Before I discuss the different loan types, I want to briefly comment on three critical aspects of getting a good loan.

Debt To Income Ratio (DTI)
Your monthly debt to income ratio (DTI) is perhaps the most important element of getting a loan. To qualify for a 1^st mortgage, your approximate DTI must be less than 35%. To qualify for a 2^nd mortgage, your approximate DTI must be less than 45%. To calculate your monthly DTI, take all your combined monthly debt payments (credit cards, car payments, mortgage payments, liens, judgments) and divide that by your gross monthly income. You must be able to validate your monthly income. DTI varies from lender to lender and this is not an exact quote. These are just typically ratios.

Credit Report
Your credit report shows all credit cards, accounts, car loans, home loans, judgments, liens, and any other kind of loan where you make a monthly payment. As you search for a loan, try not to have your credit report run too often as this lowers your overall credit score – called a FICO (Fair Isaac Score) - which can hurt your chances of getting the best loan. Here are rough guidelines to help you determine your own credit.

·   EXCELLENT: FICO is 700+
No mortgage late payments, no late payments on car loans, credit cards, or other sources of credit.

·   GOOD: FICO is 650 - 700
No mortgage late payments, 1 - 2 late payments on other forms of credit over past 3 years.

·   FAIR: FICO is 600 - 650
1 mortgage late payment over past 3 years, 2 - 5 late payments on other forms of credit.

·   POOR: FICO is 599 and lower
Bankruptcy in last 5 years, multiple mortgage late payments, multiple late payments on other forms of credit.

Letters Of Explanation
All items that appear on your credit report must be explained to your loan agent. As you progress through the loan process it is very important that you divulge all information about your financial history to your loan officer at the beginning of the process. This will allow the loan officer to address those issues quickly and efficiently. If you try to hide something, the loan officer and worse, the underwriter, will find out about it eventually as result of examining your credit report. If the underwriter feels you are trying to be sneaky about something, chances are your loan will be rejected. That’s why it’s important to be completely honest upfront and write clear, simple letters of explanation concerning delinquent accounts, liens, missed payments, and other problems you’ve had. It may be embarrassing to divulge this information, but you be thankful you did in the long run.

Home Purchase 

Your First Home
Obviously, if you don’t already own a home and you want one, you need a Home Purchase Loan. These days you have tons of home loan options. Even if you don’t think you qualify, try anyway! You might be surprised.  There are loans out there that allow you to buy a home with little or no money down. Plus, you can roll your loan closing costs right into the loan itself, or ask the seller to pay those costs. If you do have a nice chunk of money to use as a down payment, that will help reduce you monthly mortgage payment. Remember this:  Lenders want to lend you money because they make money when you pay them interest each month!  Most decent lenders will do everything they can to help you get a loan.

Here are some ideas to help you research your new prospective neighborhood. Go door to door to talk with neighbors, drive the neighborhood at different hours of the day, and on weekends to gauge the atmosphere. Other questions to ask are: Are most people in the neighborhood renting or owning? If most people are renters, that may negatively effect the quality of the neighborhood. Renters tend to take less care of their homes. If you have children, are there other kids their ages in the neighborhood?  Are schools close by? Access to major highways and freeways? Traffic?  Longer or shorter commute to work?  Distance from relatives? Crime rate?  Population growth?  Weather?

Buying Your 2^nd, 3^rd, or 4^th Home
If you already own your own home, the loan process is not new to you.  However, depending upon how long you’ve lived in your current home, you may have forgotten how much work it is to move into a new home and neighborhood! There are many reasons why people choose to move to a new home. Sometimes you are forced to move due to a job change or other events. However, if you have a choice, instead of moving you might consider simply remodeling.  Moving into a new home has so many new variables that are out of your control.  Sure, you might have a bigger, better home, but what about the new neighbors, commutes, schools, crime rate, stress on you and the kids, and more?  If you are relatively happy with your current neighborhood, why not simply do a major remodel instead? If you do decide to move, I hope the pointers outlined in the paragraph above can help.

2nd Mortgage
A 2^nd mortgage is simply a second loan on your home in addition to your first mortgage.  You are able to get a second mortgage due to the fact that your home’s value has increased over time.  The banks use the equity in your home as collateral against the amount of money you borrow from them. The most common types of 2^nd mortgages include:

·   Home Equity Loan
A home equity loan is a 2^nd mortgage which is a line of credit against the equity you have built up in your home. Typically, your credit amount is limited to 90% to 100% of your property value. You can use the money for anything you want.

·   125% Loan-To-Value Loan
This loan actually lets you borrow more than you property is worth. On the one hand, you can get more money with this loan. However, the disadvantage is that the payments and interest you pay over 100% of property value are NOT tax write-offs. It’s very important you check with your tax advisor to discuss the tax ramifications of your loan. ??

·   Home Improvement
The government used to have a special insured loan called a Title 1 Loan which could be used for home improvements. The government no longer offers this loan. However, you can still get a 2^nd mortgage which can be used for home improvements. In some cases your lender will pay the contractors directly for the work you have done.

·   FHA/VA 
This is a 1^st mortgage which is typically used to buy your first home only. If you are Veteran you can use this loan. The amount of the loan cannot exceed $290,000.

·   Debt Consolidation
In a nutshell, a debt consolidation loan allows you to pay off bills from credit cards, cars, medical items and others. The one thing you should consider is the fact that you are eating into your home equity to pay off bills.  In a sense, you will eventually pay the interest from your debts in the form of a debt consolidation loan. You are not really getting rid of your debts. You are simply converting the form of how you pay into a home loan. A debt consolidation loan can help you short term by reducing your monthly payments, but in the long term as interest accrues, you might end up paying more. However, sometimes the current stress of all your bills is just too much. In such a case, a debt consolidation loan is well worth keeping your sanity! Your lender will pay your creditors directly to pay off all your bills.

Refinance 
A refinance loan simply allows you to get a new loan with perhaps a shorter loan term (15 or 20 years instead of 30 years) and typically a better interest rate. When evaluating whether or not to refinance, use the 3-year rule.  If it takes more than 3-years to regain the money it costs you to refinance, then it probably isn’t worth it.  Also, if refinancing only reduces your monthly payment a little, it may not be worth it. You may also have a pre-payment penalty which means that if you refinance before a certain period of time, you pay a stiff penalty on your current loan.  In this case, refinancing would not be in your best interest.  However, if interest rates are extremely low, then the financial benefits may outweigh the penalty. The main thing is that you want a clear picture of exactly how much a refinance loan will cost you both short-term and long term.

Conclusion
Whatever loan you decide to get, I hope this brief article has helped you make a better decision. Good luck!

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