The economic crisis sweeping the nation and the entire globe has put a spotlight on the perils of homeownership. It's definitely a scary world out there, but the following tips can help you protect yourself as a home buyer and steer clear of toxic mortgages with onerous loan terms. 1Check your credit score. Your score will impact the interest rate on your mortgage in a big way. Order free annual credit reports from the three major credit bureaus (Equifax, Experian and TransUnion) by going to AnnualCreditReport.com or calling toll-free 1-877-322-8228. This is the only place where you can get free credit reports without any strings attached. The "free" credit reports advertised by other sources aren't really free!
2Seek help if you're new at this. First-time home buyers' programs can help people who have credit problems or limited savings to find loans with better interest rates than they might otherwise find. To learn about a first-time home buyers' program available to eligible Florida residents, visit www.floridahousing.org. Also try checking with your city and county governments' housing agencies.
3Get pre-approved for your mortgage. A pre-approval letter from a mortgage lender is a requirement in a loan market like this. Real estate agents and sellers won't want to work with you unless you have one. Be aware that getting pre-approved is a more arduous process than getting pre-qualified.
4Don't borrow more than you can afford. It may sound obvious, but in recent years untold numbers of home buyers have been funneled into mortgages that were much too big for their budgets. Rather than stretching yourself to the limit and becoming "house poor," do whatever you can to restrict your housing expenses (mortgage, homeowners insurance and property taxes) to 25 percent of your gross income.
5Search for the best possible rate and loan terms. Many home buyers have gotten stuck in subprime mortgages with high interest rates — even in cases when they didn't have damaged credit. To protect yourself from this trap, find out what sort of interest rate someone with your credit score should expect to pay. Shop around for mortgages through multiple lenders, including commercial banks, credit unions and mortgage companies.
6Beware of toxic loans. Be careful with adjustable-rate mortgages, or ARMs, that will cause your mortgage payment to jump to a potentially unaffordable level in a few years. Some ARMs automatically jump to high rates no matter where rates are heading. Interest-only loans and "pay option" loans that let you choose a payment level each month also can be dangerous because you may never chip away at your mortgage's principal. Your safest bet may be to lock in a fixed-rate mortgage while interest rates are low.
7Remember those closing costs. These costs typically include loan origination or underwriting fees, broker fees and transaction and settlement costs, and they can equal 2 percent to 7 percent of the home's selling price. Most fees are negotiable, so ask lenders what they can do to reduce them for you. A motivated seller also may cover all closing costs for you.
8Factor in other big expenses. Your mortgage payment may look reasonable enough on paper, but you'll also need to pay for homeowners insurance, property taxes, utilities and cooling and heating costs. Make sure you can handle all of those expenses before you take the plunge and buy.
9Work with a buyer's agent. It's important to have someone representing your interests. Otherwise, you could end up showing all your cards to a listing agent who actually represents the seller. Consumer Reports recently found buyers' agents helped buyers pay an average of $5,000 less than the listing price.
10Don't break the bank. Make sure you have money left in your savings account after you buy. You'll likely be hit with an unexpected housing-related expense during your first few months in your new home.
Coming next Saturday: Protect yourself as a seller.
Laura T. Coffey can be reached at [email protected]
Sources: www.consumerreports.org, moneycentral.msn.com, www.bankrate.com