Despite problems saving for down payment, more first-time buyers apply for mortgages


Processing a home mortgage loan is like riding a roller coaster. There are many ups and downs -- particularly in levels of frustration for the borrower.

But despite the problems, first-time homebuyers are entering the market in record numbers. In fact, it's the strong move by those young consumers with a homeownership glint in their eye that is propelling the current home selling and financing market in most regions of the country.

And those fledgling homebuyers are feeling the brunt of frustrations.

The recently introduced Community Home Buyers loan program is generating new opportunities for first-time buyers and lots of business for lenders. This is a relatively new mortgage loan program, structured by Fannie Mae (Federal National Mortgage Association), the nation's largest buyer of existing mortgage loans.

This program makes it possible for a buyer to pay as little as 3 percent of the purchase price as a cash down payment. The lender loans 95 percent of the price, another 2 percent is provided by a family member or employer, and the remaining 3 percent is paid by the homebuyer, plus closing costs.

To qualify, a home-buying family must not earn more than 120 percent of the median income in the area.

Keep in mind, however, that this high-ratio (loan to value) loan requires coverage by private mortgage insurance. And this involves a significant cost.

Typically, it costs the borrower 1 percent of the loan amount at closing plus an extra annual rate of .45 percent paid each month with the mortgage payments.

The best way to avoid that insurance surcharge is to limit your loan amount to 80 percent of the purchase price. But a 20 percent down payment is difficult or impossible for many families to handle. So the PMI people will probably continue to have plenty of customers.

Money-saving note: If you have been paying a PMI surcharge with your mortgage payments for some time, take a new look at your loan balance. If it has amortized down to 80 percent of the property's current market value, you can have the surcharge eliminated. But you must request your lender to eliminate the charge from your loan payments.

Normally, the lender will not do so automatically or notify you when your loan balance has reached 80 percent. They would rather let it ride.

The PMI coverage sometimes creates another problem for borrowers and brokers. It's yet another layer of buyer qualifying, and sometimes this causes serious problems in the overall qualifying process, sometimes causing more delays in closing.

Another thing to watch for when dealing with lenders: Mortgage brokers are often given rebates by lenders when they arrange a loan with a higher-than-normal interest rate.

In a typical case, when a mortgage broker submits a loan package with an initial adjustable interest rate of 7.5 percent, the broker might receive only his usual 1 percent fee.

If he brings in the same basic loan at 7.75 percent, he receives a cash rebate after the loan closing in the amount of .75 percent in addition to his 1 percent fee. If he can crank the interest up to 8 percent, his rebate is 1.5 percent.

In some states, mortgage brokers are required to disclose to borrower clients the amount of rebate they are due to receive from their loan.

But not all brokers are doing so, according to Cliff Norton, president of Norton Mortgage Corp.

"I usually pass along any earned rebates to my client," Mr. Norton said. "But in every case, I make sure my clients have full knowledge of any rebates I may receive from their mortgage loan."

Mortgage brokers are handling an increasingly large share of home financing loans, Mr. Norton noted. According to a recent report from Fannie Mae, 65 percent of all conforming mortgage loans (those less than $202,300) are now handled by mortgage brokers.

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