What I learned while getting a home loan

Ali and I have been looking for a house recently and since I truly do love math, I've taken on the loan finding, number crunching tasks. I'm pretty much done now, but I've gone from knowing nothing to learning a lot so I'm passing it on.


Credit Scores:

Credit scores drop when you open new credit cards. In our case, it hit hard as we JUST opened a CC within 6 months and have been spending for wedding stuff. Yes, I knew this would happen, but this is what prompted me to write this note. Ali took a 50 point hit to her credit so we could basically earn about maaaybe $300 at Macy's. In reality though, if our rate is even .05% higher, will will be paying a couple thousand dollars difference over 30 years. In reality this shouldn't affect us at all, but I would have passed on the extra $300 if it even RISKED such a credit hit, especially since we're trying to borrow so much. I suppose we can apply that extra cash back to the downpayment, eh?

Also, closing credit cards hurt you because it lowers the avg years on your CCs. I have a few long term (10 year) credit cards open, but I also have a card opened from Express that I closed after 2 months. That card lowers my average and I may never be able to rid it. Lesson learned: avoid opening and closing cards. One of all the major cards like master/visa/amex is plenty - and get it early or not at all near when you want to apply for a loan.

Checks against your credit also hurt your score - it implies you're planning on doing something drastic like take a loan out on a car or get a new credit card. The credit unions know that it's human nature to shop around though - so when applying for credit for a car loan, all credit checks within 14 days will count as a single check. Mortgage is the same way, but within 30-45 (not sure) days will count as a single check. I purposefully waited until the last minutes before being serious about looking at loans. Then I went all in - not caring how many credit checks are going on for a few weeks.

Those "no interest until 20##" credit cards hurt your score too. The credit places know that when you have a ticket to buy, you'll likely use it and are a higher risk to miss payments.

The credit scores do directly affect your rate: With good credit, income, current assets you can be ranked in the A loan, the A minus loan, or the sub-prime loan. The lower the ranking, the worse the rates, but the easier it is to get the loan. Did you recognize the words "Sub-prime"? That's the buzzword in the economy because the "Subprime mortgage crisis" revolved around lenders giving out money to the riskier borrowers. When they couldn't make payments, the houses foreclosed.


Borrowing money from family:

If you're borrowing money from people (ie, parents, family, reaaaaally good friends) get that money into your savings accounts 60+ days before you apply for a loan. When you report your 2 months of bank statements, they'll see that this insta-cash came out of nowhere. It won't look as good as if you just had it. Alternately you can just get your name on their account.

Don't forget that you can be gifted up to $12k/yr without having to declare it to the gov't. Anything after that is STILL ok amongst family members, but it cannot exceed 1mil over the giver's lifetime so you have to declare each large transaction to the gov't. (I'm guessing this has to do with drug trade or mafia types)

You can also get a gift loan where you pay interest to the lender. Then you can declare a write-off on the interest, but then the lender must declare the interest as income... so not a whole lot of point there.


Paperwork:

You *want* the lenders to ask you for all your statements. The more they ask, the better a loan they're trying to provide = the better rate you're getting.

Prequalify != (does not equal) Preapprove. Prequalify means that you'd get the loan based on your word that you make X amt and have X down. Preapprove means all that has been verified. Having a preapproval letter means you're more likely to be able to buy a house - so having it up front when bidding is key. A seller will choose the strongest bid which isn't always the most money - it's also about proving you're the best candidate. We've lost a bid before because we bid the exact same amount as another group, but they paid in cash and could close immediately... ... briefcases of cash I hope.


Types of lending:

Always check with a mortgage broker, not just a bank. A broker can pull from a variety of loan sources, a bank usually cannot. A broker has to declare how much % they've tacked on for their own profits (yield spread premium), a bank does not. The govt supports banks so their regulations are more lax than a broker.

That said, always check with a bank, not just a mortgage broker. The best rate I've been offered so far is through a bank. Mortgage brokers are a middle man, going to a bank gets you closer to the source and therefore closer to the money. Banks of course offer a little more stability and other one-stop-shop services.

Lending tree was crap for us. Basically lending tree charges lenders for your info - so lenders pass on that charge to you. I only get horrible deals and spam due to lending tree.


Lending amounts:

Downpayments > 20% get you a discount, the lender doesn't need to take out loan insurance on you. If they had to, then they'll just increase your rate to cover it.

A "conforming" loan means it's typical - it conforms to general guidelines including under a certain amount. Borrowing more than $625,500 turns it into a jumbo loan (it conforms to everything *but* the amt borrowed). This has actually just recently gone up to around $720k, though not all institutions support it yet.

"Buying points" mean that you put extra money in fees to "buy down" a cheaper interest rate. One point is 1% of your borrowing amount. The amount it reduces your rate is dependent on the lender. For example, the first point buys me a 3/8ths % lower interest rate, another point, 1/4th % lower. If you do the math, you can figure out when you'll break even by paying upfront for a cheaper monthly rate. Notice that if you refinance though, your initial investment is moot.

When doing numbers to to buy points, I always found it more economically sound to borrow more money to buy points to lower interest. For example, payments at borrowing 500k was always more expensive than borrowing MORE money like 505k and spending the 5k on a point. The point lowered interest and therefore monthly payments BELOW what we would have paid at 500k. So essentially we were able to borrow more at a lower rate by spending the money on points. Confused? Give me the numbers and I'll crunch em for you. I loved doing that. I'm a dork.


Misc:

If you qualify for the $8k rebate this year, you don't need to pay it back - but you don't get it immediately either. It's used as a credit for your taxes next year. Let's say you owe $600 for 2009 taxes, then you'll get a check for $7,400. Since you have to wait for that money, the goal is to decrease your tax withholding so that you OWE around $8k by the end of the year. This way, you'll get more on your paycheck and essentially get your 8k payout throughout the year versus mid 2010 in a single check. Don't forget to switch back!

How much can you afford? Monthly payments need to be made to your lender, but you also need to worry about property tax (10%ish, I think?) and insurrance (hundred or two/mo). That of course doesn't include power, electric, cable, phone, food, gas, etc. But the reminder is that expensive property tax.


Resources:

I've been learning from a variety of places including lenders, real estate brokers, the interwebs and wikipedia... but the easiest ones to share are from:

Podcasts:
Patrick Schwerdtfeger -Beyond the Rate. 15 chapters that cover everything you should know, 2006.
Bill Quigley - Your Home-Your Money, Mortgage & Real Estate Radio. Current podcast/radio show
The Mortgage Insider. The first podcast I found, opened my eyes to predetory lending practices. A seemingly honest yet biased show that tries to sell you their book - but hey, maybe it's worth it.
Note, they all brainwash you to thinking that brokers are better, but as stated above they weren't for me. I got a good deal of info about how the systems work though.

Mortgage App
Loan-U-Later: FREE mortgage calculation app. Does so much that makes a math-y person like me DROOL. Calculate monthly payments, interest, borrowing amounts, or number of months - helps so much when deciding how much to borrow/buy points/pay off mortgage early, etc. It really pays off when you're able to crunch numbers on what you can afford per month and work backwards to how much you can borrow. Available for iPhone via the app store and Mac OS

Other websites:
Bankrate.com
About.com