• ''Pre-approval'' with a lender will speed up the loan process and avoid problems later.
• Talking to a variety of lenders gives you an idea of different loan programs, competitive rates and terms in your area.
• The sellers will take your offer more seriously and be more motivated to accept your offer if they know you're already qualified to buy their home!

Putting in some of your own time and muscle to improve a home that needs work is known as "sweat equity." If you like working around a house and enjoy fixing it up and possibly remodeling it to fit your needs and, of course, you have the time, you may want to consider buying either foreclosed properties or handyman specials.

Along with your new home comes new financial responsibility. You can finance your home with a loan from a bank, a savings and loan, credit union, private mortgage company, or various state and national government lenders. See the largest secondary homelender's homepage Fannie Mae.

The four (without 20% down or in the case of FHA = five) parts of your monthly mortgage payment are based on:

• Principal -- the repayment of the amount you actually borrowed.
• Interest payment to the lender for the money you've borrowed.
• Homeowners Insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards. Required by lenders.
• Property tax: -- annual city/county taxes assessed on the property, divided by your annual number of mortgage payments.
• Mortgage Insurance Premium -- required by HUD/FHA on all loans and by conventional lenders if you put less than 20% down.

 Most loans are for 30 years, although in today's marketplace 15 & 20-year loans are also available, and some lenders are offering 40 year fixed loans. During the life of the loan, you'll pay far more in interest than you will in principal -- sometimes two to three times more. Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments, and in the final years, mostly principal.

 To prepare you for shopping for your loan, here are some common types of mortgages. Each has positive and negative aspects, depending on your income level, how long you plan to own the home, and other factors. Ask your mortgage lender to explain each option before you make a decision on what type of mortgage loan is best for you.

With a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage,whether it is for 15 years, 20 years, 30 years or even 40 years. Although with a 15-yr or 20-yr fixed rate, you may save slightly on the interest rate, it will obligate you monthly to a higher mortgage payment.

•  Keep in mind that if you make just one extra payment per year, (write a separate check and send it in a separate envelope to your lender with a note that this is to be credited to principal only), you can reduce a 30-yr fixed loan to 22 yrs; 2 extra payments per year will reduce the 30-yrs to 15 yrs. This way, if in the unlikely event there was an emergency in your family or life, you would not be obligated for the higher payment and would have still paid the loan down reducing the amount of interest you would have paid over the life of a 30-yr loan.

Advantage:

Your mortgage payment is a stable budget expense each month.

Disadvantage:

Interest rates tend to be higher than with other loans.

With this type of loan, your interest rate and monthly payments usually start out lower than with a fixed-rate mortgage. But your rate and payment can change either up or down as often as once or twice a year. The adjustment is usually tied to a financial index such as the one-year U.S. Treasury Bill, the Cost of Funds Index or the Libour index.

•  6 month - adjusts every 6 months
• 1-yr - adjusts every year
• 3-yr - fixed for 3 years, then adjusts every year thereafter
• 5-yr - fixed for 5 years, then adjusts every year thereafter
• 7-yr - fixed for 7 years, then adjusts every year thereafter
• 10-yr - fixed for 10 years, then adjusts every year thereafter.

 There is also a 3/3 ARM which stays fixed for 3 yrs; adjusts & stays fixed for another 3 yrs, adjusts, etc. Not all lenders offer this product. Be sure to talk to your lender thoroughly regarding ARMs, their caps, the index and the margin (usually between 2.50 - 3.00). Also watch out for the 6-month ARM as it may have negative amortization.
 
 

Advantage:

With an ARM, you may be able to afford a more expensive home because your initial interest rate and payment will be lower.

Disadvantage:

The possibility of adjustment upwards can make the amount of your payment unpredictable

• you'll move up within 4-7 yrs whether because of financial growth or children.
• you get yearly raises at your employment so the increase will not cause you to suffer: and
• you're buying more home at the beginning than you could have afforded at the fixed rate of 9%.

In this type of loan, the Federal Government insures the lender against loss in case the home buyer defaults on the loan. This program was set up so Americans who couldn't afford the larger down payments required by conventional lenders could still buy a home. However, today FHA with "downpayment assistance plans" allow the seller to contribute the down payment." FHA loans usually require 3-4% as down payments. FHA loans can only be so high .

For a complete breakdown of FHA loan limits for your area go to https://entp.hud.gov/idapp/html/hicostlook.cfm

FHA loans, however, require mortgage insurance premium (MIP) on ALL their loans.

• As little as 3% down. Participation with seller downpayment assistance contribution (effectively requiring little or no money from buyer).
• Available on HUD Homes or conventional homes.
• Available at either fixed, buy-down or adjustable interest rates (1/5 caps).
• If assumption is allowed (the FHA assumption rules changed drastically a couple of years ago!), it could be assumed at the same interest rate by the next qualified buyer of your home.

You may find a home with an FHA loan that is assumable - especially if the loan originated before December 1989. This means that the lender is willing to "transfer" the original loan to you, sometimes with no restrictions -- no qualifying, no credit check. However, the interest rate in 1989 or earlier may be higher than today's rate. Assumptions are great for (1) investors (investor new loans require 20-30% down payment); (2) if there is a credit problem and (3) because the closing costs are very low.

 Advantages:

• Can be wonderful bargains, depending on the interest rate.
• Loan paperwork usually not as involved, so closing often quicker.
• Makes your home more attractive to buyers when you want to sell.

Conventional loans offer you more creative financing programs (all the ARM programs plus many others not mentioned above). Many programs today only require 3% down payment (like FHA) -- such as the Community Homebuyers Program. A law enacted in 1994 made a change to the way that the Federal Housing Administration (FHA) calculated the minimum and maximum loan amounts for FHA 203(b) mortgages (one- to four-family owner-occupied properties). Minimum (Floor) Amounts FHA minimum loan amounts ("the floors") are now limited to 38 percent of the maximum loan limits used by the Federal National Mortgage Association (FNMA, or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). FHA maximum loan amounts ("the ceilings") are set at 75% of the FNMA/FHLMC loan limits.  All conventional loans with less than a 20% down payment require private mortgage insurance (PMI) similar to FHA's mortgage insurance premium. See Mortgage Insurance and Fannie Mae.

Lots of advantages with VA loans.

• You must be a Veteran and have your Certificate of Eligibility (obtained from the VA).
• You may buy with NO money down;
• Sellers may contribute 4% of the sales price plus the discount points towards your closing costs (which can include all escrow amounts).
• VA has fixed rates and buy-downs. They did have the 1-yr ARM with 1/5 caps similar to FHA (which was very popular). However, Congress deleted it this past October -- many lenders are hoping it will be added again soon.
• VA allows for the highest of ratios -- 41% total and the lenders are flexible and will go higher for good credit, etc.
• VA doesn't require any type of mortgage insurance. However, they do have a one-time charge for the "funding fee" which may be added to the loan (if the total doesn't exceed $203,000) or be paid at closing. The funding fee is 2% of the loan amount for a first-time user and 3% of the loan amount for a multiple user (meaning you've used your VA housing benefit before).

You'll need a lot of personal information handy when you're filling out your loan application. For instance:

• Social security numbers for you and your spouse, if both of you are applying for the loan.
• Copies of your checking and savings account bank statements for the past three months.
• Evidence of other assets such as bonds and securities, etc.
• A recent paycheck stub or statement.
• A list of all credit card account numbers and the approximate monthly amounts owed on each.
• A list of account numbers and balances due on outstanding loans such as car loans/school loans.
• Copies of your last two years' income tax statements.
• The name and address of someone who can verify your employment.
• If you're self-employed, you'll need a P&L statement for the current year.

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