit items or deposits that don’t match your regular paycheck. Some first-time buyer programs may require you to complete a homebuyer course over the phone. Once all of these hurdles have been crossed, your mortgage professional should be able to bring you the wonderful news that your loan is approved. Now you are ready to purchase a home.

Next Time -- In September’s “Money Matters,” learn how to find the right realtor, stay within your budget and handle contract negotiations—plus, everything you wanted to know about going to settlement.
Glen Bralley is a senior loan officer with First Guaranty Mortgage Corporation. He can be reached at (800) 296-2275, ext. 231.

This column is sponsored by the AMS Education Loan Trust, which offers the AMSA Advantage Educational Loan program.