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Karen List's Blog

By Karen List | Agent in Campbell, CA

What to know if you want to obtain a home loan in today's market

Times are very volatile in the mortgage industry. Almost every day there are news reports of mortgage companies closing, being helped/bailed out by the government, news about Fannie Mae and Freddie Mac, and it just seems to never end.  You also hear about all the different stimulous incentives and such. 

One important thing you need to know about the mortgage industry is that they have really tightened up A LOT.  And, they continue to change on an ongoing basis as necessary. Stated loans in which a borrower does not have to document their income is practically a thing of the past.  100% loans through conventionl lenders is a thing of the past. Basically, the only way to get 100% financing is through a government loan, and even then, it’s not easy and typically the seller has to participate in the financing for a buyer to actually pull off of the 100% financing.  Plus, the buyer will need some money to close the transaction, so a buyer still needs money to buy a home.

Also, with the government loans, they are a good way to get into home ownership if that is your only way of becoming a homeowner. (And, anyone who knows me knows that I am a huge advocate of home ownership and personally have never understood why someone who could own a home doesn’t own a home. I personally can not comprehend why someone would want to rent when they could own, but I won’t go there in this post).  However, I believe that a government loan is probably the last resort if you have a down payment to buy a home.

The government loans are very expensive. They typically charge .5% mortgage insurance and also charge a 1.5% mortgage insurance premium upfront. Yes, they typically add this amount of money to the loan amount, but it is still a charge. Plus, there is a lot of paperwork and extra hoops to jump through to get a government loan. And, like I mentioned, typically, the seller has to be involved and help out to get the loan closed. 

In regard to the conventional loans, it really takes 10%-20% to really get a good loan and interest rate. Plus, more than ever, good credit is really important.  I personally suggest first going to the bank you use and have your money in already as a first step to see what they have to offer. When you go to the bank where you have established a relationship, they tend to work with you and many times give you a deal on a rate and lower fees.  Also, if you set up direct withdrawal and such, sometimes they offer you even a better deal. 

The banks that I personally see giving good loans and low fees right now are Countrywide, Washington Mutual, Chase and Citibank.  I see pretty good deals with B of A, but you have to be careful with points and fees with them.  There have been some cases with my clients where B of A tacked on charges at the end and my clients went to sign the documents and were suprised by fees and/or points they didn’t expect.  I realize that Countrywide and WAMU are struggling, but they seem to still be giving good loans.  I have also noticed that credit unions do not seem to be the best place to get a loan. They tend to be very slow. They also sometimes play games where they will give you a credit for some items and say it is a “good customer” credit. However, they will also charge you a point, which is more than the credit they are giving to you. So, you have to be very careful and ask any bank you go to for a loan for a “good faith estimate” so that you can review it and look for hidden costs and fees.  Plus, then if you go to 2-3 banks, you can compare the estimates to eachother and compare them apples to apples.

I have also been asked a lot about the $7,500 tax credit.  It is confusing to many people on exactly how it works. To clarify, the $7,500 will NOT get you into a home. You can NOT put that money towards your down payment or help you to qualify with it. It is simply a TAX credit that you get at tax time.  For example, if you buy a home in 2008, in 2009 when you do your 2008 taxes, you can utilize the tax credit at that point. So, for example, if you are supposed to get a credit for $500, you will actually get $8,000 back from the IRS. If you owe $500, you will get $7,000 back from the IRS after you file your taxes.  Also, you have to PAY it BACK! You have 15 years to pay back the $7500. You have to pay a minimum of $500 per year and have the entire balance paid in 15 years.  There is no interest, but you do have to pay the $7500 back to the IRS.

It is a great time to buy a home and I highly recommend it on many levels, and in this market, it is important that you maintain your credit, try to get a down payment together, and get all your bank statements, tax returns, and asset documentation so that you will be prepared for what the lender will need to get you a loan. 

I also see people trying to predict the “bottom” of the market. Statistically, the bottom can only be determined after it is gone. The only way to tell the market has hit “bottom” is when it is on the rise. You also have to consider the interest rate in buying a home. Rumor has it that interest rates may rise in the next 15-18 months. So, even if the market has not hit “bottom”, if you wait but then have to pay a higher interest rate, you are actually probably worse off for your mortgage payment.  Locking in a lower interest rate typically lowers the mortgage payment more than the market declining another $25,000-$50,000 or so.

In the Bay Area, the market is actually quite stable in most “good” neighborhoods, especially those with good schools.  It is really broken down to the zip code for the Bay Area on whether or not the prices are going up, stabilizing, or still on the decrease. 

Owning a home is the American Dream.  There is no better feeling than knowing that the home you live in is your own. It gives a great satisfaction and comfort for you and your family.  It is so nice to paint, remodel, decorate, etc exactly as you want and make your home the way you always dreamed.  There is no better feeling than doing what you want in your own home and not having a landlord tell you what you can or can not do in your own home. Also, the tax write off is an obvious reason to buy. And, there’s just no reason to throw money away in rent if you can afford to own a home.  Plus, statisically, it is proven to be the best investment for your future.  Homes tend to double in price every 10 years.  Buying a home is a stable long term investment and also a place you can call your own. What can be better than that?

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