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The Homebuyer's Mortgage Dictionary

by Bill Nelson - Broker

Knowing that you are ready to buy a home can be an exhilarating feeling, except it is often followed by panic. While experience is the best teacher, there are some things you can do to regain control of the home buying experience. One of them is getting accustomed to the terminology, especially when it comes to the various types of available mortgages.

LearnVest offers a list of mortgage terms any first-time homebuyer should add to their dictionary:

  1. ARM: This acronym stands for adjustable rate mortgage, which in vernacular means a home loan with fluctuation interest rates. ARMs are very much a game of chance, starting off with a period of 3 – 10 years of low fixed rates, followed by an adjustable roller coaster-rate period. In short, your interest rate will reflect whatever’s happening in the market. This might be highly anxiety-inducing if you are not planning to sell by the time the rates adjust higher, but there is a chance that you will end up paying less if market trends are in your favor.
  2. Fixed-Rate Mortgage: This is the total opposite of the ARM. Instead of offering a fluctuating rate, you sign on for the same rate throughout the course of your mortgage loan. There are no surprises here, but the downside is that you must pay the same fee even if the market rates drop. There is some wiggle room thanks to refinancing, but fees and potential hassles come with it.
  3. Assumable Mortgage: This is a wild card that only becomes possible once in a blue moon. For this kind of mortgage, you take on the seller’s mortgage loan instead of taking out a new one for yourself. This helps when the market rate is higher than what the seller had it fixed at, plus it cuts some fees in the process. Yet, be aware that the seller’s lender must give you the green light as well. The other curve ball is that the home-selling price might surpass that of the mortgage balance.
  4. Balloon-Payment Mortgage: This mortgage option is like playing a game of Super Smash Brothers in which you are given 5 – 7 years of low monthly payments followed by a sudden death knockout match where you must make a giant final payment. Homebuyers tend to pick this type of loan because they expect to sell their home before the final payment while enjoying low interest rates during their ownership years. Another solution is applying for a new loan, but of course, who’s to say you’ll get it? And that’s where the sudden death part comes in: the balloon may just explode.

With this knowledge, you can now start planning your next move. What type of mortgage loan better suits your situation?

Expert Insights: When Is the Best Time to Sell a Home?

by Bill Nelson

Paso Robles CA- The best time to sell here in San Luis Obispo County is when you are ready, or when you must. That is, when you have outgrown the space in your current home, or you prefer to trade down to something smaller. Perhaps your marital status has changed, which necessitates a move, or you need to relocate for a job.

Market conditions also play a role, as do seasonal conditions. For example, your chances of getting top dollar for your home are more likely in a seller’s market, when demand outweighs supply, than in a buyer’s market.

Local and national economic factors also may dictate when to sell. If a major employer in your area is laying off workers, it may not be a good time to put your home up for sale.

People will be cautious about buying when the future seems unpredictable or bleak.

Most agents agree the best time to sell is in the spring. This is when the largest number of potential buyers hit the market. Your home is likely to sell faster and at a higher price, although sales begin to pick up as early as February and start to slack off in July, the slowest month for real estate transactions.

 

 

Understanding Private Mortgage Insurance

by Bill Nelson - Broker

Hopeful Central Coast Buyers applying for a home loan; who aren’t able to put 20 percent down upfront may be hearing their lender talk about Private Mortgage Insurance, or PMI. A PMI comes into play when a buyer, unable to come up with a 20 percent down payment, is seen as a risky investment. Instead of simply blocking the borrower from taking out a loan, the lender will require Private Mortgage Insurance to protect the investors.

Typically, the PMI payment is paid monthly along with the overall mortgage payment. While this may seem bleak, for some it is the only way to secure a loan without that pesky 20 percent down payment.

However, just because you have a PMI doesn’t mean you will need to carry it the length of your loan. To get rid of the PMI on the loan, the borrower can contact their lender and ask that it be removed after they pay down enough of principal to cover the 20 percent.

Really trying to avoid that PMI? You could also take out a smaller loan to cover the amount of the 20 percent down, although this usually comes at a higher interest rate.

Understanding the Debt-to-Income Ratio

When applying for a mortgage, your lender will be looking closely at your debt-to-income ratio, also known as a DTI. But what is your DTI? It’s a calculation, and to get it, your lender will be dividing your monthly debt by your monthly income. Let’s look closer.

To start, first add up what you spend each month on the following: mortgage or rent, minimum credit card payments, car loan, student loans, alimony/child support payments, and other loans you may owe. The total amount is what you spend each month on debt.

Next, calculate your monthly income by adding up your yearly: gross income, bonus or overtime, alimony/child support, and any other income. Once you have this amount then divide your yearly income by 12 to determine your monthly income. Now all that’s left is to divide your monthly debt by your monthly income. While the base line changes, the typical ratio of what’s considered to be the healthiest debt load for the majority of people is 43 percent or less.

It’s also important to note that there are two types of DTI ratios: front end and back end. The front end DTI includes your housing-related debts. The back end DTI includes housing-related debts as well as other recurring debt payments (things like student loans, credit cards, child support, etc.).

 

If you would like to be connected to one of our team of lenders simply call us at (805) 462-3700.

Buying a Home When Your Spouse Has Poor Credit

by Bill Nelson

Buying a Central Coast home on two incomes can be difficult enough, and it can be even more demanding if one spouse has poor credit.

A poor credit score can make it difficult to qualify for a mortgage and can lead to a higher interest rate on a home loan. A spouse with poor credit could be left off the loan application entirely, requiring the other person to have a high credit score and a high enough income to afford the loan on their own.

If a spouse with poor credit does qualify for a loan, the lender could require a bigger down payment on the house.

FHA loans, for example, which are backed by the federal government, require a 10 percent down payment with a FICO credit score lower than 580, while a credit score above 580 only requires a 3.5 percent down payment.

A credit score is just part of the financial background a lender looks into. Income and a debt-to-income ratio are also considered, though a high income by itself won’t overcome a poor credit score.

Credit scores range from 500 to 850. A low score of 650 can be a predictor of making late loan payments, while a 550 score means you’re not likely to pay at all.

A couple’s credit scores aren’t averaged together in a home loan application. Lenders will use the lower of the two credit scores. If a husband has a 620 score and the wife has 700, then the lower score will be used in the mortgage application and an interest rate of three-eighths to half a point higher will be charged.

Options for those with poor credit

There are ways to get around one spouse having a low credit score. In the above example, the wife with the 700 credit score can get a home loan if she qualifies on her own.

Both spouses should be listed on the home’s title or deed, but only she would be listed as the borrower. The husband’s name could be added to the deed later when his credit score improves.

Buying a home on one income, however, can be difficult. The best solution is to improve the lower credit score, something that should be done months before applying for a loan.

Just a 10-point credit score improvement by paying down credit cards could be enough to get a better interest rate and can be done quickly.

Even minor credit improvements can take 30 days or more to fix, such as closing all but one credit card. Most fixes can take three to four months to show up on a credit report, so repairs should be made before applying for a loan.

For more information and connection with a Central Coast Lender Call Bill Nelson at (805) 610-8552.

The Best Way To Pick A REALTOR(R).

by Bill Nelson- Past President NCAOR®

Begin by asking someone that you know here on the Central Coast. Friends, relatives, co-workers, or neighbors who have recently purchased a home locally can give you a firsthand account and attest to their agent’s professional abilities. Pick agents who live here and work exclusively with buyers and sellers in SLO County. Once you have a list of names, interview at least three agents and ask questions about their community knowledge, professional experience, and commitment—some agents work full time; others only work at nights and on the weekends. Pick an agent that makes you feel comfortable and negotiates well with others. Remember that their negotiation skills are just as important as their marketing skills. Linda Sue and I receive several referrals from past clients per year. If a Realtor (r) does a good job for others and has numerous testimonials from past clients like we have posted on our website; then they are a great candidate for the job of listing your home. The company you list with is important too. In San Luis Obispo County there are several independent brokerages like Realty One Inc. that when combined with other independent brokerages; they outsell and maintain a higher market share than the big nationwide corporations. Quality customer service is agent specific and although many large firms have excellent Realtors(s) keeping it local may have even bigger advantages. Many local Realtors(r) like Realty One and others; support local community based non-profits, and charities that help enrich the lives on our neighbors here in San Luis Obispo County. 

Displaying blog entries 1-5 of 5