Know before you borrow

The Baltimore Sun

Exotic mortgages, as well as some lenders, are a thing of the past. But the need to borrow to buy a home is very much present.

The lending landscape keeps changing fast, economists, mortgage brokers and lenders say, so homeowners and potential buyers need to stay current.

"I think the choices consumers will have will be much more constrained, as will the number of lenders," said economist Anirban Basu, chairman and CEO of the Baltimore-based Sage Policy Group.

Fixed-rate mortgages, the predictable 15- or 30-year kind your parents had, are making a comeback, with adjustable-rate loans getting a smaller share of the market, Basu said.

Whether interest rates will jump is unclear - though it is clear that skittish lenders are pickier about to whom they'll lend and at what rate.

"We are turning away people that we wouldn't have a year ago. They have a lower credit score, they already have more debt, things of that nature," said Hunter Bloch, a mortgage broker with Annapolis First Mortgage in Hanover and president of Maryland Association of Mortgage Brokers.

Meanwhile, home-builders are pushing for greater buyer initiatives, hopeful that if the lame-duck Congress won't help them, the new one will. Programs still exist to help buyers with a house, and more are in the works to aid troubled mortgage-holders.

We put together a list of mortgage questions and talked with experts to get the answers you need.

1. What is the $7,500 federal homebuyer tax credit?

What's billed as the $7,500 tax credit is more of a $7,500 no-interest loan, says C. Dennis Elliott Jr., a senior loan consultant with Advantage Home Mortgage Inc. in Potomac. It applies to a primary residence bought between April 9, 2008, and June 30, 2009. Buyers who haven't owned a home in three years can qualify for this credit amount up to 10 percent of the purchase price of the house.

But, experts say, it works like a loan because you have to repay the full amount over a 15-year period, with caveats. If you sell before you've repaid, and don't show a gain on the sale, you won't have to pay. But if you do show a gain, you have to repay.

2. How do I know how much mortgage I can afford?

"Get a dose of reality," says financial planner James F. Ludwick, of Main Street Financial Planning in Odenton and Washington. He counsels people to paint their financial portrait before taking a step toward buying.

This is not what a lender calculates as the maximum you qualify for. It is your estimate of what you are financially prepared to part with for homeownership, given not only your income and obligations, but your lifestyle and job stability.

What lifestyle expenses do you incur? Fifty dollars a week for lattes? A $5,000 annual vacation? How much goes into your retirement account? Now, forward to likely upcoming expenses. How soon will you want a new car? Furniture? What of these things are you prepared to trim?

"You as a buyer need to find out what your comfort zone is going to be as far as a monthly payment, and what you are comfortable with as the purchase price of the house," said Ashley B. Richardson, an agent with Coldwell Banker in Lutherville. "Some people may qualify for a whole lot more than they are comfortable with."

3. What's a good credit score nowadays?

The better interest rates go to people whose credit scores are at least 720, so check your credit reports before seeking a loan. Why does that matter?

"If you have a $200,000 mortgage, a 1 percent difference in your loan rate is almost $2,000 in interest a year," said Steven Isberg, a finance professor at the University of Baltimore and senior research fellow at the Credit Research Foundation.

Under federal law, you can obtain one free copy a year from each of the three national credit-reporting agencies: Equifax, Experian and TransUnion. Go to annualcreditreport.com.

"If there are problems with your credit report, make sure you get them corrected. It is much easier to work with the creditor first," Isberg said.

If the negative information is accurate, improve your habits: Pay on time. Try to pay in full every month. The closer you get to your credit limit, the riskier you appear to a lender, Isberg said.

"It's not a good idea to spend up to your credit limit even if you are paying it off every month. What shows up is you are running up your credit," he said.

4. How should I go about finding a lender?

Just like finding a pair of jeans. Shop around for what fits you best. Remember, different lenders participate in different programs, so talking to a variety of lenders and brokers and educating yourself on what's available is in your best interest.

If you have an account at a bank, talk to a loan officer there. Talk to the lender(s) who work with your real estate agent. Look online. Go to the library.

5. How large should my down payment be, and where can I get that?

Put down 20 percent of the purchase price if you can. As of Oct. 1, federal rules essentially ended what was the seller giving the down payment through a nonprofit.

"If it's not truly your money, you're not truly at risk," said Stanley Duobinis, president of Millersville-based Crystal Ball Economics.

Your 20 percent down payment not only tells the lender you're vested in the purchase, but it goes a long way toward getting you the mortgage and a lower interest rate, he said.

Some of it can be a gift, not a loan, from parents, but it's better if it's really yours.

And another thing: Lenders require private mortgage insurance for a loan for more than 80 percent of the house price to protect themselves. Put down 20 percent and you'll avoid PMI. Consider, as an alternative, investing in life insurance to cover the mortgage, advises Isberg.

6. I have a good work history, but I don't have that much for a down payment. What should I do if I want to buy?

Look for programs that help you. Remember: A first-time buyer can be someone who hasn't owned in three years. Government-run assistance programs, such as job-based and location-related, are thriving. Some provide grants, others loans that are forgiven if you stay in the house at least five years. Many require completion of an ownership counseling course.

Tarsha Goins, a 13-year city Solid Waste employee, didn't think she'd be able to buy after her efforts fizzled in 2006. Since then, she set a course to shop less and save more while paying down her credit card balances. Meanwhile, she boned up on programs that could help her and stayed in touch with a lender who deals with them.Last spring, determined to buy a house by her 36th birthday, she used $2,000 in savings toward a down payment on a $125,000 end-unit rowhouse in Waverly. That got her another $22,250 from a line-up of matching programs, plus a lower interest rate through a state program. Even with a mortgage payment higher than she had paid in rent, Goins said she has enough financial room "to enjoy life."

7. What's out there for move-up buyers?

If you're a move-up buyer, stay tuned. The $560,000 mortgage cap for the Baltimore area for Fannie Mae- and Freddie Mac-backed loans is set to end on Dec. 31, and then drop to 115 percent of the median home price. Above that amount - and this typically affects move-up buyers, not first-timers - you need a different kind of loan, and that has different underwriting criteria and, depending on your lender and your credit, a higher interest rate.

8. What about FHA?

The Federal Housing Administration, once a standard-bearer for backing mortgages with small down payments, will require 3.5 percent down as of Jan. 1, up from the current 3 percent. See FHA.com.

"FHA is still really a viable way for first-time buyers. They are the best game in town for someone who doesn't have 10 or 20 percent to put down," said Tom Atwood, an agent with the Currey Real Estate Group at Long & Foster's Federal Hill office, whose specialty is first-time buyers.

But the down payment increase has builders and agents worrying that it will knock some would-be newcomers out of the market at a time when the market needs every buyer it can get.

The change is taking place just as FHA has regained the cachet it lost a few years ago to now-vanished exotic lending. FHA went from providing 2 percent of loans in the Baltimore area in early 2007 to providing 38 percent of loans now, said Vito Simone, of the Simone Group of Yerman Witman Gaines & Conklin and president of the Greater Baltimore Board of Realtors.

9. Can I still refinance my home?

Maybe. Depends on you and your house.

"You have to really requalify. You are going to find the standards tougher," said Duobinis.

Also, the house may appraise for less than what you owe, especially if you bought in the past two years. Lenders want appraisals based on current comparables, not prices from last year.

The upshot: You may not get a refinancing offer, or get one that's of any value to you.

10. What should I do if I can't afford my mortgage?

Seek help ASAP to avoid foreclosure. Immediately contact the company servicing your loan; you may be able to work out a lower interest rate or payment reduction. Last week, the federal government announced a plan to help delinquent homeowners who have Freddie Mac or Fannie Mae loans. The plan goes into effect Dec. 15 and will allow borrowers who are at least three months behind to reduce their mortgage payment through lower interest rates, 40-year loans and deferred principal payments. The new monthly payment would be no more than 38 percent of monthly gross income.

Maryland officials recently inked pacts with six mortgage servicers, accounting for nearly one-quarter of the market. They promise a 60-day cooling off period during which delinquent borrowers can seek help. In addition, the loan servicers promise to provide contact people for Marylanders and to encourage their staff to work to modify loans before turning to foreclosure. State legislation that took effect in April extended the foreclosure timetable to 135 days.

help for mortgage troubles

If you're behind in payments or underwater with your mortgage, there are programs to help.

Maryland

For people seeking to refinance, the state Community Development Administration has three programs, said Bill Ariano, CDA deputy director:

Lifeline, offering a 100 percent mortgage insurance program for ARMs not yet defaulted but that will reset at higher rates.

Homesaver, refinancing up to 100 percent of value for people with dinged credit and who've missed a payment or two.

Bridge to Hope, a maximum $15,000 loan to help people with delinquent mortgages get back on their feet so they can catch up. See mdhope.org for state assistance and referrals.

FHA

Hope for Homeowners, which extends through Sept. 30, 2011, in which lenders write down a portion of the loan and the mortgage is 30-year fixed rate.

FHA Secure, which for now is set to expire at the end of December, which provides FHA-insured mortgages to borrowers with non-FHA ARM.

Hope Now, a hotline that helps callers contact their loan servicer or a local housing counselor. The number is 888-995-4673.

Information

Homeowners can also contact a nonprofit housing or credit counseling service to help with lender negotiations. Locally, a number of organizations, including St. Ambrose Housing Aid Center, are working with consumers. Go to livebaltimore.com/hb/ForeclosureAssis/.

Reputable services also can be found, state-by-state, on the Department of Housing and Urban Development's Web site, and the Homeownership Preservation Foundation has a 24/7 toll-free hot line: 888-995-HOPE (4673).

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