In the dozen years that Dave Craig has been teaching home-buying
seminars, his message for how to best acquire that coveted mortgage
loan has never wavered: “Credit scores drive the train.”
“Strong credit will always help you get a loan,” says Craig, a mortgage
broker with Seattle’s First Horizon Home Loans. “If you have it, there
are definitely some options out there for you.”
Options include the conventional 30-year fixed-rate loan, where the
interest rate remains the same for the duration, and the more recent
40-year fixed-rate loan, which allows for lower monthly payments with
more interest tacked on at the end.
With the real estate market so competitive, lenders are offering more
options than ever to those with poor credit. And that’s where Craig and
mortgage broker Nancy Glover say it’s imperative to be cautious and
questioning in the pursuit of a home loan. Shop mortgage companies and
compare. Don’t be afraid to negotiate. Never borrow more than you need.
And make sure you understand the loan that you’re signing.
“We’ve seen a real change in the lending industry, as banks have really
stepped up to the plate to help families get into homes,” says Glover
of Bellevue-based Legacy Group.
But the surge in loan applications also has introduced lenders that
push risky loans, bringing on a steady stream of foreclosures
attributed to adjusted-rate mortgages that have left homebuyers
questioning what they really signed up for.
High-risk options include adjustable rate mortgages (ARMs), which
provide a fixed interest rate for five years, but can skyrocket in the
sixth year. Craig says his classes point out that interest rates for a
five-year ARM and a 30-year fixed are not that different.
Craig also tells people to steer clear of an option ARM loan, which
provides a monthly statement offering four payment options: 30-year
amortized, 15-year amortized, interest-only and minimum. “It sets them
up to fail,” he says.
A popular alternative in recent years is the zero-down, interest-only
loan. Depending on the terms of the agreement, borrowers pay only the
interest on the loan for periods of five, six or 10 years, allowing
affordability early, but ensuring a steep rise in payment amount when
the principal kicks in.
“You know what your payment will be when you’re done [with the
interest-only payments], and you can always make payments on the
principal as you go,” Glover says. “In this market, it allows you to
take advantage of a home’s appreciation.”
But there’s always the gamble: Will the house be worth more than the mortgage amount when the principal comes due?
“You have be take a good look at the reputation of the mortgage
broker,” says Seattle real estate agent Edward Krigsman. “It’s
important to find someone who’s smart in how they advise you. For
instance, is there a salary increase in your future? Buy something with
a plan for the long term.”
Craig, a 20-year veteran of the mortgage trade, says he cares about more than putting his clients in a house.
“I can approve your loan to more than you’ll be comfortable with,” he
says, “but you won’t be able to afford Top Ramen. Just because I get
you approved, doesn’t mean I’ll be making the payments for you.”