The Mortgage Survival Guide

Purchasing a house? Bring on the paperwork! And don’t forget your favorite pen. Qualifying, securing, and signing a mortgage can be multi-faceted, confusing, and stressful – especially for a first-timer. Fear not, new homeowner. At the end of road is home, sweet, home…a home of your very own.

Step 1. Clean up your credit report 

Get a copy of your credit report and make sure it's accurate. If not, dispute incorrect information. Correcting en error can take time, so don’t wait until the last second to handle.

Step 2. Gather your own paperwork

Before you qualify for a mortgage, your potential lender is going to require a lot of information from you, including:

All of your bank information, from its name and address to account numbers and statements
Investment statements for the past three months
Proof of employment and income in the form of pay stubs and W-2 withholding forms
If you’re self-employed, balance sheets and tax returns
Consumer debt information, as in account numbers and amounts due
Divorce settlement papers, if applicable
Authorizations allowing the lender to verify your income, bank accounts and credit 

Step 3. Prequalify…Or Seek Preapproval

Prequalification is the lender’s determination of how large of a mortgage you might qualify for based on its ‘standard ratios’. For instance, your ratio of monthly housing expenses versus your gross monthly income should not exceed 28 percent.

Preapproval is the amount a lender will commit to based on your income and credit, which they’ve already checked out. It also gives you more credibility as a buyer, and may differentiate you from other potential buyers

Step 4. Finalize the application

Within three business days of applying for your loan, the lender must provide:
Information on the mortgage's effective rate of interest, or annual percentage rate (APR)
Consumer information on adjustable rate mortgages
An itemized ‘good-faith’ estimate of your closing costs

Step 5. The lender’s appraisal

Your home will serve as collateral for the loan, therefore the lender will order a market value appraisal of the property. Also, if your down payment is less than 20 percent of the value of the property, you’ll require private mortgage insurance.

Step 6. Mortgage approval

If the lender has not already verified your employment and bank accounts for the preapproval process, they’ll do so now – as well as obtain and evaluate your credit report.

Otherwise, that’s it! Congrats! You’ve got a grown-up, ‘real life’ mortgage to pay off.

11 Mortgages Options to Consider

Mortgages come in a number of shapes and sizes – kind of like drapery. Finding the right one for you depends on many factors, including your personal tolerance for risk, how long you expect to stay in your home, your credit history and more.

Here are 11 mortgages you’re likely to encounter en route to home ownership. 

1. Conventional Fixed Rate Mortgage

What is it? This is a low risk mortgage taken on for ten-to-forty-year terms. The interest rate will remain the same for the life of the loan, as will payments.
Potential drawbacks: This type of mortgage requires a significant down payment.

2. Adjustable Rate Mortgage (ARM)

What is it? The interest rate on this mortgage will start lower, but go up and down based on annual adjustments.
Potential drawbacks: It’s a higher risk loan prone to interest rate fluctuations.

3. Hybrid-Adjustable Mortgage

What is it? The initial interest rate is often lower on this mortgage, too. It’s taken out for a fixed term (from 1-10 years) then converts to a 1-year adjustable rate or a fixed rate mortgage.
Potential drawbacks: Like the ARM, it’s a higher risk loan prone to interest rate fluctuations.
4. Federal Housing Administration (FHA), Veterans Administration (VA) or Bond-Backed Mortgages

What are they? These kinds of mortgages appeal to first-time homebuyers because they allow for more liberal qualifying ratios and lower down payments. Payments remain the same throughout the entire life of the mortgage.
Potential drawbacks: Typically, these carry higher insurance costs.

5. Jumbo Loans

What are they? These apply to loans over $417,000 or $729,750 in high-cost areas.
Potential drawbacks: It’s a mighty big loan, which therefore increases a lender’s risk. As such, the interest rates on these tend to be high.

6. Graduated Payment Mortgage

What is it? A medium risk mortgage with a fixed interest rate. Initial monthly payments are low and increase over five-to-ten years before leveling off for the remainder of the term (typically 30 years).
Potential drawbacks: Because payments start out low, it could take longer for payments to make any real dent in the principle.

7. Growing Equity Mortgage

What is it? Like the Graduated Payment Mortgage, this is a medium risk mortgage that starts out with low monthly payments. Excess payments are applied to the principle.
Potential drawbacks: Although payments are initially low, they willincrease over the course of five-to-ten years.

8. Balloon Mortgage

What is it? It’s a short-term mortgage (3-10 years) with a low interest rate, but a high level of risk.
Potential drawbacks: That depends on your cash flow; it requires a hefty final payment.

9. Shared Appreciation Mortgage

What is it? Offers a low interest rate and low monthly payments in exchange for a shared appreciation of home value with the lender upon your home’s sale.
Potential drawbacks: If the value of home doesn't increase as expected, the lender may charge you additional interest.

10. Seller-Financed Mortgage

What is it? With this mortgage, the seller acts as the lender. Terms are negotiated between you and him/her.
Potential drawbacks: That depends on how well you and the lender get along.

11. Wraparound Mortgage

What is it? Like the seller-financed mortgage, the seller acts as the lender. The seller accepts a secured promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance. Terms are up to both of you.
Potential drawbacks: Not only will you be paying off your own loan, you’ll be paying off the remainder of theirs. Your interest rate will be higher on the seller’s mortgage, but probably lower than on a conventional fixed rate mortgage.

Beyond dotted line…

You can obtain your mortgage through your local savings bank, a mortgage specialty company or the federal government via Fannie Mae.
But keep in mind that this is a long-term relationship you’re entering into – both with your house and your lender. Do yourself a favor and put as much thought into it as you do your zip code.

7 Credits, Deductions & Tax Benefits to Bundle With Your Mortgage

Oh yeah, the other cool thing about home ownership – in addition to the ownership part – are the associated deductibles you can take against your income. 
Here are seven of them…

1. Mortgage Interest
If you itemize your deductions for tax purposes, using Schedule A of your federal income tax return, you can deduct any mortgage interest that you’ve paid over the course of the year (up to $1,000,000 of qualified mortgage indebtedness). This applies to any sort of “home acquisition debt” – i.e., a loan used to buy, build or improve your home.

2. Home Equity Deduction
When you take out a home equity loan or line of credit secured by your home, you’re generally allowed to deduct interest from that, too. The amount is limited to the lesser of…
The fair market value of the home minus the total home acquisition debt on that home
$100,000 ($50,000 if your filing status is married filing separately)

3. Mortgage Insurance
Provided that a.) your insurance is associated with home acquisition debt and b.) your Adjusted Gross Income is less than $100,000, you can deduct it. This applies to mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, and qualified private mortgage insurance (PMI) providers.

4. Real Estate Property Taxes
By itemizing deductions on your Schedule A, you can generally deduct real estate taxes. If they’re handled through an escrow account, you can only deduct what was actually paid by your lender.

5. Closing costs

When you take out a loan to buy a home or refinance an existing loan, you’ll be charged closing costs – basically, administrative fees for attorneys, titles, appraisals, document preparation and more. All of these fees are deductible, unless they’ve already been tabulated into the overall cost of the loan.

6. Energy tax credits
These are available to you for making energy-efficient improvements to your home, including eco-friendly windows, skylights, exterior doors, insulation materials and roofing.

7. Exclusion of capital gains
If you sell your house at a loss, you won’t be able to deduct that amount from your tax return. But sell your house (used as your primary residence) at a gain and you might be able to exclude some or all of it.

There are many factors to consider before purchasing a home. Tax is just one of them. Run the numbers to see if home ownership makes sense for you, or if you’re better off renting until the market leans in your favor. 

Also bear in mind that if you’re subject to the alternative minimum tax (AMT) in a given year, your mortgage interest and real estate tax deductions may be limited. Consult a tax professional for details.

Have You Considered Refinancing? Here’s Why You Should

If you have a good credit rating but are currently paying a higher than desirable interest rate on your mortgage, consider refinancing. That means…
…taking out a new home loan at a lower rate and using some (or all) of the proceeds to pay off the existing one.

What’s the point of refinancing?

Basically, so you can score a better deal on your mortgage, allowing you to …
Lower your monthly mortgage payment
Shorten the length of your loan (for example, cut the timeframe from 30-years to 15-years)
Provide capital for home improvements, debt consolidation or college tuition, if you opt for a cash-out refinancing

When should you refinance?

Some wait until interest rates drop two percent points lower than their current rate; others refinance when it hits a one to one-point-five percent differential.
Other factors to consider include how much longer you plan on staying in your home, the equity you’ve built in your home, and the costs associated with getting a new loan.

How do you refinance?

Two options are available to you:

No cash-out refinancing is when the amount of your new loan does not exceed your current mortgage debt.
Cash-out refinancing is when you borrow more than you owe on your existing mortgage.
On the one hand, cash-out refinancing will give you a better interest rate. Plus, the interest paid on your refinanced mortgage will most likely be tax-deductible. But your lender could foreclose on your home if you fall behind on your mortgage payments.

Are there tax advantages of refinancing?

That depends. A point equals one percent of the loan amount. If you pay for lender points up front, as a form of “pre-paid” interest in return for a lower interest rate, they’re deductible. If points are wrapped up in the general administrative costs of obtaining the loan, then no – they’re not deductible.
For more information on the deductibility of points, you can refer to IRS Publication 936.

The biggest question to ask yourself:  

‘Will I be able to recoup the cost of refinancing my home…while I actually own the home?’
To determine the answer, you’ll need to weigh the costs of refinancing against how long it will take you to recoup your costs.
If you don't stay long enough to recover your costs, refinancing is a bad strategy.
The longer you stay past your break-even point, the more you'll tip the balance in favor of refinancing.