I'm finally ready to buy my first home. How will the current economy affect my mortgage rates?

Using the 2010 Good Faith Estimate to Get the Best Mortgage Rates

Dear Liz,

I am shopping for a mortgage for the first time in many years. I understand that many things have changed recently, and that the standard mortgage disclosure forms are different. I even heard that they are supposed to save me $700! How do I get my $700, and what else do I need to know about the forms?

Jed, MO

Dear Jed,

I think what you are referring to is HUD's estimate of what the new Good Faith Estimate (GFE) disclosure can save the average mortgage borrower by making it easier for them to comparison shop for a loan. The new form does make things easier in the following three ways:

1. It puts the most important features of a mortgage, like rate adjustments and prepayment penalties, right up front where they are easy to see. Before, these important provisions were hidden away in special riders.
   
   
2. It details the costs of the loan, including title and escrow charges, and the estimates must either be exact (for the loan origination fee , for example) or within 10% (for title insurance and other charges). This is intended to eliminate the oft-voiced consumer complaint that actual expenses bear little resemblance to those disclosed upfront.
3. It discloses an interest rate and tells you how long that rate quote is valid.

However, reports thus far show that the 2010 GFE is not fool-proof. Many folks find it confusing and title companies report an increase in questions from confused borrowers.

What the New GFE Doesn't Do

It doesn't catch a moving target. Mortgage interest rates change with financial markets, which move continuously. So even if you contacted several lenders in a short time (using a website like this one or calling them one by one), there is little guaranty that you can compare the GFEs side by side because they correspond to different times.

It doesn't guarantee an interest rate. Only when your rate is locked do you have a commitment from the lender that can be enforced. And even then, if circumstances change, for example if your home appraises for less than expected, your credit score drops, you choose a different mortgage program, or your employment changes, you may be looking at a different interest rate. So once you're ready to lock in an interest rate, you may want to compare rates between your lender and a few competitors.

It also doesn't force a lender to commit while you are just shopping. To issue a new GFE, the lender requires rather personal information from you. Loan pricing depends on (among other things) how you plan to use the property, your credit score, and the size of your down payment. If you are purchasing a home and don't have a property address yet, your GFE won't be worth the paper it's written on because you need a property before you can lock in an interest rate. And remember, your lender isn't committed until you lock an interest rate.

Finally, the lender isn't required to give you a GFE until you actually apply for a loan, and it has three business days from that time to get you the disclosure. While many are willing to provide it earlier, others may refuse to do so, or may try to fob you off with a "loan scenario" or other such proprietary form. Understand that this commits them to nothing; if you are willing to provide the information necessary to issue a valid GFE, any lender worth working with should be willing to supply the official form.

I Want to Buy with an FHA Mortgage

I want to buy a home and get an FHA mortgage. Can I use this loan for any kind of property?

Buying a home with an FHA loan means you can't purchase property that doesn't meet FHA's guidelines. If you buy a condo, newly-constructed home, manufactured home, or fixer-upper, you have different concerns. FHA appraisals are more extensive than conventional appraisals and address additional concerns.

Brand-New Home or Home Under Construction

If you buy from a developer, your home may be newly-built or still under construction. To protect you, as well as its collateral, FHA imposes certain requirements that new home builders must meet. HUD requires the property to be pre-approved before construction begins. At a minimum the initial, framing, and final inspections must be completed. If the property is not pre-approved with evidence of the required inspections, then the home must pass a final inspection and a HUD-approved 10-year warranty must be supplied. New homes in areas with termites must have the soil treated for termites. If you want to buy such a home, make sure it's FHA-approved before making your offer, or make it contingent on obtaining FHA financing. Note that FHA no longer pre-approves entire subdivisions.

Condominiums

FHA must approve the condominium or you can't get an FHA loan. To see if a condo is approved, you can check on HUD's website; there's a condo search page. If your FHA-approved lender has direct endorsement authority, it is allowed to approve a condo project on HUD's behalf. Condominiums are approved based on their financial soundness and safety. For example, one of the requirements is that no more than 15% of the units can be delinquent on their homeowners association (HOA) dues. Another is that at least 50% of the units must be owner-occupied. FHA approval is one way of assuring yourself that your new condo is part of a viable association.

Manufactured Housing

Manufactured housing must be affixed to an approved permanent foundation and taxed as real property. It must have been constructed after June 15th, 1976, and have a tag proving that it meets safety standards issued after that date. The mortgage must cover both the home and the property (you can't mortgage mobile homes in trailer parks with an FHA home loan). Manufactured housing can't be located in a flood zone and be FHA-financed.

Other Property Issues

Well inspection may be required depending on location and drilling date. Pump tests are required where water availability is an issue. A pump test involves testing for adequate flow and volume of water over several hours. Homes with septic systems are eligible for financing but the tank must have been pumped and inspected within the last five years. Roofs must have at least three years' life remaining. Flaking paint or earth-to-wood contact must be resolved before the loan can close.

This is a short list of the most common property issues that FHA buyers encounter but it's far from complete. The bottom line is that when you shop for a home loan and compare mortgage rates, make sure you work with an FHA-approved lender. When you make an offer on a home, it should be contingent on you being able to obtain FHA financing. And just be aware that any property you select must pass muster with FHA.

I'm finally ready to buy my first home. How will the current economy affect my mortgage rates?

That depends on how much cash you're willing to pay up front and how well you've managed your money over the past few years. According to many experts, mortgage lenders have "rolled back" to the policies and protocols they used decades ago. Hoping to avoid the kind of lending that led to the subprime mortgage crisis, most lenders require higher down payments and higher credit scores from borrowers than they did only a few years ago.

If your credit has a few dings in it, don't worry. Be prepared to lock in something higher than today's best mortgage rates, and be prepared to pay extra origination fees in addition to your down payment. While you won't find many private lenders willing to finance more than 80--90% of your home's value, investigate FHA and other community home buyer options. You can use a stable employment history and community connections to find a fair financing deal.

Although I've made every mortgage payment on time for the past five years, our whole neighborhood has lost value and I'm upside down on my home loan. What should I do?

In certain cases, you might not have to do anything. If you locked in a solid mortgage rate during a previous period of low interest, keep making your payments. As real estate values normalize over time, you'll eventually regain home equity.

However, if your credit score is better now than it was when you originated your home loan, you may want to lock in today's best mortgage rates. Or you may qualify for a government-backed plan that can help your mortgage lender process a refinance. FHA, Freddie Mac, and Fannie Mae all have special money-saving programs. If your mortgage is backed or held by these entities and you meet some other qualifying criteria, you can cut the amount of interest you'll pay over the life of your loan.