How To Not Get Taken Advantage Of When Buying a Home

Understanding everything about buying a home can be a lot of knowledge to gather. Don’t you wish you could just trust everyone you work with to find the perfect home for you, give you the best mortgage and prepare all the paperwork at a fair price?

I’d say every mortgage lenders commercial says that, but really trusting them comes down to working with them and figuring it out on your own. Even though you don’t want to go to real estate school before buying a home, the more knowledge you have about mortgages and loans will allow you to approve or disapprove someone much quicker.

Think about the standard “line of bull” in your type of work. I’m sure you could pick up on anyone in your line of business when they try to pull the wool over you eyes. Why? Because you have more knowledge on the subject and understand when something is or isn’t a lie. Real estate agents, mortgage lenders and the soon to be contractors for your new home all have these lines of bull. The more research you do before hand, the less likely you are to be taken advantage of by someone.

Even someone who doesn’t know anything about real estate would be able to weed out a few agents by consulting with 5 to start. Getting to know the second agent might make you say “hey that first agent tried to mess with me!”. Getting to know 5 different agents will give you a good idea of who you want to work with.

Understanding the different loan types can be much more difficult if you’re just starting to learn about mortgages. There are different interest rates, payment types, PMI and much more to consider. If this is the case, please get a fixed rate mortgage over 30 years. Check around for the best interest rate based on that loan type and don’t let anyone talk you into anything else!

Interest rates are at an all time low right now, so you should get your rate fixed for all 30 years. Adjusting your rate every year with the current interest rates will be very stressful and there’s no way to know what you’ll be doing in 15 years from now. So the best idea is to keep it fixed to have the same monthly mortgage payment every month for the life of the loan.

If you happen to be a house flipper then find a loan with the lowest possible monthly payment. You’ll own it for less than a year and even though you get an ARM rate, or adjustable rate mortgage, your monthly payment still stays fixed for at least a year.

So when you go see your first real estate agent I want you to have a list of 10 questions that you can ask them. They can be anything at all. I want you to get them talking and hear the knowledge, or crap, that comes out of their mouth. Then when you go see your second agent you’ll probably have 5 different questions and a little more confidence about what you’re looking for.

Knowledge Is Power – Knowledge Will Save You Thousands
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Buying a Home With Only $5,000 and a Mortgage Calculator

If you’re looking at buying a home and you only have $5,000 it’s possible for you to still be able to accomplish it. Buying a home mostly comes down to the amount of borrowing power you have rather than the amount of a down payment.

Most mortgage lenders will let you buy a home in 2011 with a mere 3-5% down payment if you plan on living in the home. So the first thing to do is figure out your borrowing power and go from there.

1. Write down your gross income
2. Divide by 12
3. Multiply by .40 (40%) to see total monthly borrowing power
4. Write down all of your loans (credit card minimum payments, student loans, car loans and personal loans)
5. Don’t include household bills or taxes from your income. The bank figures that in already. Only loans.
6. Subtract the loans from 40% of your gross income and come up with the amount you can still borrow per month.

Example:

1. Gross income per year – $50,000
2. 50000 / 12 = $4,166 per month
3. 4166 * .40 = $1,666
4. Car – $200 – student loan $150 – credit card min – $50
       Total bills – $400
5. 1666 – 400 = $1,266

Total Monthly borrowing power is $1,266

Now, how much can you afford with that amount of money? Well that depends on a few things. Do you already have a down payment? Are you paying the closing costs or rolling them into the mortgage? If you’re buying a condo is there a condo fee per month?

If you only have $5,000 and you want to buy a home with $1,266 per month borrowing power you’ll have to work it out to see how much you can afford. First, you’ll need a personal loan for a down payment which will subtract from your monthly amount first. Let’s guess an amount of $150,000 or so that you can afford with that amount of money. That means you’ll need about 5% of that for a down payment and probably another $2,500 for closing costs.

Personal Loan – 5 years at 13% interest = $227
Mortgage Payment – 30 years 5% $150,000 – $800
Monthly Taxes – $200

Total – $1,227
Total Monthly Borrowing Power – $1,266

Pending a credit approval this loan would get approved with most mortgage lenders. 

Learning about the monthly amount you can afford and playing with that number rather than just knowing you can afford “X” is much easier because you can finagle it a bit. Getting a personal loan to use as your down payment will work as long as the bank says you can afford all of the monthly payments based on your income.

It actually looks like you didn’t even need the $5,000 you had in your bank with the formula we just did. You could get a personal loan for only $5,000 and use the $5,000 you already had in the bank to pay even less per month. Using a mortgage calculator will be a big help in this situation.

Make sure when using the calculators that you increase the personal loan interest rate to about 12-13% and only push it out over 5 years. Usually a bank won’t give any better terms than that because there’s nothing attached to the loan as a means of getting their money back.

Also be careful about using this formula and getting into financial trouble. This is the MAXIMUM you can afford which means it could limit you to buying a house and sitting in it as your only form of entertainment. You may not have money for anything else if you want to borrow the absolute maximum you can.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Mortgage Lenders Want You To Get ARM Rates

An ARM rate is an adjustable rate mortgage which means the interest rate changes once per year after the fixed period. Mortgage lenders are pushing ARM rates because they know interest rates are going to go up over the next 30 years of your mortgage.

Adjustable rates are seen as “3 year arm” and “5 year arm” which stands for the amount of years the initial rate will be fixed for. After the fixed portion it changes once per year up or down with the current rates. So if your interest rate goes up in 3 years your mortgage payment each month with be higher and not one dime of it will be going toward principal.

If a mortgage lender talks you into an ARM rate they’ll make a lot more money on that mortgage than if they got you into a fixed rate mortgage. They make it look attractive because the interest rate is lower to start with. That gives you a smaller payment per month or slightly more home to afford but it’s not a good idea.

Current inerest rates are lower than they’ve ever been at this point in 2011 with almost no chance of moving any lower. If you get an 3.50% rate that can adjust it can’t go down as much as it can go up before the banks and mortgage lenders aren’t making any money at all.

Have you used a mortgage calculator to see if you’ll be able to afford the increase in your monthly payment if interest rates rise? My calculator will show you the mortgage payment at 3.50% and then you can go up to 4% and 5% to see the reality of what your payment might look like in a few years.

You should be going into the bank knowing the type of loan you’re going to get because you can’t just listen to people selling things these days. If there’s a better interest in mind for the seller they might sell you something that benefits them more than you. You should learn and get advice from a 3rd party who has your best interest in mind only. Learning something from the person selling it to you makes it more difficult to believe.

Anyone, or any couple, looking to buy a home in 2011 to live in should be getting a fixed rate mortgage. Between 5-10 years ago families were getting 15-17% interest rates which means if the economy picks up again they could reach that level at some point. That’s when you’ll be thankful you have the fixed rate.

I only agree with an ARM rate in 2011 when someone is flipping a home or planning on moving before the the rate starts to adjust. A person flipping a home will buy it for about 4-6 months in order to remodel and sell. A fixed rate mortgage will only cost that person more interest which makes an ARM rate a good idea. Anyone selling their home before the “3 year arm” or “5 year arm” starts adjusting will have saved money as well.

Most families looking to buy a home to live in should most definitely be getting a fixed rate mortgage. If your excuse for getting an adjustable rate is that the lower interest rate is the only way you can afford it then I highly recommend getting a cheaper home instead. That sounds like possible financial trouble to me because you can only live check to check for so long before something happens.

Knowledge Will Save You Thousands
The Free Mortgage Caclulator

Why Are So Many People Getting Foreclosed On By Mortgage Companies?

There are a lot of people out there in the USA getting foreclosed on by the mortgage companies because they can’t make their monthly mortgage payments. Many things can happen that would cause the bank to foreclose upon a home but it mostly comes down to the mortgage payment.

Once you miss a few monthly payments to your mortgage lender they will start the process of foreclosure. It doesn’t take a year or two because by then the mortgage lender has already lost a lot of money, and losing even more by not making interest on your money elsewhere.

In most situations, for the average home owners, a person or couple will go to the bank clueless about mortgage loans and ask “How much can I afford“. At that point they’re leaving their finances up to the bank and accept whatever they get. The banks figure out the most you can afford and the average home owner will go out and start looking for a home at the peak of what they can afford.

A few things can happen from there. First the bank figures out, based on your income and monthly bills, that you can afford “X” which we’ll say is $1,300 per month. Then they use a mortgage calculator to see how much a mortgage payment will be over 30 years at the current interest rate until they get a number around $900-1000. Finally, the bank gets an average amount of taxes in the surrounding towns on that worth of home and add it to the $900-1000 getting a number very close to $1,300.

Then they simply tell the future home owner that they can afford that amount of home. I’m not sure I understand why everyone wants to get a mortgage payment that meets their absolute maximum monthly spending, but it seems people want even more than that.

If a car dealer said you could afford up to $65,000 for a car loan would you start looking at exactly $65,000 cars? Or would you think reasonably about it and get a $30,000 loan so you can have a little monthly spending money? Usually people are reasonable about a car loan but for some reason complete morons about a mortgage loan. Not the best idea when you’re buying 5-10 times as much as you spend on your car…

Anyways, all frustration aside, any minor thing that happens to you or your spouse could possibly put your monthly bills higher than your income. If one of you loses your job forget it, consider the home as good as gone. Assume your car all the sudden has an extra problem once a month that costs you $200 each time. I could go on for days about additional bills, loss of hours, loss of commission or even pregnancy that would cause a foreclosure.

What You SHOULD Do If You’re Looking To Buy a Home 

Act as if you’re buying a car. Know and understand ALL of the monthly bills you’ll have, then back off about $500 so that you can either save money in the bank for possible problems or spend some extra money each month on things you like to do. Having a bigger home isn’t the best thing in the world, trust me. Buy a smaller home and use the extra monthly money to spice the place up a bit. Get new rugs, new paint and nice things to hang up.

That’s where you’ll get the compliments from your friends and family. They’ll say, “Wow this place is SO nice!” instead of “It’s really big, but the inside needs som work“. Do you judge people when you walk into your friends and families homes? Do you really care if their home is that big or beautiful? Wouldn’t you rather afford it will ease, maybe add extra principal payments sometimes, go to the amusement park when you want and not freak out if your wife gets pregnant?

I actually bought well within my range and 3 years later I was able to afford another mortgage loan because it was only $35,000 for a 2 bedroom condo. My mortgage payment, taxes and condo fee added up to $550 and I just rented it using a property management company for $750. I can only imagine what I’ll make when I sell it in 5-10 years. I’m already making $200 per month anyways so I’m happy as can be about this investment.

Think before you act people. I’m sure your parents said that to you when you were little and it’s a cliche saying, but read it again and think about it. You’ll be much happier without living check to check trying to make every monthly payment you have with your last dollar.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Renting Costs More Per Month Than Buying A Home in 2011

I’ve been wondering why rental prices haven’t been coming down as fast as the price of real estate, so I researched it and started to understand very quickly. Real estate pricing has come down because there are a lot of people selling their home and very little amount of people buying homes.

That’s simple supply and demand. If you have a product that everyone else has it will be very hard to sell because everyone’s trying to get rid of their extra stock already. People are trying to sell their home in 4-5 months and it doesn’t happen, so they lower the price and it still doesn’t sell. Then prices continue to drop until it’s a great deal and a real estate invester picks it up.

The rental market is doing the opposite right now. Once all of these people finally sell their homes for a cheap price they need to rent an apartment in order to live. Well rentals are actually going up because investers are able to rent out each of their homes very quickly.

I’m assuming people are doubling up and sharing the rent of an appartment or else I don’t understand how they couldn’t afford their home but can afford more expensive rent.

You’re better off waiting and looking around for the next 4-5 months for a great deal on a home even if it’s a foreclosure or short sale. You can use a mortgage calculator to figure out the monthly mortgage payment, add in the monthly taxes and condo fee to get your total costs for the home. Then list it for for rent at $200-300 higher than that to make money. It’s actually a pretty simple formula now that this has happened.

Buying a home right now can be very hard especially if you’re not living in it because the banks need at least 20-25% for a down payment on an investment property. If you plan on living there you’ll only need about 5% at the most depending on your credit score.

It’s not as hard as you think to get a mortgage loan on a $35,000 mortgage for a 2 bedroom condo that rents out for $300 more than your monthly expenses. You can be buying a condo and taking the $300 extra monthly money and adding it to your first mortgage payment as principal. Then your renter is paying for one home and saving you thousands in interest on your primary home. Sounds like a good deal to me!

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Buying a Home and Renting a Room to Your Friend

A lot of people think about buying a home and then pass it off for a few years until they have enough for a down payment or enough saved up to afford the monthly payment. Well, buying a home and renting one of the bedrooms to a friend is a great option for both parties.

The first thing you need to do is talk to the bank about what you can afford without the help of your friend’s rent money. Banks and mortgage lenders only count rental money as income when you’ve had it recorded for over a year. Even then they only accept about 75% of it as income towards your debt to income ratio.

So if the bank says you can afford about $150,000 for a home then you can start looking for 2 bedroom condos or homes that you and your friend like. Obviously you have the stronger opinion of the home because it will be yours for the long run. A mortgage calculator will help you see how much you can save by finding a better interest rate or lower taxes.

Your friend should NOT be paying any of the down payment or the fees associated with closing on the home. This is your home and your investment and the rental income is the benefit you’ll get when owning the home. All you have to do is sign the papers as you would if you were buying the home for yourself only.

Once you buy the home you like you should absolutely sign a lease with your friend for a couple reasons. First of all, using cash each month to avoid paying taxes on it will only hurt the owner so the tenant should have no problem with it. Either way you’re charging them the same amount.

What do you charge your friend for rent?

This is always difficult and here’s the best way to figure it out. Look online at 2 bedrooms apartments that are for rent and figure out one that you two would’ve rented if you weren’t buying the home. So if you find one for $1,000 then your friend was obviously able to pay $500 plus half of the  utilities. As long as you buy a home of equal value then you can charge them something in that area.

Then you want to sign a lease. It can be something as simple as a typed up paragraph saying the terms of your lease. This is NOT just so that you can take them to court with it later, although it would help to have that signed paper if you two end up on Judge Judy. It’s so that your income increases by $500 per month which will help you get another loan later on whether it’s for a car or a 2nd home that you want to rent to someone else.

If you got approved for a $150,000 home then use a mortgage calculator to figure out that the bank says you can afford about $1,000 per month. Well, 6 months later you have documents showing an income of an additional $500 per month. Banks will accept 75% of that which means you have $375 per month available borrowing power based on just that rent.

At the end of the year the rent will count as income that you didn’t pay taxes on so when you file your taxes you may owe money on it. However, don’t forget about the tax write of for owning a home. You’ll get about 20% of all the interest and taxes paid on the home. Usually the rent is about the same as the amount of interest and taxes so it’s a wash at tax time.

Savings on your mortgage loan

So you got a $150,000 mortgage and now you’re getting $500 per month from your friend as rental income. If you use the mortgage calculator at the bottom of this page you’ll see that the extra $500 per month would save you $86,000 on your mortgage if you added it to the principal each month.

Adding money to the principal each month DOES NOT alter your borrowing power. If you were approved to spend $1,200 per month and your mortgage was for $1,000 then you’ll still have $200 extra for a personal loan or auto loan even if you’re adding $500 to the principal each month.

Buying a home and renting a room or two to a friend is a great idea to either make extra money per month or to help with the mortgage payment and save on interest. The interest calculators on this site will help you figure out everything you need to know about your mortgage payment.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Why Do You Get a Higher Tax Refund When You Buy A Home?

Buying a home creates a few things in the eyes of the IRS such as a mortgage payment with principal and interest, tax payments and depreciation of assests. Each will help you get more in your tax refund and the reasons are simple.

When you make your monthly mortgage payment some of it will go towards interest and some towards principal as most people understand. If you look at each monthly payment in an amortization schedule you’ll see the exact amount of interest paid in each payment and over the course of that year.

Add up all of the interest payments and write it down.

Then you’ll also be paying into an escrow account for your yearly taxes. Add up the amount you paid in your taxes and write that number down too.

Now look at your gross income per year and figure out the percentage of taxes that are withheld form you check. This can be a rough number, as can the yearly amount of taxes and interest paid on your home.

If you get about 20% taken out of your pay stub that’s how much you’ll get back from the amount of interest and taxes you paid that year. So your tax refund includes that extra money which obviously increases your refund. It’s not just because you bought a home you get a check in the mail. This happens each year you’re paying taxes and interest on your home.

Total Interest = $8,000
Total Taxes = $2,000

$10,000 x .20 (20%) = $2,000 Additional Tax Refund

You can do that with student loan interest as well. Use the same formula by adding the amount of interest paid on your student loans and you’ll get back 20% of that as well.

Going somewhere like H & R Block to get your taxes done is a very good idea because you’ll make back your money with the additional refunds they know about that most people like you and I don’t.

Most mortgage calculators will have the option of an amortization schedule so you can use that to see how much interest you paid that year on your mortgage. It’s a good idea to watch the amortization schedule as you make payments anyways to see how much you owe on your home at all times.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Paying Your Mortgage In 15 Years Instead of 30 Years

Most people start looking for a home by using a mortgage calculator to see what the monthly payment is on a 30 year mortgage. Then they increase it slowly to see the absolute maximum they can afford. Then they start looking to buy a home in that range.

As they’re searching their local MLS directory for a home they realize they want something for even more money and start looking for ways to “afford more home” online. They might find an interesting way to finagle their debt to income ratio or borrowing power to get approved for something they can’t actually afford and end up in a tough position.

Then once they’re spending every last dime they have per month on their new monthly mortgage payment they start searching for ways to pay their mortgage off in 15 years instead of 30 years. Would it be improper to say “lol” here?

The point is to start looking at “what you can afford” with a 15 year mortgage using the mortgage calculator. Then when you find something slightly over your bugdet you can switch to a 20 year mortgage to make sure you can at least still afford your home. I actually don’t even recommend a 30 year mortgage anymore even though it’s the most popular by a long shot.

The reason I say that is because more and more people are getting foreclosed on because someone in the household loses their job. Well if that household had started with a 15 year mortgage they’d be able to refinance to a 30 year mortgage and cut their mortgage payment in half. Also, they would’ve been paying MUCH more principal the entire length of the loan so it would be easier to sell at a profit and not be foreclosed on by the bank.

If you start with a 30 year mortgage and spend every extra monthly dollar you have on the payment you have no options from there and very little equity built into the home when it comes time to sell it.

Paying off your mortgage in 15 years

If you’ve had a 30 year mortgage for a few years and have extra income now then I’ll show you how to figure out the extra monthly amount of principal you need to pay it off sooner.

Use a mortgage calculator and type in your mortgage terms as they are now. Then there’s a place to add extra principal each month. Start by adding $100 to see how many years it shaves off. Then add $200 and continue until you reach 15 years or the maxinum amount of extra monthly income you have.

If your mortgage payment is currently $800 including the mortgage and taxes then all you have to do is send a check for $1,000 to pay and additional $200 in principal. Anything extra you send goes directly to principal no matter what.

If your mortgage is actually $800 per month, as I just mentioned, then you’d have to add about $375 per month in order to pay it off in 15 years. That’s why I mentioned in the beginning that you should start with a 15 year mortgage so that you have more options if/when something happens unexpectedly.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Getting Approved For a Mortgage With a Bad Credit Score

Getting approved for a mortgage with a bad credit score will be very difficult and I hope you’re not looking for a quick or magical answer here. No mortgage lender wants to approve you because you do pay back the loans that you get. If you did you’d have a good credit score.

“Well it was just this one time when I was in a bind”
“All I did was make late payments on my credit card”
“I didn’t pay my car loan but they took my car anyways so who cares”

All great excuses. No one is lowering your credit score because they don’t like you. Banks and mortgage lenders want your score to be high because, believe it or not, they WANT to loan you money. That’s how they make money and banks compete with each other to write the most mortgages. I’m sure you’ve also seen commercials of lenders WANTING to give you their money which means if your credit score is too low it is for a reason. You’re not going to get approved until you fix it.

You’ll need to start looking up “ways to improve your credit score” rather than “how to get approved with a bad credit score” because it’s not going to happen. Work on things like getting and paying a credit card or personal loan. That will build the banks trust that you’ll pay back a loan and raise your credit score each time you make the monthly payment.

Getting approved for a mortgage is a VERY big deal even for someone with perfect credit because you’re dealing with a lot of money. A lot of the banks money, not yours. If you loaned your friend $50 you’d be thinking about it every day until they paid you back. Well the bank isn’t your friend and they’re loaning you $150,000 or more so work with them and give them what they need to help you get approved for the loan and buy a home.

They’ll check your debt to income ratio in order to compare your current loans to the amount of income you make. That will help them see how much left over you have to afford the new monthly mortgage payment and taxes you’re asking for. Then they’ll check your savings accounts, pay stubs, credit cards and anything else they want. If you deny them anything they’ll just assume you’re hiding something and say “OK no problem, thanks anyways”.

For some reason you have to beg the bank to allow you to give them business. It’s not just a sale to make the profit and it’s over. It’s just the beginning and they need to get that mortgage payment every month for 30 years before the sale is complete and the profit is made.

Personally I don’t see how mortgage lenders are only charging 4% interest on a new mortgage and keeping the rate fixed for 30 years. I would never do that with my $150,000 if I had it, that’s for sure. They should be charging 7-8% to make it worth their time and effort. Especially when dealing with people who have a bad credit score..

There are plenty of things that you can do to increase your credit score so you should start there and take your time with buying a home. I’m sure you’re anxious and want to buy a home now but you’re not going to be able to if you’ve been denied by a few mortgage lenders already. Show them that you’re working at it by proving that you can pay a loan off on your own and then maybe they’ll give you $150,000 of theirs to buy a home.

Knowledge Will Save You Thousands
The Free Mortgage Calculator

Mortgage Guest Speaker – Getting Approved and Learning Borrowing Power

My blog has been getting a lot of traffic lately and the comments are coming along with it. I appreciate how much everyone enjoys my blog and I want to address a few of the comments in this post.

First of all, I don’t take the comments as serious as the emails I’m getting because half of the comments are spammed with links to other websites and commentary on things I won’t mention here. So please email me with a serious comment or question and it will be answered.

Being a Guest Speaker

I’d love to be a guest speaker about getting approved for a mortgage, learning about your borrowing power or about real estate investing in general. I have gained a lot of knowledge about mortgages and the financing process by simply doing it. I have an Associates Degree in Business and I’ve learned the rest by doing. That’s right, getting off my rump and DOING! I’ve always asked at least 100 extra questions during any process I’m going through because it allows me to learn from the people doing the actual job.

Doing An Interview

I’d also love to do an interview about my website, how it became and what I plan on doing with it in the near future. I have been working on it for a couple of years now and plan on having it for a very long time. Working so hard on it and asking my 100 questions to the web design and SEO companies has grown my knowledge of websites to a level I never thought I’d have.

This mortgage website is now over 800 pages so I’ve written quite a bit about mortgages and mortgage calculators. Using a mortgage calculator can help you in many ways, as it helped me figure out my borrowing power and buy my 3 condos that I own and rent out right now at only 28 years old.

There are ways to finagle your borrowing power, down payment and other things to help you get your hands on some money to buy a home or a condo. I tell you exactly how to get a personal loan and use it as a down payment on a home as long as you stay within your debt to income ratio. I don’t make you buy a book and purchase something of mine online just to get the information I claim I might have.

I like to just say what’s on my mind and if people respond then they do. Now I’m getting paid by the advertisements on my website. Some of them allow you to apply for a mortgage or a credit card and some pay per view of my website which has turned into a decent little income per month.

So please email me to discuess a possible interview or appointment to be a guest speaker at an event because I’d love to be a part of it.

Knowledge Will Save You Thousands
The Free Mortgage Calculator