What Impacts Your Credit Score?

Your monthly principal and interest charges are determined by the rate and the amount of the loan. And the rate and loan amount, in turn, are affected by several factors. The rate depends on your credit score, discount points you pay, and whether the down payment is less than 20 percent. The loan amount depends on the size of the down payment and the home's price.

There is also the matter of mortgage insurance, which is levied on borrowers who make a down payment of less than 20 percent.

What determines your mortgage payment?

Mortgage lenders closely scrutinize your financial history to determine whether to approve your loan application.

Of primary concern are:

• Your credit report, which details your payment history on all loans, bankruptcy filings and other financial information.


• Your credit score, which uses your credit report to arrive at a numerical representation of your overall creditworthiness.
  

Credit scores (sometimes called FICO scores after Fair Isaac Corp., the firm that created the most commonly used form) range from the 300s to about 900, with most home buyers falling in 600s and 700s.

Factors used to determine your credit score

Past delinquency: Those who have failed to make payments in the past tend to do so in the future. The more recent a delinquency, the more it counts against you; a 30-day delinquency within the past 12 months hinders your chances of getting favorable mortgage terms.

Length of credit: The longer you've had credit, the better.

Credit use: If you're maxed out or close to your credit limits, you're viewed as risky.

Mix of credit: Someone with a combination of revolving and installment debt is considered less risky than one with only a secured credit card.

The higher your credit score, the less risky you appear to a lender. A good credit score will help you qualify for a mortgage loan and obtain better terms.

Cleaning up your credit report

Why check your credit report before your lender does?

Because an estimated four out of five credit reports contain some kind of misinformation -- errors you'll want to clear up before approaching any lender.

Obtain copies of your credit report from all of the big three credit reporting agencies -- Equifax, Experian and TransUnion. Each probably will differ from the others in small ways.

Tips for cleaning up your credit report

• Look closely for any errors and correct them.


• Note late payments and credit balances; you may have to explain them to a lender.


• Compare account numbers to make sure they're yours.


• Pay all bills on time.


• Learn more about credit scores and how they're calculated.
  
  

How To Escape Foreclosure

Most people who sign a mortgage don't intend to walk away from it. Still, unforeseen circumstances -- huge medical bills, lost jobs, divorce or eroding property values -- can overwhelm even the best-intentioned borrower. A simple twist of fate can leave you facing a homeowner's worst nightmare: foreclosure.

Communicate With Your Lender

Rest assured, where foreclosure is concerned, you and your lender are on the same side. Lenders want your money and the interest that comes with it, not your house. If you seem to be a good risk, the lender will offer to help keep your mortgage afloat. But be forewarned: If you seem like a bad risk, the lender may cut its losses by taking steps to foreclose and evict you as quickly as possible.

The key is to contact the lender before your debt gets the better of you. The sooner your lender knows of your problem, the more help it can provide.

The Foreclosure Spiral

The foreclosure spiral begins when your loan payment becomes 16 days overdue. At that point, your mortgage company will try to contact you to work out a repayment schedule to bring your loan current.

If your first payment becomes 30 days delinquent and the next month's payment looks doubtful, collection attempts begin in earnest. If your payments fall 90 days behind, the company will likely refer your mortgage to an attorney or other entity that will initiate formal foreclosure proceedings.

Ways To Avoid Foreclosure

Here are some options your lender may offer you if you miss a payment and want to avoid foreclosure:

• Repayment Plan: If you suffer a short-term financial setback (expensive car repairs, a medical emergency), your lender may provide some breathing room by agreeing to let you pay off your missed payment in two installments over the next two months.
• Loan Modification: Mortgage company can adjust the terms of your loan -- most often by lengthening the amortization schedule, lowering the interest rate or rolling the delinquent amount into the loan and re-amortizing the new balance -- to help you bring the loan current.
• Short Sale: The lender allows you to sell the house for less than the outstanding loan amount, takes the proceeds and forgives any remaining debt.
• Short Refinance: The lender forgives some of your debt and refinances the rest into a new loan.
• Refinance With A "Hard Money" Loan: You won't like the high rates and fees of a hard money loan -- one from a private lender -- but it may buy you time to sell your home and avoid foreclosure.

Questions To Ask Your Mortgage Lender (Cont.)

Is there a prepayment penalty on this loan?

There may be a prepayment penalty on your loan. Some penalties are 1 percent of the loan amount, others are equal to six months' interest, some apply only when you refinance or reduce the principal balance by more than 20 percent, and some kick in if you sell your home. Find out the duration of any penalty period and how the penalty is calculated. Some lenders offer lower interest rates to buyers who accept prepayment penalties.

What is the minimum down payment required for this loan?

The rate and terms of your loan will be based on a down payment figure, typically 3 to 20 percent of the buy price. If you can put more money down, you may be able to lower your rate and improve your terms; if you come up short, you may be required to get mortgage insurance.

What are the qualifying guidelines for this loan?

These requirements relate to your income, employment, assets, liabilities and credit history. First-time home buyer programs, VA loans and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans.

What documents will I have to provide?

Most lenders will require proof of income and assets before approving your loan, and may require other documents as well. Buyers with excellent credit may qualify for a no-documentation or "no-doc" loan, but they can expect to pay a hefty down payment and higher interest rate.

How long will it take to process my loan application?

The answer will depend on a number of variables. When the loan business is brisk, underwriters get backed up, verification takes longer, appraisals move slower and other bottlenecks develop along the loan pipeline. Lenders may say two weeks, but 45 to 60 days is probably more realistic in most cases. You'll need their best guess to determine how long to lock in your loan.

What might delay approval of my loan?

If you provide the lender with complete, accurate information, the loan process should run smoothly. If the underwriter discovers credit problems, however, there could be delays. Make sure you notify your lender if you change jobs, increase or decrease your salary, incur additional debt or change marital status between the time you submit an application and the time the loan is funded.

Questions To Ask Your Mortgage Lender

Once you've narrowed the lender field to a short list of finalists, it's time to compare their offers.

Here are the key questions to ask at application time to help you find the best overall mortgage loan. If you have already selected a lender and are ready to apply, make sure you have the answers to these questions first.

Once you've narrowed the lender field to a short list of finalists, it's time to compare their offers.

Here are the 10 key questions to ask at application time to help you find the best overall mortgage loan. If you have already selected a lender and are ready to apply, make sure you have the answers to these questions first.

What is the interest rate on this mortgage?

To determine exactly what you'll pay over the term of the loan, you need to know the rate. Rates change quickly, and if your credit is less than perfect, you may not be offered the lender's lowest figure.

To effectively compare different lenders' programs, ask for the annual percentage rate (APR) of the mortgage interest, which is generally higher than the initial quoted rate because it includes some fees. But beware: the APR found in advertisements can be misleading. Mortgage lenders don't always include all the fees they charge in the calculation that determines APR, so customers who use that figure to shop rather than an itemized breakdown of rates, points and fees may end up comparing apples to oranges.

How many discount and origination points will I pay?

Lenders may charge prepaid mortgage interest points to lower your interest rate or other points that have no benefit to you at all. Find out how many you'll be expected to pay and which kind of points they will be.

What are the closing costs?

Mortgages come with fees for various services provided by lenders and other parties involved in the transaction. You want to know what those fees will be as early as possible. Lenders are required to provide a written good faith estimate of closing costs within three days of receiving a loan application.

When can I lock the interest rate and what will it cost me to do so?

Your interest rate might fluctuate between the time you apply and closing. To prevent it from going up, you may want to lock the rate, and even points, for a specified period. Ask your lender if lock fees apply.

Now It's Time To Search For A Home!

Your first step here is to figure out what city or neighborhood you want to live in. (Remember the old saw about "location, location, location.")

For overall demographics and data on metropolitan areas, you can visit a city site like CNNMoney.com's annual Best Places to Live list. For more detailed neighborhood information, check out sites like Yahoo! Real Estate, Homepages.com or NeighborhoodScout for comprehensive school and demographic information on a number of communities. Look for signs of economic vitality: a mixture of young families and older couples, low unemployment and good incomes.

Pay special attention to districts with good schools (high teacher-student ratios and graduation rates are among the hallmarks), even if you don't have school-age children. When it comes time to sell, you'll find that a strong school system is a major advantage in helping your home retain or gain value.

Try also to get an idea about the real estate market in the area. For example, if homes are selling close to or even above the asking price, that shows the area is desirable. Try Homegain.com, which is free, or Dataquick.com, which is available only to paid subscribers, to check out recent home sales.

Your real estate agent may also be able to show you listings. Incidentally, if you have the flexibility, consider doing your house hunt in the off-season -- meaning, generally, the colder months of the year. You'll have less competition and sellers may be more willing to negotiate.
Next, take your search to real estate site like reelestate.com which let you search for property that fit your requirements.

Be wary of choosing search criteria that are too restrictive. For example, select a price range 10 percent above and 10 percent below your true range. Add a 10-mile cushion to the location you specify. If you see a house you are interested in, save it, print it, add it to your bookmark or favorites list, and take note of the MLS code; your agent will want that code to arrange to show you the home in person.

In a condo, each owner has absolute ownership of his own unit, which may be an apartment or townhouse. Owners pay a monthly fee to maintain shared areas like the lobby, the pool, or the laundry room. The chief financial risk to a condo owner is that the common charges can rise, or, in the event of a major problem such as a roof repair or boiler replacement, the condo board can assess fees to cover expensive repairs.

It's a good idea, when considering a condo, to find out how much the common charge has changed over the last five years, and whether there have been major assessments during that time. Also ask what percentage of the residents actually own their units as opposed to just renting them (many condos include both). A complex with lots of renters has fewer owners who care about the upkeep, and it may be harder to get a loan on such a property.

When you actually start touring homes, bring a notebook and a digital camera to help you remember details. Your real estate agent should supply you with a description of each house and the lot it sits on, the property tax assessment, the asking price, and sometimes a diagram of the rooms. Your camera and notebook are there to record other details, ranging from the cost of heating to the view out the rear window.

One note: Don't automatically reject a house just because it doesn't measure up to your desires, either in features or price. You can always add a deck, for instance, or update a kitchen. Since the asking price is just a starting point for negotiation, you will be making offers and counteroffers as both parties seek an acceptable price.

Don't Buy A Home Without Professional Help.

With all the tools and advice available today ranging from books and magazines to online advice like this lesson - it would be possible for you to buy your home almost completely without the aid of real estate professionals.

That's not necessarily recommended. The housing market, like politics, is basically local, and each state, city, and even neighborhood has a thicket of local laws or customs that you need to understand. For that, it helps to have a team of professionals to guide you.

You might want to start by finding an agent who can represent your interests in the search. This is not as simple as it sounds. Sure, 85 percent of sellers list their homes through an agent - but those agents are working for the seller, not you. They're paid based on a percentage, usually 5 to 7 percent of the purchase price, so their interest will be in getting you to pay more.

What you need is what's known as an "exclusive buyer agent." Sometimes buyer agents are paid directly by you, on an hourly or contracted fee. Other times they split the commission that the seller's agent gets upon sale. A buyer's representative has the same access to homes for sale that a seller's agent does, but his or her allegiance is supposed to be only to you.

To complicate matters, there are hybrid agencies called either single-agency or dual-agency brokers. In both cases, an individual agent in the firm may represent either sellers or buyers, sometimes both, in the same transaction. Potential conflicts of interest abound in this situation, so if you are seeking a buyer agent but no exclusive buyer agent is available, make sure to ask the agent about conflicts of interest.

There are now about a dozen Web sites that help connect buyers with buyers agents, among them reelestate.com.

Next start looking for a mortgage lender. Take your time, since you could be paying this loan for 30, even 40, years. Start on the Internet at places like LendingTree.com and E-loan.com. You may also want to check out the rates at CNNMoney.com, Bankrate, or HSH Associates. These sites carry nationwide listings of mortgage interest rates and other related information.
Don't limit your search to the Web, though. Once you have an idea of the best rates from national lenders, get on the phone to your community banks and any other institutions with which you may have a relationship. Ask if they can beat the national rates. Often, the local lender can offer a better deal simply because he or she knows the local market and wants to keep your business.

You might also consider using a mortgage broker, a middleman who keeps tabs on rates from a multitude of lenders. The mortgage broker isn't paid directly by you but gets paid by the bank. However, the fee - usually 1.5 to 3 percent of the loan amount - may get transferred to you in the closing costs. Most search engines have extensive listings of mortgage brokers. There's also a trade group, the National Association of Mortgage Brokers, which can put you in touch with a broker in your area.

Getting the money right

For most people, buying a house involves a double financial whammy.

First you have to assemble a pile of cash for the down payment and closing costs. Then you must convince a bank to lend you an even more staggering sum - generally 80 percent or more of the purchase price.

So your first step, even before you start the actual hunt for a property, should be to get your financial house in order.

Start with your credit

Credit reports are kept by the three major credit agencies,
Experian, Equifax, and TransUnion. Among other things, they show whether you are habitually late with payments and whether you have run into serious credit problems in the past.

A credit score is a number calculated by Fair Isaac based on the information in your credit report. You have three different credit scores, one for each of your credit reports.

A low credit score may hurt your chances for getting the best interest rate, or getting financing at all. So get a copy of your reports and know your credit scores. Try Fair Isaac's MyFICO.com, which charges upwards of $50 for all three reports and scores.

Errors are not uncommon. If you find any, you must contact the agencies directly to correct them, which can take two or three months to resolve. If the report is accurate but shows past problems, be prepared to explain them to a loan officer.

Know what you can afford

Next, you need to determine how much house you can afford. You can start with one of the Web's many calculators. For a more accurate figure, ask to be pre-approved by a lender, who will look at your income, debt and credit to determine the kind of loan that's in your league.
The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary. If you have significant credit card debt or other financial obligations like alimony or even an expensive hobby, then you may need to set your sights lower.

Another rule of thumb: All your monthly home payments should not exceed 36 percent of your gross monthly income.

The size of your down payment will also determine how much you can afford.

Line up cash

If you haven't already, you'll need to come up with cash for your down payment and closing costs. Lenders like to see 20 percent of the home's price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you'll need to find loans that can accommodate you.

Various private and public agencies - including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs - provide low down payment mortgages through banks and mortgage companies. If you qualify, it's possible to pay as little as 3 percent up front. For more, check out their Web sites at Fanniemae.com or Freddiemac.com.

A warning: With a down payment under 20 percent, you will probably wind up having to pay for private mortgage insurance, a safety net protecting the bank in case you fail to make payments. PMI adds about 0.5 percent of the total loan amount to your mortgage payments for the year.

So if you finance $200,000, your PMI will cost $1,000 annually.

Increasingly, though, lenders are giving qualified buyers the option of using "piggyback loans" to cover a portion of a home's down payment and avoid paying PMI. These second loans are usually in the form of a home equity loan or line of credit for 10 percent to 15 percent of the home's purchase price.

Once you've considered the down payment, make sure you've got enough to cover fees and closing costs. These may include the appraisal fee, loan fees, attorney's fees, inspection fees, and the cost of a title search. They can easily add up to more than $10,000 - and often run to 5 percent of the mortgage amount.

If your available cash doesn't cover your needs, you have several options. First-time homebuyers can withdraw up to $10,000 without penalty from an Individual Retirement Account, if you have one, though you must pay taxes on the amount. You can also receive a cash gift of up to $12,000 a year (the limit for 2006) from each of your parents without triggering a gift tax.

Gift taxes are paid by the donor, not the recipient. (In fact, if your and your spouse's parents are both well-heeled, they can give you a total of $96,000 in one year - $12,000 from each of the four parents to each of you.)

Check on whether your employer can help; some big companies will chip in on the down payment or help you get a low-interest loan from selected lenders. You can also tap a 401(k) or similar retirement plan for a loan from yourself.