• There are hundreds, if not thousands, of mortgage people out there. How do I choose the right one?
• Once I decide on a lender, what's the next step?
• How can I tell if the person I'm working with is licensed?
• What kinds of things are lenders going to look at?
• How do the legs of the loan affect interest rate and risk?
• How long does a loan typically take?
• What are "points" and how do they work?
• How much can I expect to pay in closing costs?
• Are there any loans for people that, because of some problems in the past, had to declare bankruptcy?
• Is it possible to purchase a home with absolutely no money down, like the late-night gurus suggest?
• I would like to purchase a home but have income tax liens. Is it still possible to purchase a home with nothing down?
• I have some credit card lates in my recent past. Is it still possible to purchase?
• Who are the major players in the real estate/mortgage industry, and how do they affect my loan?

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There are hundreds, if not thousands, of mortgage people out there. How do I choose the right one?

We believe this is the single most important question you can ask. With all the choices people have out there, picking just one can be tough. This is made more difficult by the fact that a majority of the people out there do not have your best interests at heart. In fact, if you've ever purchased or refinanced a home, you've probably experienced disappointment at the way the transaction turned out.

The first thing you should do is get educated about how the industry works and what your loan might look like. The Internet will allow you to do all kinds of research and find out what's out there. By doing this you'll know what questions to ask and what the answers should sound like. We would also recommend that you start with people who come recommended by your friends or family members, people you can trust. After all, if someone did a great job for a trusted friend or family member, they'll probably do a good job for you as well.

Finally, you should go with someone you feel like you can trust. Anyone can tell you they'll get you the lowest rate or the lowest fees, but only an honest person will deliver on that promise. Ultimately, you're going to be better off paying a little bit more, if that's what it comes down to, than going with someone who's going to rip you off at the end or not get you the best deal available for your situation.

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Once I decide on a lender, what's the next step?

Generally speaking, once you've decided who you're going to go with you'll want to have them fill out an application with you and sign the disclosures that are required by your state. Every state is different so it's important to work with a lender who is licensed in your state and familiar with the laws where you live.

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How can I tell if the person I'm working with is licensed?

Every state has some kind of agency that handles all the education and licensing of people working in real estate. Our recommendation is to search on Google for your state's agency. In California, the agency is called the Department of Real Estate and you can find them online at http://www.dre.ca.gov.

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What kinds of things are lenders going to look at?

It's going to be different for everyone, but generally speaking there are four parts to every loan. Just like a table or chair with four legs, a loan missing one of those legs is going to be a little less stable and may mean it's a harder deal to do. Here are the four legs of a loan:

Income

Your income, specifically the income you can verify, determines what kind of payment you can qualify for. Lenders measure this using the DTI, debt-to-income ratio. Simply take the total amount of monthly debt payments you have, including anything that would show up on your credit report, and divide by your gross monthly income. For example, if you have a mortgage of $1,000 and $500 in credit cards ($1,500 total) and your income is $4,500 per month, your DTI would be $4,500 divided by $1,500, or 33%. The DTI ratio measures your ability to pay.

Credit

Every person in the US has a Social Security number, or SSN, that is used for anything from getting to job to buying a house to leasing a car. Most companies that issue credit report your monthly payment history to the three credit bureaus - Experian, Equifax, and TransUnion. These three bureaus each have a proprietary scoring system that results in a credit score, also called a FICO score or a TRW. This score helps the lenders measure your willingness to pay.

Equity

Any lender is going to want to know how much equity is in the home, which will tell them how much of a cushion they have. This is called the LTV, or loan-to-value ratio. This can be calculated by taking the total amount of the loan and dividing it by the value of the property. For example, if your loan is $70,000 and the house is worth $100,000, then your LTV is $70,000/100,000, or 70%. The LTV ratio helps the lender determine the cushion they have as well as the amount of money you have invested in your home.

Reserves

Reserves are a fancy way of saying money in the bank. This doesn't necessarily mean a savings account, it can mean a 401(K), money market, or brokerage account. Essentially, any funds that are in your name that you would have access to in an emergency.

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How do the legs of the loan affect interest rate and risk?

Generally speaking, each of the four legs of the loan helps the lender guage the amount of risk in your loan. If one of the legs is bad or missing, this may not be a huge deal. However, if two or three of the legs are missing or in bad shape, this will mean a much riskier loan and higher interest rates. Here's how the different legs affect your loan and what risks are involved.

Income

As mentioned above, the income tells the lender your ability to pay the mortgage payments. If you have enough income to qualify for the loan (generally a DTI of 50% or below) and you can verify that income (using paystubs, W2s, tax returns, etc.), then you're in good shape. If you don't have enough income to qualify or you can't verify the income that you receive, then the loan becomes a little bit riskier.

Credit

Your credit score tells the lender how good you've been at paying your bills on time in the past. This isn't necessarily a guarantee that you'll continue to do so, but it's a much better risk. If your credit scores aren't so good, then the lender knows that the loan is a little riskier and they probably need to compensate for the fact that you may not pay your mortgage on time with a higher interest rate.

Equity

The LTV ratio tells the lender not only how much cushion they have in case something happens and they have to sell the house, but also how much "skin" you have in the game. If you're buying a house and doing 100% financing, then you have no money invested in the house and there will be very little to keep you from walking away. However, if you put 30% down then the lender knows you've got a lot of your own money in the house and you're much more likely to do whatever it takes to make the payments on time and protect your investment.

Reserves

Reserves reduce the risk to the lender since they can see that not only do you know how to save, you have money set aside for life emergencies so your mortgage payment won't be the first thing that gets missed. If you can show at least 2-3 months worth of income in reserve, this will reduce the risk to the lender and mean a smoother loan and potentially a better interest rate.

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How long does a loan typically take?

The best answer to this question is "It depends", but generally it's about 3-4 weeks, depending on your situation and the difficulty of the loan. A refinance is generally faster than a purchase, as purchases are dependent on the length of the escrow period, which is usually 30 days.

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What are "points" and how do they work?

A "point" is basically loan lingo for 1% of the loan amount. In other words, if your loan is for $400,000 then 1 point would be equal to 1% of the loan amount, or $4,000. Lenders usually charge borrowers in points so that if the loan amount goes up or down, their compensation changes automatically. More on charges in the next question.

Generally speaking, points are used in two ways. One is as compensation for the lender - they get paid in points. Two is for buying down the rate - a lender may charge you a point to get a lower interest rate. The idea behind this is that if you pay the lender up front, then they can charge you a lower interest rate. There are always exceptions, but as a general rule it's better to pay points to buy down a rate only if you're going to hold the loan for a long period of time, at least 5-7 years.

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How much can I expect to pay in closing costs?

Again, the best answer to this question is "It depends", on your situation and whether it's a purchase or refinance. For a purchase, closing costs are usually around 1.5-3% of the purchase price of the home. If you're buying a home for $200,000, you can expect to pay somewhere between $3-6,000 in total closing costs (lender, escrow, title, notary, etc.). A good rule of thumb is that the lower the purchase price, the higher percentage you can expect to pay, and vice versa. For a more detailed answer, please feel free to contact us via any of the information here.

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Are there any loans for people that, because of some problems in the past, had to declare bankruptcy?

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