After several years of a real estate depression, homebuyers in the Atlanta area are back.
Buyers entering the market now are faced with bidding wars and are taking measures such as removing contingencies and offering to close in less than 30 days in order to make their offers look better. Sellers, for their part, are wanting to make sure that buyers are prequalified for a mortgage loan. The last thing a buyer wants is a contract with a buyer who may not receive loan approval.
A recent survey of over 1,000 buyers by a major market player indicates that many buyers are not familiar with the concept of how a mortgage works or how to obtain loan approval.
The Zillow Mortgage IQ Survey showed that prospective home buyers answered basic mortgage questions wrong nearly one-third of the time.
For example, one-third (34 percent) of first-time home buyers are not aware that it is possible to get a home loan with a down payment of less than 5 percent. In fact, the number of lenders on Zillow Mortgage Marketplace quoting loan programs with a down payment between 3.5 and 5 percent has risen by 570 percent over the past two years.
Yes, you must have bullet-proof credit, and yes, you must have a strong employment record, but these loan programs are available in today’s market. Most major lenders offer 30-year fixed rate programs with as little as 5 percent down. And FHA actually offers down-payment assistance programs for a variety of target groups. In some cases, no down payment is required whatsoever, so it’s worth checking out.
Homebuyers also don’t understand how to obtain the best possible interest rate and loan terms.
One-quarter (26 percent) of homebuyers incorrectly believe they are obligated to close their loan with the lender that pre-approved them, and, separately, 24 percent of homebuyers incorrectly believe that the best interest rates and fees can always be found through the bank with whom they currently do business.
In addition, more than a third believe all lenders are required by law to charge the same fees for credit reports and appraisals.
The truth is somewhat different: It almost always pays to shop and compare among a variety of lenders for the best terms and conditions. Only rarely does your existing bank or lender have the ability to offer you a better deal than another source.
And this is true for both acquisition loans and refinance programs.
Finally, my experience shows that many borrowers don’t understand the concept of lower rates for a shorter term loan.
In a nutshell, lenders are worried about any longer term payback more than they are about a shorter term payback. As a result, they will usually offer you a 15-year loan for a slightly lower rate than a 30-year loan. The rate differential is typically about half a percentage point off the interest rate. Yes, the rate is lower, but the monthly payment of principal and interest is higher each month.
If you want to pay off your loan in a shorter period of time, but you are not sure you will be able to make the higher payment every month, select the longer term program. By making larger monthly payments than required, your loan will payoff in the term you choose, but you get to make that decision each and every month.
I recommend every buyer take time to learn (or review) the basics of home loans and how they work. One resource I like is at Bankrate.com, and its an educational site called Mortgage Basics. I will post a link on my website at Money99.com.
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