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Personal Finance
First-home primer

Robert F. McGinty -- This is a tale of two Sarasota couples, both young, recently married and both in the market for their first homes. All four hold down full-time jobs. And, by the way, each couple is expecting a first child early next year.

The couples are the same ages: the husbands are 25, the wives 24. While their goal of home ownership is the same, there are major differences in their educational and work backgrounds. One couple graduated from college and both husband and wife have professional jobs. The others only finished high school and both are blue-collar workers.

What are their chances in today's real estate market? Does the weakening economy play a role in their pursuit of the American dream?

What about mortgage rates, which are at some of their lowest levels in years? What kind of competition will they run into as they enter a mortgage market heavily saturated with current homeowners who are refinancing their loans to take advantage of today's better rates?

The couples are fictional, but their composite personal and financial circumstances are real. So are the real-estate and financial circumstances they face.

The purpose of this article is to provide young couples who are thinking about first-time home ownership with a realistic assessment of their chances for success.

Here, we outline the steps each couple will have to take to get them into a home.

The first question the couples will have to answer: How do we start? The Mortgage Bankers Association of America (MBA), a nationwide organization of mortgage lenders, has prepared a checklist to guide first-time home buyers from dream to reality.

According to the MBA, the best place to start is with a mortgage lender. The MBA, of course, recommends one affiliated with its organization. In addition to mortgage bankers, other institutions and agencies make home loans. These include banks, savings and loan associations and credit unions. Some governmental agencies, such as Housing and Urban Development and local agencies, administer programs that offer low down-payment loans or down-payment assistance. And mortgage brokers arrange loans, acting as the middleman between borrower and lender.

There are many ways to find a lender. The couples may want to start a short list of potential lenders by comparing mortgage rates. They can shop by phone by looking under "mortgages" in the Yellow Pages. And many Web sites offer mortgage information on the Internet.

The MBA cautions the couples against trying to find the lowest rate, period. Financial considerations are important, of course, but other factors enter the picture. Types of mortgages, for instance. They may be best suited for a long-term fixed-rate loan (the interest rate never changes during the life of the loan), a variable rate (it can go up or down depending on the market), or some type of creative financing (a balloon note, for example, which is due in full at the end of the term, maybe five years). Each couple will need to determine the type of mortgage that is best for them. They can make such a determination after open, frank, discussions with the lenders they choose.

The MBA also urges first-time home buyers to find a lender they can trust, someone they can work with effectively. Things the couples can do along these lines include talking with people they know who have bought homes recently, calling and talking with lenders on their short list to get an idea what it would be like working with them for a loan, asking about special fees and other costs associated with the home loan, and, finally, comparing rates between lenders. The couples are cautioned to compare "apples with apples." Don't compare a 15-year loan with a 30-year mortgage, for instance.

They also should add to their list of must-reads Jack Guttentag's column, "The Mortgage Professor," which is printed each Saturday in this section. Guttentag shares inside information that can save consumers money in the tricky, complicated home-lending business.

The couples will have to assemble certain financial information that they will need to present to potential lenders. This includes where they are employed and how much they earn; any dividends, interest or other special income they may have; current balances in their checking, savings and brokerage accounts, and retirement funds, if any; face amounts and cash values of life insurance; and the value of any significant personal property, including automobiles. They also will need have their tax returns or W-2 forms for the past two years.

The second question the couples have to answer: When should we talk with a lender?

The MBA says the short answer is "as soon as you start thinking about buying a home."

While it's true that the couples can't actually apply for a mortgage until they have chosen a home and signed a contract to buy it, the MBA urges that the couples do some preliminary work before they apply for a loan. The important determination here, of course, is "how much house can we afford?"

As a general guide, couples can afford a home with a value of two to three times their total annual income, depending on their savings and debts. Also, they may be able to take advantage of special loan programs for first-time home buyers that allow the purchase of a home with a higher value than three times income.

But what about the down payment? How much cash down will our couples need? The MBA says many first-time home buyers are surprised to learn that there's no set answer to this question. Generally, however, the down payment can be anywhere from 3 to 20 percent of the home's value. Our military couple may even qualify for a Veterans Administration home loan with no down payment requirement.

And, yes, each couple will have to undergo a credit history check. They can do some advance preparation here by getting copies of their credit reports. The three major credit-reporting agencies, and their toll-free numbers, are Equifax (800) 525-6285 Experian (888) 397-3742 and Trans Union (800) 680-7289. Free credit reports also can be obtained via the Internet. Choose a search engine (Yahoo or Google, for example) and search for free credit reports.

The bottom line is to get pre-approved for a mortgage amount, not just pre-qualified. The latter indicates that the lender thinks the borrower can qualify for an approximate loan amount, while the former is proof that the lender is certain the borrower qualifies for a specific amount. A pre-approval carries a lot of weight when it comes time to negotiate with home sellers. The seller then knows he's dealing with a bona fide buyer who can complete the purchase.

Another question: How can our couples find a home to purchase? Here, they are going to have to be guided by real estate agents to find the best properties for them and guide them through the process.

Once they've determined how much home they can afford, how much down payment they will need and where homes in their price range are located, and get their financing in order, our couples can start looking at houses.

Looking is where the fun (and excitement) begins. Looking at a lot of houses also can be confusing. After a while, the houses start blending together. ("Which one was it that had the open-kitchen plan with a tiled breakfast nook opening into the formal dining room?") Our couples will have to take notes, maybe even photographs or videos. It's too hard to try to remember everything.

Proper planning is vital to finding and buying that first home.

Here's a question-and-answer checklist of some of the questions that will face our first-time home buyers:

Q.Where do we start? Usually, the best place to start is with a mortgage lender to finance the home.

Q.How do we find a lender? Check your newspaper real-estate section, Yellow Pages; talk with friends, family members.

Q.How much do we need for a down payment? Anywhere from zero to 3 to 20 percent of the home's value.

Q.Where should we look for a home? This depends on how much home you can afford. Check with real-estate agents and brokers.

Q.What type of mortgage do we need? Make this determination after open, frank discussions with the lender you choose.

(c) 2001 Sarasota Herald-Tribune

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