Making the most out of a $10,000 investment
Often overlooked when comparing investment options are the leveraging and tax advantages of purchasing a home. This hypothetical example in the chart below analyzes those benefits over a 10-year period by comparing the experiences of two households. One household used $10,000 in savings as a down payment on a home; the other buys a $10,000 Treasury bond and continues to rent. Looking at the bottom line 10 years later, the homeowner out-earns the renter by more than $49,000 on the initial $10,000 investment. Both households consist of a husband, wife, and one child. Each family has a combined income of $40,000 that increases 5 percent annually. The example assumes a property tax rate of 1 percent of value each year, hazard insurance of 0.4% of value per year, and a marginal tax rate of 15%.

Why You Should Start Planning To Purchase A Home

If you've ever thought about buying a home, but decided that it was too big a financial gamble, think again. It's possible you haven't considered the risk of not buying a home. For the majority of working people, home ownership is the single most reliable way to achieve financial security. Without it, you may find it almost impossible to gain access to the kind of capital you'll need to support yourself in your later years, pay for your children's education or start a new business.

Home ownership among young Americans has dropped alarmingly in recent years. In 1980, 52 percent of all 25 to 34 year-olds owned a home. By 1990, only 45 percent did, and among 34 to 44 year-olds, home ownership had dropped from 71 percent to 66 percent. The primary reason for the decline in ownership among the young is cost. The price of housing more than doubled between 1975 and 1985, and mortgage interest rates skyrocketed.

Fortunately, the pendulum has swung back. Since 1991, overall housing prices have remained stable though in some areas of the country they have fallen by as much as 25 to 30 percent, and mortgage interest rates have dropped dramatically. But if, like many young people, you grew up in an overheated housing market, you may continue to think of home ownership as something beyond your reach. Here's why that attitude could be a big mistake.

1. You may wait a long time to see rates this good again.
   Suzanne recently saw a house selling for $125,000. She has $20,000 in savings to use as a down payment; a $105,000 30-year mortgage at 7.5 percent would cost her $733 a month, and she might have another $150 a month in real estate taxes, for a total of $883.
   
   Suzanne is hesitating: $883 feels like a stretch for her now, since she's paying only $650 for her rental. But if she waits, and prices and mortgage rates rebound to the levels of five years ago, the exact same home might cost her $150,000, and she could be paying a 9 percent interest rate. The bottom line: She would be stuck with mortgage and tax payments of $1,190 - almost twice her current rent - for exactly the same home.

2. Renting deprives you of big tax breaks.
   Home ownership is one of the last remaining tax shelters. In the example above, Suzanne would be able to deduct about $9,300 in mortgage interest and real estate taxes on her annual tax return. She earns $30,000 a year, which puts her in the combined 31 percent federal and state tax bracket. Therefore, her tax savings could come to about $2,900 a year, or almost an additional $250 in take-home pay each month. If she rents, she'll get no tax breaks whatsoever.

3. You need to start small to trade up.
   You may feel that there will be plenty of time to get into the housing market when you feel financially secure. The problem is, you'll probably need the profit you'll make by selling your "starter" house to be able to afford the one that you'll want in the future.
   
   Between 1968 and 1992, the median price of a single-family home rose an average of 6 percent a year, according to the National Association of Realtors; over longer periods, the increase has been between 3 and 4 percent. That's great - if you buy early and hang on to your purchase. If you don't, you'll have to keep up with those increases through other investments, which is generally difficult to do.

4. Your future is going to be expensive.
   Financial experts generally suggest that to retire, you'll need to build up enough in savings and investments to generate yearly income of 70 percent of your pre-retirement income. That's a tall order - and a reason to start amassing some serious capital soon.

There are several factors that lenders take into consideration when determining how much they will lend to you for your home purchase. The three most important factors are your income, debts and down payment. Any one of these can greatly impact the amount of mortgage you qualify for. Lenders are primarily concerned with the percentage of your gross monthly income that goes to your new monthly housing expense and to your new monthly housing expense plus your other monthly debts. As a general rule, no more than 33% of your gross monthly income should be going toward your monthly housing payment and no more than 38% of your income should be going to your housing payment plus other monthly debt. These guidelines vary by the amount of down payment you make and the loan program you choose. These are general rules for loans with loan amounts at or below the conforming loan limit.

If you have been pre-qualified and are not satisfied with the amount you qualify for, we have listed four of the most common obstacles to qualifying for a home below and possible solutions to each.

1. Excessive Long-term Debt

• Consolidate your debts by taking out one loan and paying off your bills with the money.

• Pay off long-term debts by using some of your cash and making a lower down payment

• Pay off long-term debt by selling another asset and using the cash generated from that sale. (Generally, this is something you should consider doing in preparation for looking at homes to purchase, well before the application process.)

2. Inadequate Income

• Income from bonuses, overtime, or future raises might be considered in qualifying. If you've overlooked any income, be sure to tell your loan officer.

• Find a co-mortgagor who is willing to go on the loan with you to help you qualify (They may need to live in the house and take title as well).

• Make a higher down payment.

• Consider a financing option that will allow you to stretch your purchasing power. Some of these options include FHA loans, adjustable rate mortgages, balloon financing or graduated payment mortgages.

• Remember that non-taxable income may be grossed-up, as though it was taxable.

3. Credit Problems

• Repair your credit file by contacting creditors and requesting that negative information be removed.

• Pay off outstanding judgments, liens and collections.

• Re-establish good credit

4. Lack of a Down payment

• Get a gift from an immediate family member. (3-5% of the value of the house must still come from your own funds, unless the gift is 20% of the value or more)

• Ask the seller to carry back part of the financing.

• Sell or borrow against another asset.

• Borrow against or cash out your 401(K) - but consider the tax implications, if any.

• Ask the seller to contribute to closing costs, within the allowable limits.

• Obtain a low point or zero point loan.

• Consider financing options that offer lower down payments and help with closing costs.

One of the biggest problems facing potential homebuyers today is coming up with enough money for the down payment and closing costs. The amount of money you have available can greatly limit or increase your purchasing power. Rather than saving all of the money yourself, there are options that may help. Here are some ways to accumulate the necessary funds that are acceptable to most lenders.

• Have your parents give you the money as a gift.
  Documentation will be required to prove that the money is actually a gift and not a loan. Any taxpayer is permitted to give up to $10,000 per year to another person without having to pay a gift tax. Technically, your mother could give you $10,000 and give $10,000 to your spouse. Your father could do the same. This would give you $40,000 for a down payment and closing costs. (Note: Unless you are putting down at least 20% or are obtaining an affordable housing loan, 5% of the sales price must be your own money.) You should consult your tax advisor for guidance.

• Borrow against your 401(K)or insurance policy.
  You can also cash out your 401(K) but you will be subject to withdrawal penalties and payment of taxes. If you borrow against it, the loan payment may be counted as a debt. You should consult your tax advisor for guidance.

• Sell or borrow against an asset.
  Selling an asset such as a car can help increase the amount of money you have available. Borrowing against an asset is also acceptable as long as you qualify with the additional debt.

• Obtain a low point or zero point loan.
  This will reduce the amount of your closing costs substantially. In some instances, the lender can also pay all or a part of your non-recurring closing costs, with higher pricing (i.e., rate).

• Ask the seller to pay for all or a part of your non-recurring closing costs (within allowable limits).
  Your real estate agent can assist you with this when you make an offer on a home.

• Ask the seller to carry back financing.
  If the seller does not need all of the equity in their property, they may be willing to carry some of the financing which will reduce the amount of your down payment.

• Consider different loan programs.
  Your loan officer can help you in determining the best loan program to suit your needs. There are a wide variety of programs that require lower down payments and assist with closing costs. There are also city and county down payment assistance programs you can investigate.

The majority of real estate transactions take place with the assistance of a real estate agent and for good reason. Working with a professional real estate agent is the most efficient means of shopping for a home and can help make the home buying process an easy, hassle-free experience.

A real estate professional:

• Helps you assess your wants and needs to find the perfect match between what you can afford and the home that best suits your preferences.

• Keeps your personal style in mind when selecting properties to show you.

• Accesses all the properties for sale in your desired area by computer. "For Sale" signs and newspaper ads are not always a true reflection of everything that is on the market. Your real estate agent always knows what's available at any given time.

• Negotiates for you. Once you have found the home you want to buy, your realtor will write up your offer and present it to the seller. This gives you the best opportunity to have your contract accepted.

• Gets the right price. Your realtor is a specialist in your area and knows the market inside out so you will get the best price possible.

• Allows you to make your own decision. A professional agent works for you and respects your opinions. He or she will not try to force you into a decision you don't feel comfortable with.

• Protects your rights. Real estate laws have become increasingly complicated. Your real state agent is there to assist you as an informed expert in every way.

• Doesn't charge you anything! Your real estate agent's services are absolutely free to you as a buyer. Their commission is paid by the seller.

• Do not change jobs
  Changing jobs before or during the loan process can create a real problem in qualifying you for a loan, particularly if that job is in a different line of work or at a lower rate of pay. During the loan process, changing jobs can also create time delays while the new employment is verified.

• Do not switch banks or move your money around
  It is best to leave your money right where it is until your loan is closed. Moving your money to a new bank or even into a new account can create problems with the verification process.

• Do not pay off bills
  Your loan officer will be able to advise you of your qualification status and advise you of the permissibility of paying off bills in order to qualify for a larger loan.

• Do not make any major purchases
  Many borrowers make the mistake of buying a new car, furniture or making another major purchase without realizing the impact it can have on their ability to buy a home. A large monthly payment can affect the amount of home you qualify for and, during the loan process itself, make loan approval more difficult to secure.

If you must take any of these actions, contact your loan officer. He or she can help you by pre-qualifying you, if necessary, and advising you of your options. A successful loan closing will be your reward!

• Make yourself scarce
  Let the agent sell your home. If you are not there, the prospects can talk openly with the agent, who is well-versed in handling objections and calming nerves.

• Remove pets
  Your pets should not be seen or heard while prospects are viewing your house.

• Let there be light
  Turn on all lights, overheads and lamps. Make sure you have replaced all burned out bulbs. Open all curtains and window shades to provide a cheerful atmosphere.

• Silence rules
  Turn off all television sets, radios and stereos. If you have window air conditioners on, make sure they are on low so that the noise is not distracting.

• Keep it clean
  Your house must be clean and tidy at all times. All beds must be made, all dishes in the dishwasher or covered up in the sink with a towel. All wood surfaces should be dusted, all floors swept and mopped. Carpets must be clean. Fingerprints need to be removed from the walls. Paint inside, if necessary. Your kitchen and bathrooms, especially, need to sparkle.

• Make it neat
  All closets should be clean and neat. Excess clothing, shoes, linens or toiletries should be packed away. If your furniture is large or excessive for the size of your house, you should consider putting some of it in storage. Garages, storage areas, tool houses and attics should also be straightened up. Pick up all children's and pets' toys and put them away. Clutter will make your house look smaller.

• Create curb appeal
  The outside of your house needs to be as appealing as the inside. Touch up the paint where needed, make minor repairs. Keep the landscaping trimmed and neat. Remove any toys or tools.

• Little things mean a lot
  Consider adding mirrors to walls to give the impression of more light and space. Make sure all appliances and plumbing are in good working order. Remove any personalized items (like door knockers) and any light fixtures that will not be sold with the home.

If you put some thought and effort into putting your home's best foot forward before it is shown the first time, you should be able to find a buyer quickly.

Mistake #1 - Failure to examine/repair credit problems prior to loan application
Nearly all potential new homeowners and borrowers have no idea what type of credit they have or how to repair any adverse credit that they have. They fail to realize that credit is one of the key factors in acquiring a mortgage or refinancing a current mortgage. Credit problems slow down the process of getting a home loan and can damage one's ability to make other purchases.

What is good credit?
Good credit usually means a person has about five or six solid pieces of seasoned credit (such as a car loan, a current mortgage, a credit card) that are at least two years old and indicate no late payments. Of course, rarely is anyone's credit history perfect. One 30-day late payment on your credit report won't take you out of a good credit category. Most underwriters, those who approve loans are looking for trends. Isolated incidents do not carry as much weight as an established history of paying bills well past their due dates.

How can I repair my credit?
In most cases, a letter or phone call to the Credit Card Company or business that originally gave you the credit can put you on the right track for having a "scar" removed from your report. Sometimes the company will require you to pay off the balance of your debt or send in a letter explaining why you were late with your payment. However, if you have a history of late payments, you may have to let time take its course, waiting while you build up a record of timely payments on outstanding debt.

Can high levels of debt affect my ability to buy a home?
Yes. And there is an easy way to determine if you have too much. Most loan programs will not allow your monthly mortgage payment (plus housing expenses) to exceed 28% of your total gross monthly income. Also, they will not allow your total monthly debt (mortgage payments, car loans, installment loans, credit cards, rental losses and alimony/child support) to exceed 36% of your total gross monthly income. (Note: these are guidelines only. Special circumstances and special programs may be able to overcome excessive ratios) If you exceed the 28% and 36% guidelines, you may want to consider paying off some of your debt in order to lower your monthly obligations before you apply. Remember, however, that some loan programs have more lenient ratios (such as FHA, VA, FNMA Community Homebuyer and Jumbos).

Mistake #2 - Failing to realize (in advance) how much money a lender is willing to loan you.
Whether you are planning on refinancing or purchasing a new home, most lenders have strict guidelines on how much money they are willing to lend. The lender's decision is typically based on the loan-to-value ratio. In other words, lenders have limits on how much money you can borrow based on the value of your home.

For example, if you are refinancing, most lenders will not lend more than 90% of the appraised value of your home. So, if your house appraises for $100,000, you would be eligible for a $90,000 loan, assuming your current loan balance and closing costs equal $90,000 or more so that you are not getting cash out of the property.

On the other hand, if you are planning to buy a home, most lenders will allow your loan-to-value ratio to go as high as 95-97%, or even 100% with a VA loan.

So, if you are planning on buying a new home, make sure you have at least 3% of the purchase price - your own funds, not gifts or loans - available for the down payment, plus closing costs. Closing costs include discount points, origination fees, attorney's fees, etc. They often run anywhere between 4% and 8% of the loan amount, depending upon your location and loan amount. The larger the loan, the smaller will be the percentage of that loan required to cover closing costs.

Is it possible for me to take cash out when I refinance and pay off some credit Cards?
Yes, but in most cases, this means you cannot borrow more than 75% of the appraised value of your home.

What can I do if I can't come up with a 5% down payment?
The vast majority of loan programs look to the borrower to make a down payment from his or her own funds of 5% of the value of the house. As mentioned, some will accept only 3%. Some of these still require 5% down, but will allow the remaining 2% to come from a gift from immediate family members, grants or unsecured loans from your employer, non-profit organization, government agency or first mortgage lender. In addition, if you are eligible for a VA loan, you can qualify for a 0% down payment loan (provided that you have sufficient VA eligibility)!

I am self-employed and earning a good living, but my tax returns are complex, usually in some stage of completion, and difficult to put my hands on. Can I get a loan ?
Yes. There are a number of "no income verification" programs available for people like you. Under the guidelines of these programs, most lenders will not loan you more than 80% of the appraised value of the property They will require that you have strong credit, have substantial liquid assets, and have been self-employed for a minimum of two years (with some exceptions). If you fit these criteria, there's a good chance you'll be approved for the loan you need.

Mistake #3 - Failure to find a reputable and experienced mortgage lender to help finance the home
Associating yourself with an honest, high quality, and service-oriented mortgage banker is probably the most important ingredient in finding home financing. This is an important decision in your life. It is probably one of the largest financial transactions you will make. It's not something you want to treat lightly. Dealing with the right lender can mean the difference between having your loan application approved or rejected. So, how do I find the ideal person to handle my loan?
This shouldn't be too difficult. There are many reputable, knowledgeable professionals. Just be sure to ask a few good questions before choosing one. We recommend asking:

1. “Can you provide references?” If they can, call the references.

2. “How long have you been in business?”

3. “How, and when, can I get in touch with you?” Your loan officer should be available through many channels (phone, fax, pager, email) at times that are convenient for you.

Have this information available to apply online or on the telephone:

Borrower information

• Address and telephone numbers of each borrower

• Previous addresses if less than two years at current addresses

• Social Security Number of applicant(s)

• Value of assets including cars, stocks, and real estate

Employment/Income

• Name and address of employer(s) for the past two years

• Pay stub(s) for the last 30 days showing year-to-date and current period earnings. If you have additional income, you may need documentation for accuracy

Bank accounts/Investments

• Checking and savings account statements for the past two or three months

• Most recent brokerage account statement for the past three months, or copies of stock certificates and/or savings bonds

• Copy of current thrift plan or retirement benefits statement (including IRAs and Keoghs)

Creditors

• Credit cards, loans, and current mortgages

• Name and address of each creditor, account number, monthly payment, and outstanding balance

Purchases

• Copy of the sales contract and all addenda

Fees

• Please have a credit card or check ready for the application fee.

The loan approval process is relatively simple but can seem very mysterious if you do not receive an explanation of it. The loan approval process is much quicker than it ever has been.

Every mortgage application goes through these steps:

• Completing the application
  The key to the loan process going smoothly is the initial interview. At this time, we make every effort to obtain all pertinent documentation so that unnecessary problems and delays can be avoided. To make sure you are prepared, see our Application Checklist.

• Ordering documentation
  Sometimes immediately, but in no case more than 24 hours after application, we request a credit report, appraisal on the property, and any verifications required to confirm information that was not documented at loan application. These could include employment, bank account or rental verifications, for example.

• Awaiting documentation
  As we receive any information requested, we review it for any potential problems and request additional information, if necessary, to solve them. We keep you aware of what is going on through status reports throughout this period. In the past, it often took 60 days to process a loan. That is quite unusual these days. We often can have loans approved and closed in two weeks. It will depend upon your individual circumstances.

• Submitting the loan application
  Once all of the documentation is in, the loan officer reviews our current programs to make sure that the borrower is getting the best rate and terms. The loan processor then puts the loan package together for the underwriter's review.

• Loan approval
  Final loan approval generally takes anywhere from 24-72 hours. (An original credit approval may have been provided upfront, in a matter of hours. This review considers the property as well as the loan applicants ). All parties are notified of the approval and any loan conditions that must be satisfied before the loan can close. The loan approval is the beginning of the closing process.

• Document preparation and review
  Within one to three days after loan approval, the loan documents such as the note and deed of trust or mortgage are completed and sent to the title company or attorney's office. The escrow officer or attorney calls the borrower to come in when the papers are ready for signature. The borrowers learn how much money they will need to close the loan.

• Funding
  When all parties have signed the loan documents, the loan is funded. The documents are returned to the lender, who reviews them. If any document was incorrectly completed, the lender contacts the appropriate parties for correction.

• Recordation
  When the paperwork is complete, the lender or title company records the documents serving as the lender's security for the mortgage loan at the county recorder's office.

• Payments
  The mortgage lender gives the borrower a coupon book and a monthly billing statement or the option to have payment automatically drafted each month.

• Get a secured credit card.
  Many banks will in exchange for a sum of money deposited with them, give you a credit card. Use the card and make your payments on time. Your credit rating can improve quickly.

• Obtain a secured loan.
  If you have a passbook savings account or can open one, ask the bank to give you a loan against that money. They keep your passbook until the loan is paid in full. Make sure the bank reports on the loan to the credit bureau.

• Work with a local store.
  Some businesses will give you credit on a purchase regardless of your credit standing. Although you may pay a higher rate of interest, this is another way of re-establishing good credit.

• Satisfy judgments, liens, and collections.
  Make it a priority to satisfy any unpaid items against you.
• Make all of your current debt payments on time.
  You are on your way to having rebuilt a solid credit file.