Changing market conditions make pre-loan homework critical

Andy Bronson | ANDY BRONSON THE BELLINGHAM HERALD

Now, more than ever, doing your homework is essential to making sure you land the best deal and a legitimate mortgage that doesn't break your piggy bank.

"You really have to have all your ducks in a row," says Bellingham real estate agent Nancy Braam. She says that's a responsible change on the part of some lenders, who, in the recent past, didn't require documentation or verification of essential information such as income and savings.

Start getting in shape for a home purchase by following these simple rules for home buying in the aftermath of liberal lending.

KNOW YOUR CREDIT SCORE

Before prospective homebuyers even start looking at new homes, Banner Bank mortgage loan officer Josh Martin suggests they check their own credit report.

"That way you're not surprised when you attempt to buy a house," says Martin, who teaches first-time homebuyers classes in association with the Kulshan Community Land Trust.

While the old adage about real estate — "location, location, location" — still holds true, a new adage about lending is "credit score, credit score, credit score."

In today's lending environment, credit scores rule. The rating required for the lowest interest rates have risen in the past year, lenders say.

Poor credit, caused by past financial problems or even mistakes on credit reports, can cost homeowners thousands of dollars in interest over the life of a loan or even cause denial of a loan.

Federal laws now mandate that everyone can obtain a free credit report annually through annualcreditreport.com or by phone through any of the credit reporting agencies. These free reports do not provide you with your scores; you usually have to pay extra or sign up for some sort of extra service.

Correcting mistakes, discovering identity theft or repairing shoddy credit before applying for a loan can bump up credit scores and lower interest rates offered by banks, Martin says.

Peoples Bank mortgage consultant Scott Greene says most mortgage officers will help people sift through their credit report and determine if there are short-term or long-term steps they can take to improve their score before applying for a loan.

"One of the quick things you can do is correct errors," Greene says. "Or if there is $500 or $1,000 in collections, paying those off quickly can raise the score."

Know what you can afford and line up loan pre-approval

Typically, financial experts say that a house payment, including taxes and insurance, shouldn't be more than 33 percent of your income.

But banks will often offer buyers a loan with pricier payments as long as they have a history of paying their bills.

However, "just because a bank says, ‘We'll loan you this amount of money' doesn't mean you can afford it," says Bellingham real estate agent Mike Parcher. "Work it backwards. What's your monthly payment? How much does insurance cost? Taxes? Then you can decide."

Parcher says real estate agents can help buyers pencil out the figures.

Many home buyers don't follow Martin's suggestions to get pre-approved before looking at houses. Instead, it's an impulsive purchase. Many customers come into the bank with a specific house they want to buy.

Martin says pre-approval can focus your home search in a price range you can really afford and smooth the path to home ownership once you find a house. Many sellers require loan pre-approval letters when an offer is made on their house.

Greene says he's dealt with some customers who excitedly enter the bank with a house already in their sights.

He says he's more than willing to get a deal done quickly, but wants customers to go in with their eyes open.

When they go over the numbers, adding in taxes, insurance and determining what the monthly payments will be, their excitement sometimes turns to "Oh, my gosh," Greene says.

"I call it the ‘sleep at night factor,'" Greene says. "Are you going to be lying in bed at night worried about a $2,200- or $3,000-a-month mortgage payment? It's a reality check."

Find a lender you trust

There's no clear-cut way to find the mortgage company or loan officer that's best for your situation. Referrals from a real estate agent or simply making lots of phone calls and getting multiple loan quotes is the way to begin.

"It's one of the most important things," says Christina Olson, homeownership coordinator with Kulshan Community Land Trust. "You really need to find someone you trust."

Greene says relying on friends or family isn't always the best way to find a lender. They may unwittingly pass on the name of someone untrustworthy.

Greene says many of his clients come from recommendations from real estate agents or other professionals in the housing business who have been through the process with him many times. People in the business know that he's upfront and willing to take the time to explain every detail before asking someone to sign on the dotted line, he says.

It may seem like common sense, but if a lender doesn't answer questions directly, or take the time to go over every fee listed on loan documents, it's a cause for concern. If someone is reluctant to give you a written estimate, that is a big red flag.

Marcus Acosta and his wife, Donnalee, relied on their agent, Leah Bunger, to recommend a mortgage company. The Acostas were living in Anchorage, Alaska, and spent a day in Bellingham looking at homes before considering a move to the Lower 48.

They found a house in Sudden Valley priced at $269,000 that seemed like a deal compared to what they could afford in Alaska, where developable land is at a premium.

Bunger recommended going through Countrywide Financial and walked the Acostas through all the paperwork long distance. In the weeks before banks started pulling back on zero-down loans, the Acostas were able to lock in a zero-down loan with a fixed rate. They took out a home equity loan on their Anchorage townhouse to pay closing costs.

"She gained our confidence when we met her," Marcus Acosta says of Bunger. "She was always following through and we never had a problem."

Plan to make a down payment

One lending option is pretty much gone in light of tightening loan standards: the zero-down loan. Also rare any more is qualifying for two or more loans to cover 100 percent of the purchase price. In the past, such loans helped homeowners avoid mortgage insurance, which is usually required if a loan is for more than 80 percent of purchase price.

Now, most lenders require at least a minimal down payment, often at least 5 percent for a standard loan, Martin says.

With zero-down loans gone by the wayside, Federal Housing Administration-insured loans, which were less appealing to borrowers during the years of easy credit, have come back into play, Martin says. FHA-insured loans allow first-time borrowers to put down as little as 3 percent of the purchase price.

An FHA-insured loan was the perfect fit for Shane Batton. A supervisor at Montigo DelRay, a fireplace manufacturer in Ferndale, the 31-year-old was ready to buy a house earlier this year.

He stopped by RE/Max in Ferndale and found a $245,000 rambler in Birch Bay. Built in 2005, the house was ideal. The previous owners had landscaped the yard, sparing Batton the expenses of a newly constructed home as well as any remodeling costs he would pay for an older home.

He first sought a zero-down payment loan, but several loan companies told him they had discontinued the practice. His real estate agent, Marie Rose, suggested Bellwether Mortgage of Bellingham, which still offered a zero-down loan. The company also offered a 3 percent-down FHA-insured mortgage that was a full interest rate point lower than the zero-down loan. And Batton's mortgage insurance was cheaper because it was an FHA-insured loan.

In addition, the sellers paid his closing costs, so in the end he only had to put up $6,500 to purchase the home.

Batton was able to lock in a 5.75 percent interest rate after making multiple calls to lenders.

"Don't limit yourself to the first offer you get," Batton says. "I would suggest getting lots of quotes from banks." Experts recommend asking for Good Faith Estimates from several places on the same business day. Be sure to get them in writing. In some cases, programs have disappeared in the middle of a transaction, so be sure to get a written rate lock as soon as possible.

Greene says even though FHA-insured homes require a down payment, there are first-time homebuyer programs that help buyers cover some or all of the down payment. "So there are still ways to do zero down," he says.

Read important documents, ask lots of questions

Martin says the most important way to protect yourself is to read what you're signing at closing. Make sure the closing officer presents the list of terms and check that it matches what you agreed to pay. If you agreed to a 30-year fixed interest rate mortgage, make sure the contract's language doesn't refer to interest rate adjustments.

It's critical to understand your interest rate. Fixed-rate mortgages set a rate that does not change over the life of the loan.

Adjustable rate mortgages (ARMs) are still available, although not used much in recent months, Martin says.

Adjustable rate mortgages set a typically low interest rate for a certain number of years, then allow interest rates to fluctuate. During the past two years, interest rate adjustments on ARMs increased mortgage payments for some homeowners by several hundred dollars. People who were unable to cover the higher payments and unable to refinance into a fixed-rate loan because of poor credit have gone into foreclosure.

Martin also says to look out for prepayment penalties, which aren't typical for conventional bank loans. But some mortgage companies require that if a home is sold within two or three years, the owner must pay out a percentage of the loan. Pre-payment penalties can make refinancing costly, particularly to refinance an adjustable-rate mortgage into a fixed-rate mortgage.

Greene says home buyers should be wary of "junk fees," costs that drive up the fee from the lender, but are listed separately on documents. Such fees can make comparing lender costs more difficult.

In addition, Greene suggests homebuyers thoroughly investigate before paying points to reduce interest rates. Sometimes referred to as a loan origination fee, points are a percentage of the loan amount paid in cash at closing. In exchange, the buyer receives a reduced interest rate. Paying points might not pencil out if a buyer expects to sell the home in a few years.

"Most borrowers will not benefit if a fee is more than a half point," Greene says.

Look before you leap into a home

Greene says buying a home, the most expensive purchase most people will make in a lifetime, is worth some planning. Check in with some lenders and with your credit report well before you're ready to buy.

"If you're a first-time buyer, we want to start the process ahead of time, up to four to six months," Greene says. "I tell people ‘Let's set the table for success.' Then when it's time, it's a simple transaction."

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