Should I Wait to Purchase A Home Until I Can Make a 20% Down Payment?

Question #98 from HOW TO GET A MORTGAGE DURING & AFTER THE SUBPRIME CRISIS

Not necessarily. It depends on your financial situation and/or how you feel about investing in real estate. There are many mortgage programs which allow you to put down less than 20%.

The Real Deal: Nowadays there are many purchasers who make less than a 20% down payment. For instance, in the Garden State of New Jersey, prices are exorbitant in certain areas. In some places $500,000 doesn’t buy that much home. Even if a home is half that price ($250,000) a 20% down payment would be $50,000. Many home purchasers don’t have that much loose change lying around to close the deal. On the other hand, if you can get approved for an FHA mortgage with a 3.5% down payment, you’d only need $8,750. One reason the FHA was developed in 1934 was to spur homeownership and make it easier for Americans to qualify for a home purchase by insuring mortgages. Why not take advantage of it? Even during those times many people couldn’t afford to put down 20% when homes cost far less than they do today.

On the flipside, the more money you put down, the more mortgage products are available to you. You may be able to lower your interest rate and your debt-to-income ratio with a larger down payment. Also, many homeowners feel more secure the greater the equity is in their homes. They feel as though they have funds in reserve and they’re always are able to do a cash-out refinance or get a HELOC if they must have cash.

The question is do you want to put that much of an investment into real estate, do you want to use your cash for another purpose, or do you have the cash period? If one purchaser puts down 20% he could be house rich and cash poor, while putting down 5% could make his economic situation more palatable. Another purchaser could be rolling in dough and putting down 20% is a piece of cake. Another purchaser may feel as though he can never save 20% for a down payment, so why not go for it with what he has? It entirely depends on your situation.

The Bottom Line: Whether you should make a 20% down payment depends on your financial circumstances, how you feel about investing in real estate and/or whether you have the ability to do so.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.

Credit Card Mistakes

This past Wednesday evening I had the pleasure of doing a homebuyer's seminar at the chic offices of Coldwell Banker Park Avenue Realty, 1015 Park Avenue in Plainfield, NJ. Call me superficial, but I always love going there because the office is so pristine and classy...BTW, pristine and classy is always good for business. Anyway, if you're looking for a home in the area drop in and see Sandy Jackson-Gill (908-251-6450) to make your homeownership dreams come true.

Inevitably, at all seminars I do, the issue of credit is always a big pain in the gluteus maximus for many in the audience. Therefore check out 10 Worst Credit Card Mistakes to save yourself a few headaches in the future. If your credit has just had a myocardial infarction, following are a few quick tips to resuscitate it and/or keep it on life support if you're looking for a home in the near future...

• Don't close credit cards, just pay them to a zero balance or keep the balance low. Closing the card could drop your credit score.
• Don't pay off collections until you speak with your loan officer. Paying off old collections (greater than 6 months old) would be activating an old account and could drop your credit score.
• Don't apply for any credit or open any credit cards if your looking to purchase a home in the next few months. If a new credit account hits your credit report it can temporarily drop your score. If you appy and you're denied for credit...ouch! That's ugly.
• Don't go over your credit limit. You'll get charged with extra fees and a drop in your credit score.
• Don't, don't, don't make any late payments. If you do I'll kick and pout...this one should be obvious, I hope.

Finally, this Saturday, May 9, 2009 at 12:00, I will be presenting a homebuyer's seminar at 178 South 9th Street, Newark, NJ at 12:00 noon. The event is sponsored by the Mid-Atlantic Investment Alliance. The goal of the group is to revitalize the area and turn it into the next Black Wall Street. For more information on the event please call 973-277-6342.

What is a Mortgage Pre-Qualification?

Question #3 from How to Get a Mortgage During & After the Subprime Crisis

A mortgage pre-qualification is a document from a lender outlining how much of a mortgage a home purchaser can qualify for. A loan officer asks questions which would be essential in underwriting the mortgage, analyzes the information, and drafts a pre-qualification letter.

The Real Deal: Many realtors refuse to show a prospective buyer a home until he or she is pre-qualified. Why? Because time is money--and most people don't have a lot of either one!

Paula Prospect calls Rebecca Realtor to see a $375,000 condo. Rebecca agrees and they drive 15 miles to Condo Paradise Estates. Paula is excited by what she sees and immediately wants to make an offer. Rebecca says we can't make an offer until we have a pre-qualification letter. Paula calls Ben Banker to get pre-qualified. Ben says, "Sorry, Paula, but I can only pre-qualify you for a $325,000 purchase. Don't be foolish and try to go beyond that amount!" At that point, Paula and Rebecca realize they've wasted a lot of energy and the one thing they can never get back--time.

The real deal is that it's ridiculous to shop for a home you can't afford. I've known plenty of realtors who have chaperoned prospective purchasers all around town, without a pre-qualification, only to find, to their chagrin, that the prospects have stinky credit, shaky income, or no money at all for a down payment.

Also, sellers determine which offer they will accept, based on the financial strength of the purchaser. If two equal offers come in, but one has a stronger pre-qualification, the intelligent seller will accept the offer with the stronger pre-qualification. Stronger in this sense may mean better credit, a larger down payment or a superior mortgage product (prime as opposed to subprime). No one wants to waste time, money and energy working on a deal that is either a pain in the neck to process or simply can't be closed.

On the other hand, mortgage pre-qualifications can be completely bogus. The loan officer relies on the representations of the prospective purchaser regarding income and assets. The credit report stands on its own two legs once it is run, although there may be mistakes on it! But oftentimes a prospective buyer says he makes $60,000 per year when it's really closer to $55,000. (By the way, do you know your exact income?) Or he says he has 10% for a down payment when it's closer to 8%. Those two misrepresentations, among others, could make or break a deal.

One of the big problems with the mortgage pre-qualification process is that many loan officers get a wee bit overzealous, telling Paula Prospect she can afford a little more home than she really can. Loan officers might do this because the truth hurts and telling Paula what she wants to hear keeps her happy. However, many deals have been killed because Ursula Underwriter does not quite agree with Ben Banker's assessment of Paula's purchasing power. Ursula smacks the deal down and, of course, even more time, energy and money is wasted.

The Bottom Line: The mortgage pre-qualification is essential to determine how much home you can afford. That being said, if a lender says you're pre-qualified for a mortgage of "X" amount, that doesn't guarantee that you will close the deal. You still must go through the underwriting process.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.