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by David Thornton

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If you area a first time home buyer, choosing a mortgage can seem like a daunting task. It gets a lot easier if you learn some basic information. In one of my previous jobs, I worked as a mortgage loan officer. I've also bought several houses, and I'd like to pass along some tips on shopping for a mortgage.

Obviously, the better your credit, the easier finding a mortgage will be. Banks look at your credit history when you apply. If you havn't been paying your bills on time, it will be much more difficult to find a loan, especially in today's market. For most banks, payments on your house are considered more important than payments on credit cards and cars, but all credit is important. If you are thinking about buying a house, get your bills up to date as quickly as possible, then keep them current.

Second, loan officers look at how much money you make. If you are a self-employed person, start documenting how much money you make. This is typically the opposite of what your accountant will tell you because your accountant wants to hide money from the IRS. You loan officer will want to see proof of your income.

Typical mortgage guidelines are that your monthly mortgage payment should not be more than about 25% of your monthly take home pay. All of your monthly payments should not be more than about 32% of your take home pay. This allows you to have extra money for things besides paying debt. They know that you have needs for things like food, gas, electricity, and water.

If you use these guidelines to figure out how much you can afford to pay for house before you start shopping for one, you will make the process much easier. If your net pay is $5,000 per month, multiply that by 0.25 to find a maximum monthly payment of $1,250.

Remember that many mortgage payments include escrows for your property taxes and homeowner's insurance, so the mortgage payment that you will be able to afford will be smaller than $1,250. (Escrow means that you pay the lender a portion of your tax and insurance costs each month, and the lender pays these bills when they come due.)

Next, do an internet search for "mortgage payment calculators." Take an educated guess as to what the interest rate will be. You can find out what rate lenders are offering in their ads, posted at the bank, or on the internet. Put in the number of months or years that you would like for your mortgage. Thirty years is the most common. Then guess at loan values until you find a monthly payment that is close to what you can afford. At 7% interest over 30 years, a $150,000 loan will require a payment of $997.95. That is pretty close to our estimate.

Next determine what you can afford for a down payment. In the past, you could finance 100% of the value of a house, but those days are probably gone for a while. A loan-to-value (LTV) ratio of 80-95% will probably be more likely. That means that you will need a down payment of 5-20% of the house value.

Keep in mind that the $150,000 is the loan value. If we assume an 80% LTV, you could buy a house worth $187,500 ($150,000 divided by 0.8). Your mortgage would be $150,000 and you would need a down payment of $37,500 for the balance. If you need a smaller down payment, shop for a lender that will give you a larger LTV.

Exercise caution here and don't spend all of your cash on the down payment. Keep a reserve to pay for unexpected maintenance items or other emergencies.

Start shopping lenders for a mortgage before you find your house. If you talk to a lender and get pre-approved based on your credit and income, things will move much faster when you find a house you want to buy. Start with your local bank and see what they will offer. Ask your friends who own homes for referrals for their lenders. Ask your real estate professional for a referral. Credit unions often have great deals on loans for their members. You might also contact a mortgage broker. Brokers are independent businesses who will shop your loan around to several lenders, so that you don't have to.

Don't get caught up on brand names. State and federal governments heavily regulate mortgages so they are very few differences from one company to another. The same is true of insurance. With respect to mortgages, even if a brand name lender gives you a loan, it will likely be sold to another company after your closing, and you'll end up dealing with a completely different mortgage company.

Do find out what you are being sold. There are fixed interest rate and adjustable rate (ARM) mortgages. Fixed rates stay the same for the entire loan, but ARM interest rates can vary, so if you consider an ARM, be sure you know how often and how much your rate can change. Failure to understand this point was a major component of the current mortgage crisis.

Points are fees paid to the lender to decrease the interest rate. If you have a lot of money for a down payment and want a lower interest rate over the life of the loan, you might want to consider this option.

Closing costs are fees that will need to be paid at the loan closing. Closing costs might include fees for the appraisal of the house, underwriting fees, your homeowner's insurance premium, attorney's fees for the closing, and the commission for your real estate agent. You might be able to negotiate with the seller to have them pay some of these closing costs. You might also be able to include them in the loan amount.

If you pay less than 80% down, your lender might require Private Mortgage Insurance (PMI). PMI protects the lender if you default on the loan. This will add to your monthly payment. Keep track as you pay down your loan principle, you can probably get the lender to remove the PMI when the LTV goes below 80%, although this may require a new appraisal.

Finally, the government offers several programs through the Veterans Administration (VA), Federal Housing Authority (FHA), and Rural Development Service of the US Department of Agriculture (USDA). These loans may require a smaller down payment if you can qualify.

In closing, if buying a house for the first time, find some experienced and trustworthy professionals that can help steer your through the process. Verify what is in writing and make sure your understand what you are signing before you make the deal. That will help keep your dream house from becoming a mortgage nightmare.

Learn more about this author, David Thornton.

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