How much can I learn by reading books and articles about buying a house?

You can learn a lot, but most of the information is fairly "generic" and sometimes out of date. Consider everything you learn from books and on the web as background information.  After you get some "practice" by going out and actually looking at homes, more of what you read will begin to make sense.   The books and articles provide good advice for the most part and can be part of your learning experience, but for specifics, you are going to have to talk to a lender or Realtor.   Many of the "experts" who write the books and articles may have never actually earned their living by making loans or selling real estate. Some of those who did were in the business long ago.  Some are in managagment and not actively selling houses or originating loans anymore. 

Can I talk to a lender if I just want to get information?

Absolutely. One thing you should realize is that the term "lender" can refer to either the lending institution or to the actual loan officer representing that institution.  If you simply get a phone number from the yellow pages or a newspaper ad, you don’t know if you are going to be talking to an experienced lender or someone who has only been on the job for a few weeks. The reason loan officers are pretty free about answering your questions is because they hope that, by providing you this service, you will consider them as your lender when you actually decide to apply for a home loan.

How do I get in touch with a lender?

The best way is through a referral from someone you know or a Realtor. Realtors will usually recommend someone who will be helpful and reliable, based on past experience. Realtors do not want you to have an unpleasant experience and perhaps be angry about it with them, so you can be reasonably certain that any loan officer they recommend has performed well for others in the past.

Don’t Realtors get "kickbacks" for referring lenders?

Kickbacks in any form are illegal.  If you discover there are kickbacks involved, you should inform your local Department of Real Estate.

How can I afford a home of my own?

Lenders look at several things, as you will find when you gather information from books or on the web. Assuming you have saved the down payment and have a good credit history, the main thing that determines your ability to qualify for your home loan is income. Lenders have guidelines they use to figure out what monthly payment you can afford and call these "debt to income" ratios. It is basically a percentage of your monthly income.

Can I determine on my own how much house I can qualify for?

You can get in the ballpark. There are a variety of "calculators" all over the web that can help you figure out what payment you qualify for, and knowing the payment, you can calculate backward to calculate the purchase price.  However, there are a lot of variables that you may not be aware of.  Depending on where you may buy, there may be homeowner’s association fees or higher property tax rates that have to be included in the calculation.  Different loan programs have different guidelines.   If you are making a larger down payment, guidelines may be more elastic.  With a smaller down payment, the guidelines may be stricter.  In determining what loan amount you would qualify for, you should make certain assumptions about what your taxes, insurance and HOA fees (if any) might be.  Once you think you are close, you should also talk to a lender.

Why should I talk to a lender before I buy a house?

If you are an experienced buyer and are putting at least twenty percent down on your new home, talking to a lender before you make an offer is probably unnecessary.   At the same time, you could have your loan totally approved before making the offer, which might make your offer more attractive than others.  If you are a first time buyer or putting less than twenty percent down, then your lender can help you zero in on your maximum purchase price and can pre-qualify you for a loan.  Knowing that you qualify for a loan eases the stress of buying a home.

Does pre-qualification mean I’m approved for a loan?

No.  A pre-qualification is strictly an opinion of the loan officer that you will be qualified to purchase a home of a certain price.  He bases this opinion on information you provide regarding income, debts, and savings.  The information you provide might be verbal, presented in a telephone conversation, or you might provide him with pay stubs, bank statements, and he may review your credit.  You can see that the more documentation you provide, the more valid the pre-qualification.  If you are willing to provide documentation, you may as well apply for a loan and get pre-approved.

What is a pre-approval?

Pre-approval means you or your loan officer has completed a loan application, and you have provided required documentation so that an actual underwriter can approve your loan before you have purchased a property.  Such an approval makes certain assumptions about the interest rate and other items associated with your monthly payment.   If the property taxes are higher than anticipated, or you buy in an area where there are homeowner's association fees, the underwriter will have to review your loan again.  A pre-approval applies only to you, the borrower.  Once you choose a home, the property will have to qualify as well.

Why is the loan officer so important?

If all borrowers were alike, it would simply be a matter of service. If you mail in a loan application to a faceless institution, you may have only a phone number to contact and may only be able to contact them during business hours.  You may be put on hold or have to leave a message and wait for a phone call back.  A loan officer that has been referred to you will often meet you face to face in your home, his office, or your Realtor’s office. He will have a pager that you can usually use to contact him at any time, and he will usually respond promptly to pages.  However, all borrowers are not alike.  Each borrower and each transaction has something unique about it, which may or may not present a challenge. A qualified loan officer will anticipate those challenges and prepare for them in advance, where a faceless person in an office may just process your loan as "paperwork."

Won’t I pay more because of the loan officer’s commission?

In most cases, no. With most loans, there is somebody earning a commission on your loan, anyway. If you deal directly with your loan officer, it is just that you know exactly who is earning the commission.

How do I get the best rate if I am referred to a loan officer instead of "shopping around" like all the experts advise?

Shop around, too. Then tell your loan officer what you found out.   Interest rates are pretty much the same everywhere, usually varying by only about one-eighth of a percent.  Your loan officer will probably match whatever you find because he has an incentive to do what it takes to keep your loan.  First, he earns a commission.  Second, he has a duty to whoever referred you to him. If a Realtor or builder refers clients to the loan officer only to have them obtain their home loan elsewhere,  they may come to question why.

What if my lender cannot match the best rate?

First of all, you should beware.  When you receive a rate quote that sounds too good to be true, it usually is.  You should adhere to some rules for "shopping around."  Always compare rates on the same day, because rates change from day to day, sometimes during the day.  Always make sure you are talking about the same commitment or lock-in period.  If your lender is quoting you thirty-day pricing and the competitor is quoting twelve-day pricing, there will be a difference.  Then, compare fees by getting Good Faith Estimates from each lender on the same day.  The Good Faith Estimate has numbers in front of all the fees and charges.  All lender fees have a number in front of them that is in the 800's.   Be sure not to include the other fees in your comparison because the lenders are only estimating those anyway.  If you choose the competitor, be sure to get a commitment letter guaranteeing your rate and fees for a specific period of time.

Should I lock in my interest rate?

It depends on whether you like to be "safe" or prefer to "roll the dice."  If you think rates are trending upward, then of course you should lock your rate.  If you think they are trending downward, then it is your choice.   It is often difficult to predict when rates will quit going down and begin to increase.  When rates start to go up, they usually go up fast.  Even in a downward trending market  interest rates are sometimes volatile.  There may be "spikes" where rates jump up a bit before continuing their downward trend.   If you have put off locking in your rate until the last minute trying to get the very lowest rate, you might get caught in one of those volatile jumps in the market. You will have to lock in anyway so you can close your purchase on time.

How can I keep track of interest rates if I choose not to lock in?

Unlike stocks, whose prices are published each day, interest rates on mortgages are not.  Most major papers publish a weekly survey of interest rates, but it is difficult to insure that what is in the paper is accurate.  Plus, some advertisements are designed to look like rate surveys and you have to be careful.  Advertisements are designed to generate phone calls and are not always accurate.  You can keep track of the trend, however, by turning on CNBC each morning and listening to the news of the "bond market."  The bond market, in this reference, refers to the buying and selling of thirty year treasury bonds.  The same factors that influence the bond market influence interest rates.  When the bond market is "up," yield (rates) go down.  The day to day changes may be minute or none at all, but you can track the trend.  As you are tracking the trend, you can continue calling your loan officer and checking on the interest rate for your loan. If you feel your loan officer is not giving you the benefit of a drop in rates, then start shopping around again and tell him what you have found out from other lenders.  Be sure to get honest rate quotes as advised in a previous question.

Shouldn't I "shop" for interest rates?

Refer to the advice in the above question, "What if my lender can't give me the best rates?"  At the same time, of course you should shop rates.  My advice is to do it in the way suggested in the previous question.   The problem is that when you call lenders on the phone to ask for a rate quote, the loan officer knows you are calling everybody else.  It is tempting to tell you whatever you want to hear.  Later, you may get a "surprise."

What determines my interest rate?

If we are talking strictly about the interest rate quote you receive from your lender, instead of the overall function of the market, then this is the way it works most of the time.  Each morning, most lending institutions issue a rate sheet that goes out to its branch offices, loan officers and to brokers.  The rate sheet will quote several different rates and have a cost associated with each rate, expressed in "points."  One point equals one percent of the loan amount.  The loan officer then decides how much to add to that "base price" to charge his clients.   In most cases, it is the loan officer who determines your rate in this manner.   Some institutions set a flat rate that all loan officers must charge, but they are in the minority.

So how does my loan officer get paid?

As his commission, the loan officer earns a percentage of whatever is added to the base price from the rate sheet.

What are "junk fees" or "garbage fees"?

In addition to points, lenders charge other fees as a source of additional income. Certain fees, such as appraisal fees, credit report fees, tax service fees, and flood certification fees are actually costs incurred by the lender in processing your loan. Other fees are not associated with direct costs, but designed to offset the costs of processing loans or to generate income.  These have been called "junk fees" by some people in the business.  Some examples of these fees are processing fees, document fees, underwriting fees, wire transfer fees, and so on.  Over recent years, the amount collected in these types of fees has increased as rate competition between lenders has become fiercer.  Fees differ from lender to lender, but if you are comparing fees, you must also take into account the interest rates and points charged as well.  Companies that claim to be offering the lowest rates often have higher fees.   Companies that claim to have the lowest fees, often have slightly higher rates.

What does a mortgage payment consist of?

It depends on whether your loan is impounded or not. In some cases, having impounds is voluntary.  In others, it is a requirement of the loan.  If your loan is impounded, the monthly payment will cover not only principal and interest, but a certain amount each month that will accumulate in your "escrow" or "impound" account and will be used for the payment of mortgage insurance, property taxes, and homeowners insurance.

Besides the down payment, what other costs can I expect?

There are many types of services required when you buy a home and each of them charge costs, only a part of which come from the lender.  Lender costs include any points you may pay, plus fees for appraisal, credit report, processing, documents, floor certification, and others.  In addition, there will be escrow or settlement fees, and title insurance, plus some miscellaneous fees from both the title company and the escrow or settlement agent.  Depending on your choices, you may also have fees for property inspections, homeowner’s warranty, pest inspection,and homeowner’s association related fees.  Then there are "prepaid" expenses which will depend on whether your loan is impounded or not, the loan-to-value of your loan, and what type of property you buy.  Prepaid expenses include items such as mortgage insurance, homeowner’s insurance, property taxes, and pre-paid interest.

What happens if I don’t have enough money?

Many buyers obtain additional funds as a gift from a family member.   Another source is that you may be able to borrow against your 401K plan or retirement plan.  You can use the sale of personal property as a source of funds, but you must document it carefully.  You will need an appraisal or valuation of the item (such as the blue book for automobiles), a copy of the bill of sale, a copy of the check used to make the purchase, and a copy of the deposit receipt showing the funds going into your account.