Real Estate Buying & Investing
Applying for a mortgage—a loan you can use for the purchase of a home — can seem daunting, knowing that it’ll likely take you years to pay back. But it also gives you the freedom to buy something you couldn’t do out of pocket. Depending on your finances, there could be a variety of loans available to you.
To get a mortgage, you must have a down payment. The more you put down, the lower your monthly mortgage payment will be. Your chosen loan program might stipulate the minimum down payment, but you can always pay more. The higher the down payment, the bigger your equity position, and you’ll avoid paying for mortgage insurance if you can come up with 20 percent of the purchase price. There are different kinds of mortgages, including guaranteed loans and conventional loans which are made by private lenders, including banks, online lenders, and credit unions. There are also conforming loans that fall below financing limits set by the Federal Housing Finance Agency and non-conforming loans—known as jumbo loans—for higher amounts. Whatever the mortgage, the amount will be determined by the appraised value of the home you wish to purchase.
The Basics of Borrowing
If you make payments on time, your mortgage balance is reduced and the borrower gains equity in the home, meaning you own an increasing portion of it. The lender also gains additional security for the loan as equity grows. When home values fall, a lender’s security is often diminished. If the security value falls below that of the mortgage balance, you might need to sell as a short sale—one that pays the lender less than is due after all costs of the sale are factored in—in order to eliminate the debt.
It is also important to know that many lenders sell their conventional loans in the secondary market, which consists of other lenders, companies that package mortgages into securities, and investors. In the event a mortgage or the right to service it is sold to another lender, you will have to start making mortgage payments to the new lender. The original lender can sell a mortgage without your permission.
Line Up Your Finances
Before you decide to search out a mortgage, it is good to line up your finances. Ordering a free credit report will give you time to clean up any errors or mistakes you find. Reducing your current monthly debt obligations will leave you with more borrowing opportunity. You’ll want to be on solid financial ground with proof that you can pay your mortgage in the future. Each lender will ask for specific details when it comes to this, but the bottom line is that your finances look healthy and you don’t pose a risk. Talking to your buyer’s agent about what will be expected of you and making everything tidy is your best bet. Doing this before you meet with a lender will put you in the driver’s seat when it comes to signing the best mortgage possible for you.
Establishing Credit with a Credit Card
You generally need established credit to get a mortgage to buy a home. This means you should have at least one credit card in your name. While it isn’t impossible to obtain a mortgage without established credit, it is difficult. You will probably pay a higher interest rate because no credit means no credit score, a measure banks use to estimate how likely you are to default on your mortgage. So, if you don’t already have one, obtain a credit card. You can pay the balance in full every month and avoid finance charges while you build credit.
Committing to Financing vs. Renting
The simple act of financing a real estate purchase does not make buying a home with a mortgage riskier. Home buyers run into trouble when they overextend themselves. For example, if it takes two income earners to pay a mortgage and one person loses a job, your home could be at risk. However, you could say the same thing about renting a home. You might need two incomes to cover your rent and may get kicked out by the property owner if you fall behind on your rent payments.
A mortgage frees up capital and gives you financial leverage—the ability to use borrowed money to purchase something you didn’t have enough cash to buy. If your mortgage payment is close to the amount you would pay in rent, then you are probably coming out ahead. That’s because mortgage interest is deductible from your federal income taxes on loans up to a certain amount. Plus, paying down a mortgage builds equity for you; renters never own a part of their property, no matter how much money they pay.
Mortgage vs. Deed of Trust
The term deed of trust or trust deed is often used interchangeably with the term mortgage, but they are different. A financing instrument used by a major banking institution for real estate is generally a mortgage or a promissory note secured by a deed of trust. Whereas a mortgage contains a mortgagor and a mortgagee, a trust deed contains three parties: a trustor, a trustee, and a beneficiary. The trustor is the borrower/home buyer. The beneficiary is the lender, the entity providing the money. The trustee is a third party, either a person or company mutually agreed upon by the trustor and the trustee, with power of sale.
Many states that use a mortgage as a financing instrument follow laws that make foreclosures a much longer process than states that use a trust deed. Foreclosing upon a mortgage can often take a year or longer. A trust deed foreclosure that utilizes a trustee’s power of sale can be finalized in fewer than four months after a notice of default recorded.
No one wants to think about foreclosure while they are deciding if they want to take out a mortgage but knowing the process will help you plan for this worst-case scenario. If you have a plan b, likely you’ll never get to the end of your rope. The foreclosure process derives its legal basis from a mortgage or deed of trust contract, which gives the lender the right to use a property as collateral in case the borrower fails to uphold the terms of the mortgage document. Although the process varies by state, the foreclosure process generally begins when a borrower defaults or misses at least one mortgage payment. The lender then sends a missed payment notice that indicates they haven’t received that month’s payment.
If the borrower misses two payments, the lender sends a demand letter. While this is more serious than a missed payment notice, the lender may still be willing to make arrangements for the borrower to catch up on the missed payments. The lender sends a notice of default after 90 days of missed payments. The loan is handed over to the lender’s foreclosure department, and the borrower typically has another 90 days to settle the payments and reinstate the loan known as a reinstatement period. At the end of the reinstatement period, the lender will begin to foreclose if the homeowner has not made up the missed payments.