INTRODUCTION

Congratulations! You've decided to purchase a home! You are probably now aware that owning a home also means owning a mortgage, since the vast majority of homes are bought with a mortgage loan. Very few of us have hundreds of thousands of dollars stashed away to make an outright cash purchase.

For most of Americans, a home is the biggest financial commitment that they will make in their lives. It will determine their eventual lifestyle, their monetary stability, and their economic well-being.

You've made one serious decision - home-ownership - now it's time to make two more: Which mortgage is right for you, and how to get this loan?

When you borrow money, you are committing yourself to two crucial documents: The Note which is your personal obligation to pay back the loan on a regular basis; and the Mortgage which pledges the home you will be buying as security in case you fail to meet the repayments on a regular basis.

Did you know that the word mortgage literally means "a dead pledge?" Why, you may ask? The pledge is considered "dead" until your failure to repay "revives" it, brings it to life - thus causing it to go into effect. The result being that the home can be taken from you according to the terms and conditions of the mortgage.

The normal meaning for mortgage, however, is financing that you get which is secured by real estate. It used to be that this type of financing was called a mortgage. However, this term is coming to be replaced by the term "trust deed".

PLACES TO LOOK

The best way to safeguard your interest is to shop carefully, and look for the best mortgage that you can find. A real estate broker can help you, and some local newspapers even print the current interest rates on a weekly basis. Look at all these pieces of information carefully and decide what is best for you. Your best source of finding the right lender is the Yellow Pages. You should go down the list and call as many as you can. Ask for rates, points, and all other costs (for example, FHA, fixed-rate, ARM. All these terms are explained in the Glossary).

It is not a bad idea to ask friends as to where they got their mortgages and what their experiences were with the lenders. Always deal with a reputable lending institution rather than search for a "deal" that could end up costing you time and money.

LOCKING IN RATES

Rates are always fluctuating, therefore you have to make sure that you ask about the Lock-in, when you speak with a mortgage lender. A lock-in is the period for which the quoted rate will be valid. A lock-in protects you because you will be assured of getting the best rate when you are ready to assume the mortgage (usually a month). If you haven't locked in, then you may find that the interest has changed from the time you last got the quote. At the same time, get the amount of the application fee clarified.

Often, a lender may offer a 60-day lock-in; in return he may want 1% non-refundable fee. Other lenders may simply refuse to lock-in because the market is too volatile and they will offer you the prevailing rate at the time of closing. Never go with a lender who offers you a low rate and a long lock-in period. This is a red flag - you will have to pay a high price in incidental fees.

GATHERING DOCUMENTAION

When you approach a lender have all the paperwork with you. Make a list of your accounts, such as, checking, savings, and all your debts. Always include account numbers and balances. Also, bring copies of car titles, a list of securities you own and their value, copies pf 1099 tax forms to show dividend, interest, and royalty income; if you have rental property, bring proof of rental income. If either spouse is divorced show proof of alimony and/or child support that you are paying or receiving. Bring a list of jobs that you have had over the last 10 years, with addresses, phone numbers, income and the names of supervisors; as well, bring W-2 forms for the past two years.

Help the lender verify your income and your net worth. This will speed up the loan process significantly.

And finally, get an idea from the lender as to how long the process will take. Phone regularly and keep on top of things. As well, keep the seller and real estate broker informed of your progress.

CALCULATING YOUR PRICE RANGE

Buying a house is a major investment. So how do you figure out what amount you can easily carry? Most lenders use the 28/36 Ration. It is made up of two components: The Housing Ratio - 28% and The Debt Ratio 36%.

28% -- The Housing Ratio
The Fannie Mae guidelines suggests that a person should spend no more than 28% of monthly income for housing payments. The 28% Housing Ratio is calculated by taking 28% of the borrower's gross monthly income (e.g. $40,000 a year = $3333 per month X 28% = $933).

This housing payment includes Principal on the loan, Interest, Taxes and hazard Insurance (PITI).

36% -- The Debt Ratio
The Debt Ratio is 36% of total monthly income. The Debt Ratio includes the mortgage payment plus all your monthly payments being made on other debts. This figure is derived thus: Total debts ? Monthly income = Debt Ratio. The figure should be 36% or less; it should be greater. If your Debt Ratio comes to a figure greater than 36%, then the lender takes into consideration various factors such as: Excellent credit, assets and savings. There are other Debt Ratios available (33/38 or 45/45), but these usually have higher down payments and various other restrictions.

PAYING OFF YOUR MORTGAGE

As you begin planning your financial life around your new home, there are a few things you should keep in mind. These will help you reduce your mortgage quickly and effectively. You should follow this course:

1. Refinance high rate loans that were arranged many years ago, with lower rate mortgages that are currently available on the market.
2. Amortize your home mortgage quickly to enhance your financial security. Consider a 15-year mortgage when refinancing.
3. Pay off a home mortgage with money that would otherwise go into a savings account. For example, if Certificates of Deposit pay 5%, and your mortgage debt is at 8%, then reducing the mortgage is the better investment. Keep this in mind if you receive a bonus or a tax refund.
4. Consider increasing your mortgage payment by a systematic amount, such as $100 per month or more (towards the principal), so you can retire the debt faster.
5. Consider taking adjustable-rate loans, especially ones that have a long period of fixed rates (5-7 years), with tolerable rate ceilings on renewal.
6. Check on the income tax law pertaining to home interest deductions before refinancing with a larger debt or taking out a second mortgage.
7. Check on loan assumability, prepayment privileges and penalties before you arrange new financing.
8. If you want to pay off a mortgage earlier, there is a better way. Get a 30-year mortgage (with a no-prepayment feature), but pay it off using a 15-year payment schedule. So if you borrowed say, $100,000 at 8%, for 30 years, your payments would come to $734 a month. But instead of paying $734 per month, you paid $934 per month, which is $200 extra, towards the principal, you shall work on a better schedule. Not only will you see your mortgage go down, but also if you ever face some tough times, in case of sickness or financial hardship, you can easily fall back to paying $734, the amount you were contracted to pay at the beginning, because you were never locked in to pay the higher amount. That was your voluntary choice.

MORTGAGE TIPS

1. The interest rate usually varies from lender to lender, even though there is a market rate. It's worth shopping around.
2. You can lower your monthly payments by getting a longer term, putting more money down, or buying a less expensive property.
3. A prequalification for a mortgage can help you negotiate a good deal with the seller, because you will demonstrate that you can actually buy the property. A prequalification is a commitment from the lender that says you are good for the money.
4. Do not pay extra for a lock-in, other than the minimum. It is usually cheaper to wait and reapply later on when the rates go down. Remember, rates fluctuate daily.
5. If you've got bad credit on your credit report, make sure you come up with a credible explanation for the report. Lenders often listen to explanations. Sincerity on your part can go far.
6. If you're looking for an FHA-insured or VA-guaranteed home mortgage, the bank is your best bet. Even if you want a construction loan, a bank will offer you better terms than other lenders.
7. Mortgage brokers do not get a fee from the lender unless they get you a mortgage. So they are definitely on your side, and banks like dealing with brokers because they bring in volume business. But find a broker who does not charge extra fees.
8. If you belong to a credit union, don't go around shopping. Credit unions always offer the best rates for mortgages.
9. Getting a loan online can make the hassles of the loan process a lot smoother. Use technology for your benefit. But do make sure that the mortgage can be offered in your city and state, since the Internet is universal in scope. You don't want to be applying for a mortgage from a broker stationed in Norway.
10. Don't get taken. Get educated. And shop around. Only then put your signature on paper.
11. Most prime mortgages are available only if you intend to live in the property.
12. When filling out a mortgage application, do not lie about anything. However, you can present information in a favorable light, such as your experience and your job history. Make this information work for you, not against you.
13. If you decide to borrow money from a friend or relative for the down payment on your house, do so well in advance, preferably six months ahead of the time of your application for a mortgage. This way it will look like part of your savings. Lenders check back at least two months.
14. If you are behind in payments catch up before you apply for a mortgage. Try to stay caught up for at least three months before applying.
15. Hang on to credit card accounts. Keep a credit card you have had for years even if a new credit company offers you a better deal. An old card shows you have a long credit history and this is an asset when applying for your mortgage.
16. If you have too many loans, consider consolidating them before applying for a mortgage. Do this at least six months before your mortgage application.
17. For a subprime mortgage you will pay more in interest and points. However you will still get the loan. It really isn't a bad trade off.
18. An assumable mortgage is usually 50%-60% of the original purchase price. For your benefit get the seller to carry back a second mortgage for another 20%-40% of the sale price. This will raise the total mortgage amount to a level where the buyer will only need to put down 10%-20%.
19. Before getting an equity loan, look at your finances carefully. Make sure you can in fact carry the monthly payments. You don't want to lose your hard earned money on a property that you won't be able to hang on to.
20. An asset-based mortgage ties up your savings and the bank will not let you make withdrawals on the asset given as security until the mortgage is paid down or paid off.
21. Pay you bills on time. Nothing messes up your credit quicker than late payments. This is the easiest ways to preserve your good credit.
22. If you cannot pay all your bills, make sure you make your mortgage payments. You don't want to be staring at foreclosure.
23. It is a good idea to get a copy of your credit report before applying for a mortgage. That way you can see what the lender will see and have the right answers for any questions that may arise.
24. The basic method for correcting bad credit is twofold. First of all you have to write a letter to the credit bureau explaining the problem and why it was not your fault. Secondly you must provide some documentation proving what you say.
25. If you have new credit or no credit you can quickly establish credit by showing rent receipts, utility receipts and informal loans from friends and family, which can be shown in the form of canceled checks.
26. If you're looking for a quick mortgage, go to a mortgage banker. Many of them are now hooked up on the Internet, and can give you fast results.
27. The longer you can show that you've been self-employed, the better because a lender wants to see that you are successful in your business endeavors.
28. Never try to submit a false tax return to a lender. It may work, and you might get the mortgage. But that false tax return will stay in your file forever. And if you ever default on your mortgage, the tax return will be pulled up, and you will have to face the IRS. It's not worth it.
29. Do not get a no-document mortgage. It usually involves a higher interest rate, higher costs and a greater down-payment. You can usually get enough documentation together to qualify for a documented mortgage.
30. The APR will often be different from the quoted rate for the mortgage. Keep in mind that an APR includes the various costs that go into your interest rate, whereas the stated interest rate is only that rate itself.
31. An appraisal is a necessary part of the mortgage loan process, and it is customary for the buyer to pay for this service. However, given all the competition out there, many lenders are now offering free appraisals. So shop around.
32. Sometimes an advertised interest rate does not show the points that will be added on later. You may think you're getting a low rate, but when you actually get the mortgage you find that the rate is even higher than the going market rate. Make sure you get the lowest rate with the lowest points.
33. A lender cannot collect more than 2 months' worth of insurance and taxes from you.
34. Interest on a mortgage is paid in arrears. Try to have the escrow close on the last day of the month. This way the next payment won't be due until the first day of the month after next. This way you will have a whole month before your first payment comes due.
35. The Department of Housing and Urban Development offers a great booklet on settlement costs and other information about buying a home. You can download it free at HUD's website: www.hud/gov/fha/res/stcosmsw.bin
36. Many mortgages do not expressly say that a balloon payment is involved, where your final payment is larger than all of your other previous payments. Ask your lender, your agent, and your attorney. Don't get left in the dark.
37. If you have a fixed-rate mortgage, you know where you stand all the time, because your payments do not vary. For an ARM (Adjustable-rate Mortgage), payments are always lower initially than for a fixed-rate mortgage. You have to decide which one is right for you.
38. Convertible mortgages are usually the best ones available on the market. But do shop around because they come in all varieties. Make sure you choose the right one for you.
39. The best time to get an ARM (Adjustable-rate Mortgage) is when interest rates are high. This way, you know that when interest rates fall, your payments will go down as well. The worst time to get an ARM is when interest rates are low. Your payments will only go high.
40. Teaser rates (very low introductory rates) do not last more than a few months. Then the rates shoot up to normal market points, or higher.
41. If you are going to hang on to property for a long time, an ARM with a good teaser may be best for you. First of all, you'll benefit from the low teaser rate, and then you can sell the property before the ARM interest rate (and your payment) rises.
42. Make sure you ask the lender what the rate will be once the teaser rate is gone. And make sure you can live with this change.
43. All mortgage loans are tied to market indexes that dictate the interest rates that will be charged. If you are going to keep a property for a long time, make sure that you get a stable index. Ask the lender. He must show you the history of the index going back at least 10 years. Ask to see what the index did during the volatile years of 1978-1982. These years will show you what the index does when interest rates shoot up.
44. Lenders are not looking out for your best interest. Get educated. Ask questions. Investigate. Be informed.  Make sure you get the longest adjustment period possible. Usually lenders like a short adjustment period. You should ask for a long one.
45. Shop around and get the best deal for you.
46. Negative amortization means that instead of the mortgage going down, it goes up. Each month instead of paying off some of the loan, you add to it, and you end up paying a lot more than you borrowed.
47. Calculate how long you must live in your house before you begin to lose money. Usually, you'll stay ahead until about 10 years. After that, staying on costs you more money. Maybe, it's time to move to another place.
48. A biweekly mortgage is not for everyone. It is best for those who have salaried jobs and get paid weekly or biweekly, because they can easily budget their money to take care of the payments. But if you get paid once a month or work for yourself, it will feel like you're making payments all the time.
49. Never approach firms that offer to set up a biweekly mortgage for you. All too often they can take you money and run, and cause you to lose your home.
50. Lenders like short-term mortgages. If you can afford the higher payments on a 15-year mortgage, a lender will give you a lower interest rate or fewer points, or even both. This will certainly reduce your payment.
51. If you make one additional payment every month, in the first year, toward the principal, you can reduce the time it takes to pay back the loan by over a year, and also reduce the interest paid over the term of the mortgage.
52. You don't have to own property for 15 years or longer to get the benefits of biweekly or 15-year mortgages. Everything that you pay at once on the principal will increase your equity as soon as you make the payment. The sooner you pay, or the more you pay, the sooner your mortgage will be lower, and the more you will really own the house.
53. A "soft money" mortgage is one in which the seller is the lender. A "hard money" mortgage is where the buyer goes to a bank for a loan.
54. Look for a seller who doesn't need all the cash out of a property in order to move on to another property. Such a seller can become your lender. Most sellers are selling because they want to move on and buy somewhere else.
55. The wrap-around or wrap mortgage combines two mortgages. The seller gives you a single mortgage that includes a new second as well as an old, assumable first mortgage. But instead of making two payments, you make only one - to the seller. The seller in turn makes the payment on the first mortgage and keeps the difference. A wrap can benefit both the buyer and the seller.
56. Be wary of usury laws that are still current in some states. These laws limit the amount of interest that a seller can charge on a second mortgage. Any amount over that limit is unlawful. However, in other states, as a seller, you can charge any amount of interest that you want.
57. Some states limit the amount of a late payment penalty. Also, this penalty may not be applicable to a balloon payment. Make sure you check with your attorney, so you can negotiate better terms.
58. It is worth paying more for a property where the seller will carry the first mortgage. You will qualify quicker and easier, and face lower fees and costs. Such an arrangement is well worth the effort.
59. Real estate has four golden rules: Everything is negotiable, Identify what you want, Give in order to get, and be flexible.
60. Don't expect lenders to automatically remove the PMI (Private Mortgage Insurance) just because your house appreciated in value or you significantly paid down your mortgage. You have to initiate everything yourself.
61. Before you sign a mortgage agreement, make sure you check that the PMI can indeed be canceled, because in some cases the PMI cannot be canceled.
62. When faced with foreclosure, don't walk away. The lender could get a judgment against you and you could still owe money even after the foreclosure. The lender will also report the foreclosure to credit bureaus that will ruin your credit for a long time to come. You should hang tough, and fight.
63. It's tough to refinance once you're facing foreclosure. Heed warning signs. If things are looking tough, get refinancing, arranging the new loan while you're still current on your old loan.
64. At the time of closing, double-check everything, especially the math. Make sure everything adds up properly, because mistakes happen. Never sign a document with errors on it.
65. Before you sign on the dotted line, read everything; even the small-print. All kinds of discrepancies may have slipped in since you last spoke with the seller. Make sure the document you are signing is the one that you can live with. If there are any disagreements ask the seller to redraw the documents from scratch.
66. If you take out a mortgage against your home and then buy bonds that are tax-free, the interest on the mortgage may not be tax-deductible. However, if you use the money for education, there may be special exceptions. You should check with your accountant.
67. If you're thinking of applying for special government sponsored programs, you should do so before you contact a lender. In some cases, you will only be considered after you get a mortgage; and sometimes you may only be considered before you apply. Always find out first, so you won't be disappointed.
68. Check with Fannie Mae and Freddie Mac to see what programs they are offering. Visit their web sites at: www.fanniemae.com and www.freddiemac.com
69. Beware of getting rid of your old mortgage too easily. You could reduce your equity return significantly, even though your monthly payment may be less. Consider what you already have in the property and act accordingly.

FREQUENTLY ASKED QUESTIONS

1. Should I prequalify before I start looking for a house?
   Yes. It is easier to buy a home if you have been prequalified, and you don't have to worry about whether you will get the loan or not when you find your dream home. To prequalify, make an appointment with your lender, and take all your paperwork with you, such as bank statements, W-2 forms, and paycheck stubs. The mortgage lender will review your credit report and examine your documents. At this time, you can also decide which financing option best suits your needs. Afterwards, most lenders will write you a prequalification letter which you can show to your real estate broker and the seller so they know that you are a serious buyer. The lender may charge a small fee for this service, but it is well worth it.

2. Can I get a mortgage loan without credit?
   It is possible; but you do have to prove your credit-worthiness. Some "proofs" of good credit are: The fact you currently rent, credit letters from utility companies, short-term notes, rental agencies (such as furniture or appliance), and even car references. Any company or person who gave you credit in the past can be used.

3. Can I qualify for a mortgage even though I had problems in the past?
   Yes, you can qualify - because bad credit in the past meant that you fixed whatever it was that became a financial problem for you. This shows strength and commitment to a lender. Remember, bad credit in the past does not mean the same thing as a bad credit risk.

4. Will my spouse's poor credit history affect me?
   Yes, it will. So if you can manage it, try to arrange a mortgage under your own name. Make sure that your spouse is happy with this arrangement, as he or she will have to sign documents at the time of closing. Also, do consult with your attorney or title company to make sure you have complied with all state laws, since some mortgage loans require various pieces of information on your spouse.

5. Will personal bankruptcy affect my ability to buy a home?
   Bankruptcy itself will not keep you from being approved for a mortgage. You can certainly buy a home sooner than you might expect after bankruptcy, because the lender may look at your credit history before the bankruptcy, the cause of bankruptcy, and how you have handled your financial life after bankruptcy.

6. What do I do if my mortgage loan application is rejected?
   It is very rare that a mortgage loan application is rejected outright. Rather, you are often told that a loan is "not possible at this time." The last three words of this phrase are crucial. You can actually work at getting approved. Meet with the lender who rejected you and ask for the reason of the rejection. Then work at removing this reason. Perhaps in a month's time, you can apply again and be approved. Simply ask the lender bluntly: "Will I be approved if I do this and that?" Chances are, he'll say yes.

7. What is the "truth-in-lending statement?"
   If you're hunting for a mortgage, no doubt you've heard this phrase come up frequently. This statement gives you the entire list of costs that you will have to pay (loan origination fee, discount fees, and prepaid interest), along with the actual figures of the carrying the loan. These figures are entered into a computer to figure out the annual percentage rate (APR). The end result is a statement that shows you the true cost amortized (see Glossary) over the term of the mortgage.

8. I am self-employed. What documentation do I need to get a mortgage?
   You will need to show the following: Two years personal income tax returns, two years business income tax returns (if you are incorporated), a current balance sheet, a current profit and loss statement, a business credit report, and a personal credit report. Some lenders may ask for a list of documents. Just be patient and show everything needed.

9. Should I pay off my bills before buying a home?
   No, do not deplete your cash reserves, because you need to show these reserves to the lender so he knows that you can save and manage your money. A depleted bank account does not inspire confidence in a lender. Proceed paying your bills in a normal way, and get a prequalification letter. That way you won't have to worry about paying off the bills.

10. How do I plan for a mortgage?
    Go prepared with at least 2 years of financial information. If your lender asks for additional information, get it to him as soon as you can. Have all the paperwork ready in one place. Keep in mind that most loans take 2-4 weeks to process and complete; government loans (such as, FHA and VA) take 4-6 weeks. Always close a little earlier in the month rather than at the end of the month, which is a very busy time for attorneys. Make sure you work with a reputable mortgage company, and get references. And remember, do not go with the cheapest rate quote; you'll end up paying in time or poor service.

11. Is a large down-payment important?
    This really is a matter of personal choice, and your own "comfort zone". A large down-payment does not automatically qualify you for a mortgage, since approval often depends on what the lender thinks you can comfortably pay back. Speak with your lender and ask him for estimates with both a small or large down-payment.

12. I've just changed my job. Will this affect my loan approval?
    There is no hard and fast rule to this, but do remember that sometimes a change in employment may not work to your benefit. Make sure that you show your job change as an improvement in your financial life. This is what the lender wants to see. In most cases, it is best to wait 2-3 months after getting a new job before you begin applying for a mortgage.

13. What is the Community Home Buyers Program?
    The CHBP is a special program made available through the FNMA (see Glossary), the world's largest home loan investor. With this program, you need to have only 3% for the down-payment. The rest of the money can come from a gift from relatives or a non-profit organization, or even a grant from a state or local government program. Also, the qualifying ratios are greatly eased so you can get a better home. There is only one stipulation that you have to meet with this program, and that is to take a special, educational course on home ownership.

14. I am a first-time home buyer. What is the best loan for me?
    Most first-time home buyers make a home purchase with a Federal Housing Administration (FHA) mortgage, which is especially designed for the first-time buyer, and comes with 3% down-payment. Most lenders and real estate brokers are familiar with this mortgage, and you should simply ask. But, again, get yourself prequalified, so you'll know how much of a home you can purchase.

15. I am a recent college graduate. Can I purchase a home?
    Yes. Many lenders are interested in lending to recent graduates, if they have good credit. Often, your college courses are seen as your "experience". However, the Veteran loan wants you to actually be on you new job for 6 months before you can qualify to buy a home.