Publication Date: Wednesday, March 12,
Getting a home loan
Navigating the waters of first-time home buying
by Sue Dremann
Buying a home for the first time can be daunting, fraught with
twists and turns. Prospective Bay Area home buyers also have to
contend with sticker shock, regardless of how many news reports
they've read about the exponential growth in local home prices.
But there is good news. "There are currently two exciting
things happening for first-time home buyers: The market is currently
experiencing the lowest rates in 40 years, and prices are coming
down - it's a double-bonus," said Berna Davis, an agent with
Coldwell Banker in Menlo Park.
Realtor Berna Davis offered this home on Seventh Avenue
in Menlo Park as a good example for first-time buyers. It was
on the market in early March for $549,000.
On a printout of starter homes, Davis found list prices in Menlo
Park ranging from a low of $365,000 to a high of $599,000 for a
two-bedroom, one-bath, single-story residence. A four-bedroom, two-bath
home on Madera Avenue is even available for $525,000. Prospective
home buyers who thought that they could only purchase a condominium
in that price range are now finding that nice homes can be purchased,
"A real concern in this area is the high cost of housing,"
said Jeff Crang, principal broker at Bayside Funding Corporation
and C and G Real Estate in Palo Alto, where starter homes cost more
The hardest part to getting started is getting together the down
payment, which on average amounts to 20 percent of the price of
the home, he said. That starter home in Palo Alto could require
as much as $120,000 for the down payment.
And that's just the beginning of the financial picture. Other factors,
such as inspections, appraisal fees, taxes, flood certification
fees, and items that the lender requires be paid in advance, such
as a 30-day estimate of interest, mortgage insurance and hazard
insurance premiums - closing costs -- are costs that buyers often
neglect to factor into the price of the home. "Even a bargain
is still a lot of money," Davis said.
Coldwell Banker real estate agent Berna Davis acknowledges
that even a bargain in this area can be a lot of money for first-time
Getting a clear picture of the total costs, and preparing for the
lending process can go a long way in making one's dream come true.
Crang suggests asking a lender or broker for a copy of a "Good
Faith Estimate of Borrower's Settlement Costs," which lists
the kinds of fees that one can expect to incur as closing costs.
Then ask the broker or lender to explain it, he said.
Other advice: Get a credit check done a few months before applying
for the home loan through Equifax and the other credit bureaus.
Make sure that there aren't errors on the credit report. Having
a high score - what's known as a FICO score - of 680 and above,
one can secure a loan with 5 percent down, Crang said.
Don't make a lot of inquiries to apply for credit cards in the
months before applying for the home loan. Lenders also want to see
a good credit history, and a minimum of five trade lines. Two credit
cards may not be enough. They will also want to see activity on
those credit lines within the last 12 months. Have a good track
record for two to three years, he added.
Lenders will also look at the debt-to-income ratios: Divide into
the gross income the amount of debt, including the home-loan amount.
The debt should not exceed 40 to 42 percent, said Crang.
That percentage varies depending on who one consults with. In general,
lenders allow the total monthly housing costs to go as high as but
not higher than 30 percent of the gross monthly income. Not more
than 36 percent of the gross monthly income can be tied up in monthly
house payments and payments on outstanding long-term debt, according
to Fidelity National Title Company's buyer's home guide.
Plan also to have two to three months' worth of cash reserves -
what is known as PITI - the principle, interest, taxes and insurance,
If a buyer comes in with less than 20 percent down, lenders require
private mortgage insurance, also known as PMI. The PMI costs can
be considerable, depending on whether they are fixed or adjustable.
One way around the PMI requirement can be to obtain secondary financing.
"If you have 5 to 10 percent down, you can get a first loan
for 80 percent of the home cost, and a second loan for 10 to 15
percent of the down payment to make up the balance needed to reach
20 percent. It's all fully tax-deductible," Crang said.
There are a number of ways to get the down payment for a home.
"We're in an era where a lot of first-time buyers are getting
gifts or loans from parents. It's very common. Parents who want
their children and grandkids nearby are doing everything to keep
them near," Davis said.
Regarding cash gifts, lenders like to see money "seasoned."
It should be in the borrower's possession in an account for at least
60 days, or have a paper trail showing where it came from, Crang
Other sources of down payments can include money in a 401(k) or
IRA. Some plans will allow for borrowing against the plan. Although
some lenders will count the use of that money against a borrower,
the more progressive ones don't, he said.
There are many kinds of mortgages. With a fixed-rate loan, "what
you see is what you get," Crang said. Equal payments are made
at a fixed rate for 30, 20 or 15 years. Amortization, common term
in financing parlance, is the repayment of a loan in equal installments
of principal and interest, rather than interest-only payments.
Hybrid loans are generally amortized over 30 years. The payment
rate is fixed for three or five years. After that, it becomes an
adjustable mortgage. Take a good look at how often a lender can
change the interest rate or payment, he said. Prepayment penalties
are in the fine print, and everyone should understand them. They
can cost thousands of dollars, he said.
Beware the Option ARM adjustable rate mortgage. Some have possible
negative amortization. Caps, or limits on how much an interest rate
or monthly payment can change either at each adjustment or over
the life of the mortgage, can be set too low. The monthly payments
can fail to cover the interest cost. The interest that isn't covered
is added to the unpaid principal balance. Even after several payments,
borrowers could owe more than they did at the beginning of the loan.
Savvy borrowers can sometimes utilize ARMs to defer the teaser
amounts (initial lower payments during the fixed portion of the
loan). "These are great loans for those who can manage it.
One program, the interest-only loan, is very popular with people
at all ends," Crang said. For a fixed period of time, perhaps
for five years, borrowers pay only the interest on a 30-year loan.
Over the next 25 years, the borrower plays catch-up, he said. Some
have a balloon payment for the entire principle, he added.
One way to increase one's buying power is to get an energy-efficient
mortgage, or EEM, said Steve Curtis, owner of Affordable Home Energy
in Mountain View. EEMs allow the borrower to add several thousand
dollars onto the value of the loan by getting a loan to make home
improvements, such as adding double-paned windows, upgrading a furnace,
plumbing or adding insulation. Packages range from $5,600-$6,500,
and up to $10,000.
The one hitch is that EEMs are only accessible through FHA and
VA federal loans. Those loans, which usually are limited to a maximum
of $300,000, are usually too low to purchase a home in the Bay Area.
There are pockets where homes are inexpensive enough to be covered
by a federal loan, he said. "A pilot program is currently in
place with a loan program through Fannie Mae and Freddie Mac."
Once you qualify for the loan, getting the EEM is "a slam-dunk,"
"There's always a way to put things together," said Crang.
Sue Dremann can be reached at firstname.lastname@example.org.