Mortgages: Knowing What You're Getting Into

There’s a lot more to buying a home than just picking one out and moving in. If you don’t have a wad of cash in your sofa cushions, chances are you’ll need a mortgage. Mortgage lending has been around for a long, long time, and some things haven’t changed while other parts of the mortgage process are brand new. Knowing what you’re getting into can help you make the right decisions.

WHAT’S THE DIFFERENCE BETWEEN BUYING AND RENTING?
One way you own the roof over your head, and the other way, you don’t. If you’ve always rented or otherwise never owned a home, one of the things you’ll discover is that when things go wrong with your house there’s no landlord to yell at. There’s no superintendent to come fix your leaky faucet.

If your hot water heater is busted, it’s you who has to make the trip to your appliance store to shell out another thousand bucks or so just so you can take a hot shower in the morning. When you rent, you can pretty much walk away as long as your lease agreement has been fulfilled. Want a change of scenery?

Pack up and move across town. Want a swimming pool and fitness center without the hassles of owning either? Rent. Want new carpet or drapes every year? Rent. Want your utility bills paid? Rent. Free cable? Ditto. You get the point, renting has its perks. Much less responsibility and no hassles of ownership.

HOW DO I KNOW HOW MUCH I CAN BORROW?
That depends on a variety of factors, but the most common answer is that your debt ratios are in line with lending guidelines. But it may also be more than that.

It may just be the amount that you feel comfortable with. What’s good for one borrower may not be good for another. Different mortgage programs can have different lending guidelines, but for the most part these programs decide how much you can borrow based upon these ratios.

It used to be that debt ratios were relatively strict. If a ratio were above 41, for example, the buyer would either have to borrow less or find a cheaper house.

WHAT WILL THE LENDER LOOK FOR WHEN LOOKING AT MY ASSETS?
First and foremost, you need to make sure the assets belong to you and you have access to them. Sometimes first time home buyers share a savings or money market account with their parents. Even though your name might be on the statement, a lender might split that asset between you and your mom.

Let’s say you have a checking account with your mom that you used all through college, and now there’s about $12,000 in the account that you plan to use for a down payment. If your mom’s name is on the account, you may only get credit for $6,000. If this happens to you, have your mom turn over that account to you by writing a short gift letter stating, “I’m giving all these funds to my wonderful son so he can buy a house.” Any asset you list needs to be all yours.

Another consideration may be how “liquid” the asset is. If you have a retirement account worth $50,000 but can’t get to it unless you retire, it’s not liquid. You can’t get to it and therefore can’t count it toward your home. Some accounts let you cash them in but do so only under a penalty. If you can get that same $50,000 for the purposes of buying a home but there’s a 10% penalty if you do that, then the lender might also deduct that 10 percent, which leaves $45,000. Be careful that you understand the tax and penalty implications of tapping retirement accounts by speaking with a good tax accountant or financial planner.