| Getting a Home Loan | | | | slow economy. Lower interest rates promote |
| With all the factors that go into deciding your loan | | | | borrowing, because money becomes cheaper to get |
| terms, keep in mind that some of these are | | | | and easier to spend. A rate hike should happen when |
| determined by you; others are and always will be | | | | money is being spent too freely and prices are going |
| beyond your control. An investor's ability to judge | | | | up at a more rapid pace than is sustainable. The goal |
| whether you are a good candidate for a loan, and if | | | | of our economy is to promote a strong and steady |
| so, how large that loan should be, comes from two | | | | growth rate; we want to grow, but not too fast. So |
| factors: your financial status, and the current economic | | | | changing interest rates like this maintains a certain |
| environment. | | | | degree of control over our system and balances the |
| Financial Status | | | | economic scales for the most part. Now back to how |
| When you talk to a loan officer and express interest in | | | | this affects your home loan. |
| procuring a mortgage loan, they're going to ask you a | | | | Economic Environment |
| few questions about yourself. Be ready to provide | | | | When you apply for a home loan, the lender wants to |
| honest and accurate answers to these questions; | | | | give you money. You've got to have it to make it, of |
| anything else will only make things hard on you in the | | | | course, and the way lenders make it is by setting the |
| long run and may get you into trouble. | | | | interest rate at which they lend money a few |
| The loan officer will ask about your job; who you work | | | | percentage points higher than it costs them to get that |
| for and where you work, how much money you | | | | money in the first place. So a high fed funds rate |
| make, and how long you've been employed there, | | | | means a bank has to pay more to get money. In turn, |
| along with other sources of income you may have | | | | they have to charge you more to borrow it from them |
| from renters, a side job, or freelance work. They'll | | | | so they can still turn a profit. The average interest rate |
| want to know about any assets you have besides | | | | set by banks is called the prime rate, and in the United |
| your monthly income such as savings or investment | | | | States it is generally about 3 percent above the fed |
| accounts, cars, and a rough estimate of the total value | | | | funds rate. Banks use the prime rate to set their own |
| of the other merchandise and personal property you | | | | rates for loans as they see fit. |
| own. Your place and length of residence will also be in | | | | What happened in the subprime mortgage meltdown |
| question; if you currently own any other houses, and if | | | | was that lenders were offering loans at values less |
| you have ever filed for bankruptcy. | | | | than or very close to the prime rate. These were |
| The officer will probably inquire as to any debt you | | | | called "teaser rates" because the terms of the loans |
| have incurred - credit card balances, back taxes, liens | | | | they were attached to specified that they were only |
| or other loans. They may ask if you know what your | | | | to last for a short period of time when compared to |
| credit score is, but whether you do or not, they'll check | | | | the overall length of the loan. When the introductory |
| it for you. All of this information will be used to figure | | | | periods began to expire and many found themselves |
| out what your debt-to-income ratio is and therefore | | | | unable to make payments, a rash of foreclosures took |
| how much you can borrow. The debt-to-income ratio | | | | place and banks were swamped with huge inventories |
| is a measure of how much a mortgage of a given | | | | of vacant properties. |
| amount would cost you each month versus how much | | | | Real estate values plummeted, and banks could no |
| you make in an average month. Target DTI ranges | | | | longer sell these homes anywhere near the amount |
| vary depending on the type of loan you end up with, | | | | they had lent the original borrowers. Then, due to |
| but they typically hover somewhere around 30% of | | | | increased supply and lacking demand, some of the |
| your gross income. | | | | leftover homeowners who had purchased at high |
| The Fed Funds Rate | | | | prices bought second homes and voluntarily let their |
| Just wanted to insert a quick note on the fed funds | | | | first, overpriced ones go into foreclosure. Some didn't |
| rate and a crash course in economics, for any who | | | | mind the extreme negative effect this had on their |
| may not have the background of how this works. The | | | | credit scores - after all, credit scores can be fixed |
| Federal Open Market Committe (FOMC) is in charge | | | | over time, and in the end they were left with much |
| of setting interest rates based on the economic | | | | more affordable housing. |
| climate in the United States. Banks are always lending | | | | Your Rate |
| money to and borrowing it from one another. The fed | | | | Your rate will be determined mostly by your credit |
| funds rate is the interest rate that banks use to lend | | | | score; if you have a solid credit history and little debt |
| money to each other overnight. This is one way the | | | | you can count on your rate being fairly close to the |
| FOMC (hopefully) keeps events like the Great | | | | average. If you've had some trouble paying things off |
| Depression from happening in the future; it's a way of | | | | on time in your recent past, though, you may be stuck |
| manipulating our supply of money (incidentally, called | | | | with a higher rate. Refinancing is one way you can |
| the money supply) so that people aren't spending and | | | | remedy this in the future, but you'll want to wait and |
| saving too much or too little. | | | | make sure a refinance is worth your while. |
| When interest rates go down, it's usually to stimulate a | | | | |