by Michael Cutting

Created on: August 16, 2008   Last Updated: August 20, 2008

Knowing Where You are at Financially When Dealing with Home Loans

Everyone has heard and seen the advertisements for loans with the lowest rates possible, or with no closing costs. Sure, those sound like great deals, but those deals do not apply to everyone. The low rates you see on television everyday only apply to the people with great credit ratings. There are alternatives for those with not-so-good credit histories.

Here are some tips from a former mortgage loan professional regarding proper planning in mortgage loans, so that customers of all credit histories can get good rates on loans, make payments affordable, and pay off loans faster, while improving you credit rating.

Shop around- Every Tom, Dick, and Harry is offering the lowest rates possible with no closing costs, but beware of the fine print on these deals. Most apply to the top credit profiles, have loan to value restrictions, or are only rate and term refinances. If you are a good credit customer only looking to lower your rate and reduce your term while getting no cash out for other bills, this is the program type for you. However, if you want to take out cash for bills, home improvements, or a big purchase, you are not going to get that advertised rate, because the loan style is a higher risk loan to the lender, and therefore, investors will not buy that loan bulked into a security unless the rate of return is higher.

Only take what you can afford- The rule of thumb for excellent credit customers when refinancing is to have the mortgage payment be no more than 33-36% of the customer's monthly household income before taxes. If you are looking to refinance, make sure your new payment is not higher than 36% of your income, or you may have difficulty with that new payment. Customers with other-than-stellar credit histories most often get mortgage loans through sub-prime (non-conforming) lenders. These lenders often allow a debt-to-income ration of up to 50%, which get these customers into financial trouble, explaining why the customers are sub-prime in the first place. It is also important for all customers looking for a mortgage loan to only refinance if there is excessive equity in your home. A guide is less than 80% of your home's appraised value. For example, if your home is worth $200,000, it is wise to not refinance if the new loan amount is over $160,000. A high loan-to-value loan increases the chance of default in a situation where home values drop, and all of a sudden you owe more on your

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