By Russ Van Arsdale, executive director Northeast CONTACT
Posted March 09, 2014, at 8:50 a.m.
We’ve all heard the ads urging us to buy, since “interest rates are near historically low levels.” With spring approaching (at least on the calendar) and those low rates expected to hold for a while, many renters are thinking about buying a home.
Many may think twice, wondering if all those horror stories about houses going “under water,” or costing more than they’re worth, might come back to bite them. Those with second thoughts might want to spend some time with a new publication from the Maine Bureau of Consumer Credit Protection.
It’s called The Downeaster Common Sense Guide to Finding, Buying and Keeping Your Maine Home. The 32-page guide was written by the bureau’s principal examiner, David Leach, and senior consumer credit examiner, Edward Myslik.
It starts in exactly the right place: asking if you should buy a home or continue to rent. Once you’ve determined that your best bet is to buy, the real work begins.
The best piece of advice in the guide is not to buy more home than you can afford. You figure affordability through a debt-to-income ratio. The “front-end ratio” is figured by dividing the monthly mortgage payment (principal, interest, taxes and insurance) by the borrower’s total monthly income. The ratio should not be more than 28 percent.
What’s termed the “back-end ratio” is a measure of income against the mortgage cost plus the cost of all other loans.
The guide cautions against allowing this ratio to go higher than 43 percent.
New federal lending rules are aimed at ensuring that borrowers will be able to make payments on schedule; those rules make it unlikely that a loan will be approved if the back-end ratio exceeds 43 percent.
Once you’ve ordered an up-to-date credit report ( www.AnnualCreditReport.com, 877-322-8228) you’ll have an idea what your credit score will be. The score is not part of the report; it’s a number generated by Fair Issue Corporation, also known as FICO.
The scores provided to each of the three credit reporting bureaus may be different, and lenders will use the lowest number when offering an annual percentage rate, also known as APR, on a loan.
When shopping for a mortgage, you need to decide between conventional loans and Federal Housing Authority, also known as FHA, backed loans. Under the latter type, the FHA provides a guarantee to investors should a borrower default. The guide advises that, while FHA loans are priced about the same as conventional loans, the mortgage insurance costs more (meaning higher APRs).
The guide has lots of nuts-and-bolts info on shopping for mortgages. Note rate vs. APR, mortgage points, disclosure, home inspections and other concerns are all covered. The authors also caution against falling for three advance payments that guarantee a low APR. Advance fee loans are always scams and are illegal in the U.S. and Canada.
Read the guide online at www.Credit.Maine.gov and go to “Consumer Guides.”
Maine residents can also request a free printed copy by calling 800-332-8529. For a real estate professional’s take on home mortgages, visit www.realtor.com/home-finance/mortgages/how-to-get-best-interest-rate.aspx?source=web.
Consumer Forum is a collaboration of the Bangor Daily News and Northeast CONTACT, Maine’s all-volunteer, nonprofit consumer organization. For assistance with consumer-related issues, including consumer fraud and identity theft, or for information, write Consumer Forum, P.O. Box 486, Brewer 04412, visit http://necontact.wordpress.com or email firstname.lastname@example.org.