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Issue Date: March 2008 Issue


Mortage 101

Learn how to get the best mortgage.
Nancy Loyan Schuemann
We keep hearing the lending atmosphere is tight and obtaining a mortgage is impossible unless you’re Snow White. Experts say this isn’t true. They say the time has never been better to buy a home and obtain a mortgage.

“With the very low interest rates and home prices, it’s a great time for buyers to purchase a home,” says Monica Martines, public relations director, Third Federal Savings and Loan.

The process of obtaining a mortgage, however, should not be entered lightly. Educate yourself first to find a mortgage that is right for you.

Be Prepared

The first step is to do your homework and be prepared.

Begin about six months prior to your search for a new home. If your credit score needs help, you’ll have to take the necessary steps to make home ownership possible.

Obtain a copy of your credit report. Credit bureaus compile a record of your debts and how you have paid them. They gather information from banks, credit card companies, department stores, etc. Check your credit report, and if there are any errors, report them.

Know your credit score. If it’s low, bring it up. A credit score is an indicator of risk to the lender. If a person isn’t paying off credit card debt, it’s unlikely he or she will stay current on a mortgage payment. And mortgage rates can change based on your credit score.

Have a job history. Usually, all that is required is one month’s pay stub and the previous year’s W-2. If self-employed, a business history/track record is necessary.

Before you consider going out to look at a home, you need to have your finances in order. Most real estate agents will not work with you unless you have a pre-approval letter that shows you are pre-qualified and have the funds available to purchase a home. A mortgage agent at the real estate office, mortgage broker’s office or financial institution can work with you to make this possible.

“In today’s market, sellers may be willing to lower their home prices if they know they have a serious buyer who can afford the home at a somewhat lower price,” Martines says.
Where to Obtain a Mortgage

Each situation presents unique options.

The larger real estate firms are full-service “one-stop shops,” including their mortgage divisions. Other real estate firms recommend long-standing mortgage brokers with whom they regularly work and refer to clients. There are also banks and savings and loans.

Banks and savings and loans offer the same retail rates to everyone who qualifies for a loan. They also have a track record and are regulated by the government. Banks and savings and loans are considered safe bets, especially if they do not sell their mortgages.

Mortgage brokers are essentially customers of banks, obtaining funds wholesale from them. A good broker can deal with 90 different sources for mortgage loans, in and out of state. They shop around for the best and lowest interest rates for their client because brokers work on volume.

Be careful of unknown firms. The most important thing is to work with a mortgage company or financial institution that is secure. Not everything you read in the telephone book or newspaper or see on television or the Internet is true. Check with the Better Business Bureau. Research the mortgage company, looking at its years in business and clients. No fees should ever be charged up front.

Know your credit profile and let the professionals know.

Review all contracts carefully, especially the fine print. Everything should be clearly disclosed. Any fees should be in writing.

Know what the loan is about, what the costs are: insurance, taxes, etc. Ask questions. Understand what you’re signing.

“There are no tricks in mortgages. It comes down to service and professionalism,” says A.J. Barth, owner of Consumer’s Choice Mortgage. “If it doesn’t seem right, do double-checking. Get a second opinion.”

What to Avoid

The old adage “If it’s too good to be true, it probably is” applies to obtaining a loan. An educated consumer is a wise consumer.

“Predatory lenders prey upon the uninformed and desperate,” Martines warns. “Folks who are behind on credit card payments, car payments, rent payments, maybe have had a recent bankruptcy or had a car repossessed should not expect to purchase a home until they have repaired some of the damage to their credit reputation. If someone tells them they can get a mortgage with extremely poor credit, it’s going to be a predatory loan.”

Don’t be lured into buying more of a house than you can afford with promises that if the rate on an adjustable mortgage goes up, you can simply refinance using the equity in the home. When equity doesn’t grow — as is most often the case — the buyer cannot refinance. When buyers can’t make monthly payments, they could lose the home.

Don’t finance a home with two loans —the first being the primary mortgage, and the second covering all or most of a down payment. When both loans are adjustable and rates go up, buyers have found themselves in over their heads. This practice has resulted in many foreclosures.

“Another good idea is to have a down payment,” Martines advises. “Many mortgages that have gone sour were offered with no down payment with the same promises — rates will go up but equity will grow and folks can refinance. Doesn’t always work out, as we know.”

Understand that mortgage brokers are paid on commission. Commissions can be $15,000 and higher. Unscrupulous brokers have a huge financial incentive to make as many loans as possible. They are lured by the quick profits of creative and subprime lending. Deal with a reputable lender, one who isn’t afraid to tell you that you do not qualify for a loan. Believe him or her. Your next step will be to clean your credit record so that you can qualify in the future.
Where to Get Help

A number of organizations provide free information on credit, mortgages and homebuying. Local communities offer workshops on predatory lending. Neighborhood community development corporations are a valuable source of information and advice. Check with your city hall or the city hall in the area where you plan to move. You can also contact the East Side Organizational Project with mortgage questions and a review of paperwork.

The Cuyahoga County Foreclosure Prevention Program is another resource, as are

Neighborhood Housing Services and the Spanish American Committee. United Way’s “Call for Help” can offer referrals. Banks and savings and loans often have advice on their Web sites and real estate firms also have informational Web sites. The

Legal Aid Society of Cleveland offers free legal advice. Another good online resource is www.housingeducation.org. Don’t forget the Better Business Bureau as well.

The Best Loan for You

There isn’t a true “one size fits all” mortgage. A mortgage professional will analyze your situation and find the appropriate product.

Do remember that the more money you have for a down payment, the lower your principal and monthly payments. If your down payment is less than 15 percent of the purchase price, you are required to pay

private mortgage insurance based on the type and amount of your loan. This cost is added to your monthly payment and is paid through escrow. Also, the longer you stretch out your loan, the higher your total cost.

Be aware that interest rates change an average of twice per day based on the loan market. Until you have a contract in hand and the interest is locked in, the interest rate is subject to change. A “reasonable rate” within a certain range can be given but not guaranteed.

Obtaining a mortgage isn’t rocket science, but being an educated consumer can bring you one step closer to home ownership without the risk of foreclosure.

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