Lenders feel safe with buyers who pay 20% down and finance the rest. If you're willing to pay that much up front, the lender is relatively confident that you're not going to default: You've already shown you're a serious saver, and you'll have a lot on the line, too. Even if you default, the lender has a good chance of collecting what it's owed if it sells the house through foreclosure, because you have more equity in the property. In turn, the advantage to you of putting 20% down is that you avoid paying for private mortgage insurance (PMI), and you'll pay less interest overall.

Of course, if you're in a very hot market, you may not want to wait until you've scraped together a 20% down payment. That's especially true if increasing prices mean you'll later have to pay even more for a house (uh oh, that 20% amount just became a moving target). You could end up being priced right out of the market. What's more, if values are rising while you're saving, you won't reap the benefits of the increased value-instead, you'll pay for it down the road, when you're finally able to afford a place.

The Creative: 80/10/10

Sometimes called a piggyback loan, an 80/10/10 strategy allows you to avoid PMI by putting 10% down and getting two loans: a mortgage for 80% of the purchase price and a second loan for 10%. With this strategy, you'll be making two payments each month, one on the primary mortgage, and one on the secondary mortgage. That second loan is commonly a home equity loan or home equity line of credit. Until fairly recently, some buyers even financed 100% with a piggyback, using an 80% mortgage and a second loan for the remaining 20%.

A home equity loan works a lot like a primary mortgage-you borrow a fixed amount of money, using the house as collateral. Usually, you get a fixed interest rate. Lines of credit, on the other hand, are more open-ended. While you still use your house as collateral, you can draw cash as you need it, as long as the line remains open. However, the interest rate on a line of credit is adjustable. Also, both of these types of loans are likely to have a higher interest rate than a primary mortgage, because the primary mortgage holder is the first in line to be paid if you don't make payments and the house is foreclosed on. The risk of losing money is higher for the secondary loan holder, because it has to wait until the primary holder is paid before it recovers anything.

Not a Recommended Strategy Homer: Homer Simpson does not lie twice on the same form. He never has and he never will. Homer Simpson does not lie twice on the same form. He never has and he never will.Marge: You lied dozens of times on our mortgage application. You lied dozens of times on our mortgage application.Homer: Yeah, but they were all part of a single ball of lies. Yeah, but they were all part of a single ball of lies.-The Simpsons

In the past, one of the major benefits of the piggyback loan was that the buyer didn't pay PMI, which lenders usually require when the loan is for more than 20% of the purchase price. However, through 2010, PMI payments are tax-deductible. Until then, you may save money by getting one loan, paying and deducting PMI, and skipping the higher-interest second loan. It may be your only choice, anyway: Lenders in the last couple years have become reluctant to fund purchases with two loans. Second mortgage holders in particular worry they won't recover what they're owed if you don't pay up and the home is foreclosed on. For this reason, a piggyback loan may not even be an option.

The Risky: Little or Nothing Down

Almost nonexistent today, 100% financing was all the rage just a few years ago, when up to one third of first-time buyers purchased this way. Today, lenders almost universally don't allow borrowers to do it. If the value of the property drops and you haven't paid off a significant portion of the mortgage, the lender stands to lose everything; and with the downturn in the housing market, lenders simply aren't willing to risk that.

TIP.

If you want to make a low down payment, check out FHA mortgages, which allow you to purchase with as little as 3% down. For more information, see Chapter 7. check out FHA mortgages, which allow you to purchase with as little as 3% down. For more information, see Chapter 7.

If you are able to find one of these loans, you'll usually have to show good credit and pay higher interest rates and more fees, including PMI. So while the out-of-pocket expenses will be relatively low (pared down to your remaining closing costs), your monthly costs will be significantly higher.

While we won't prophesy heartache, putting nothing down is still risky. If the value of the property falls below what you owe, you're either stuck paying your way out of the hole or selling the house for less than you paid and finding cash elsewhere to pay off the mortgage balance.

The risk is even greater when you combine low-cost financing tools like option ARMs and interest-only mortgages. In those cases, if you can't afford to pay down the loan principal and your property value doesn't rise, you could go deep into debt and even lose your home.

Where Do I Look? Researching Mortgages

Once you understand your loan options, you can start researching where to get the best deals. We advise exploring several research avenues, from a mortgage broker to online. Then you'll have plenty to choose from, or at least know what to ask a mortgage broker about.

As you research, organize your findings in one folder or file. It's easier to do this if you get printed information about different loan options, so ask for that whenever possible. You might also want to create a worksheet or spreadsheet to compare different mortgage features like interest rates, fees, or other terms or requirements. You can create this worksheet yourself or use one available online, like on the Federal Trade Commission website (www.ftc.gov, search for "Mortgage Shopping Worksheet"). No need to fill out your worksheet for every mortgage, just the few you're seriously considering.

Online Mortgage-Related Sites

The quickest way to get information about mortgages is on the Internet. In addition to sites operated by individual lenders, various sites aggregate lender information and allow you to compare different loan options. At bankrate. com, for example, you can compare rates based on your geographic location, the amount you want to borrow, and the terms you're seeking. Then you can contact the prospective lenders directly to get more information.

CHECK IT OUT.

Check out these sites to compare different lenders: * * www.bankrate.com * * www.hsh.com * * www.compareinterestrates.com.

Be careful, however, about any websites that require you to enter personal information like your name, Social Security Number, or address. In the worst case, you can actually agree to purchase a mortgage online-not the smartest impulse buy. More likely, you'll be contacted by potential lenders, or they'll check your credit history (and multiple inquiries can affect your credit score, though all checks within a 14-day window are treated as one.)

Newspaper Ads

The real estate sections of newspapers often advertise interest rates. Usually, lenders will list the different loan products they offer, with their base interest rate, APR, any points, and sometimes fees charged. These are probably the lowest rates offered to the very best borrowers-not necessarily the rate you'll get. Also, because interest rates change daily, these numbers may not be an accurate reflection of what actual rates are. Use them only to ballpark what's available.

Banks and Other Direct Lenders

You can also research rates through banks and other direct lenders (such as savings and loans, credit unions, and investment firms). You can do this online, pick up printed information that's available in bank lobbies or sent in the mail, or talk to a loan officer. Your options range from large national lenders to small local ones: Don't assume a bigger bank means a better loan.

Mortgage Brokers

A mortgage broker is an obvious resource and should be able to give you detailed information and help you get preapproved when you find a good loan. For more information on choosing a broker, refer back to Chapter 5.

I'll Take That One! Applying for Your Loan

Assuming you get preapproved for a loan (described in Chapter 3), you'll have already dealt with most of the necessary loan paperwork and given a lender a laundry list of your relevant financial information. (Even if you decide to work with another lender, you'll still have all the documents in one place.) If you don't get preapproved, you'll probably get a loan after you've made an offer on a house and may be pressed for time. Usually, your contract will give you a few days to find financing on terms laid out in the contract. The lender is still going to want the documents listed in Chapter 3, as well as those below.

Assembling Your Documents

After preapproval, and after you've chosen a house, but before the loan is finalized, your lender will need: * A copy of the house purchase contract. A copy of the house purchase contract. Your real estate agent should be able to provide this directly to the broker or lender. Your real estate agent should be able to provide this directly to the broker or lender.* A preliminary title report. A preliminary title report. The title company should give this directly to the lender or broker. The report tells the lender whether the seller owns the property free and clear and whether there are any financial or other encumbrances on the property. The title company should give this directly to the lender or broker. The report tells the lender whether the seller owns the property free and clear and whether there are any financial or other encumbrances on the property.* A property appraisal. A property appraisal. The appraisal report tells the lender whether you're asking to borrow more than the house is worth. The lender will probably schedule the appraisal and just ask you to show up for the appraiser's house visit. The appraiser will normally give a copy of the report directly to your broker or lender. The appraisal report tells the lender whether you're asking to borrow more than the house is worth. The lender will probably schedule the appraisal and just ask you to show up for the appraiser's house visit. The appraiser will normally give a copy of the report directly to your broker or lender.

It's also typical for the lender to ask permission to get more financial information about you by contacting different entities who have that data. This can include getting not only your credit history, but also your employment and bank records, and possibly even IRS tax records.

CD-ROM.

The "Financial Information for Lenders" worksheet in the Homebuyer's Toolkit on the CD-ROM includes a complete list of the documents you need to apply for a loan.

Filling Out the Application

Many lenders use a standard mortgage application form called the Uniform Residential Loan Application (sometimes called "Form 1003"), mainly because it's used by Fannie Mae and Freddie Mac. You might want to take a peek at the form before it's given to you, at www.efanniemae.com. Although the form is quite long, a lot of the information is stuff you already know. The rest, the loan officer or mortgage broker should be able to help you with.

If you're lucky, your mortgage broker or loan officer will actually offer to fill out the form for you (sometimes after asking you to fill out a mini-version). At a minimum, they should be willing to explain how certain items should be filled out. Ultimately, however, you're responsible for making sure the information is accurate, truthful, and complete, so review the form carefully before signing.

You May Want to Lock in a Rate Interest rates change frequently. If you apply for a loan and rates go up before the sale is complete, the lender will require you to pay the higher rate.To avoid that, you can ask for a "lock in" or "rate lock." It ensures you get the interest rate quoted to you. If interest rates are on the rise, this is a great thing, especially if you can't afford a higher rate.There are some downsides: Lock ins are usually tied to a specific property, and they're usually short term. Typically, you can get a lock for 30 to 60 days without much trouble, but you may have to pay for it, often in the form of extra points or a slightly elevated interest rate.If you get a lock in, make sure it's in writing and specifies the interest rate and points you'll pay on the mortgage. For more information, see www.federalreserve.gov/pubs/lockins.

TIP.

Play it straight. Think a little fib on your application is no big deal? Watch out: It's known as mortgage fraud, and as mortgage broker Russell Straub explains, "It's rarely prosecuted on the front end, but if a mortgage goes bad and ends up in foreclosure, a scapegoat is usually looked for. The original application is scrutinized, and in the worse cases-which I've seen-borrowers go to jail." Think a little fib on your application is no big deal? Watch out: It's known as mortgage fraud, and as mortgage broker Russell Straub explains, "It's rarely prosecuted on the front end, but if a mortgage goes bad and ends up in foreclosure, a scapegoat is usually looked for. The original application is scrutinized, and in the worse cases-which I've seen-borrowers go to jail."

Getting an Appraisal

The final-and easiest-step in your loan application process is allowing the property to be appraised. Usually, you literally stand back while the lender chooses the appraiser and tells you what day to be at the house to meet him or her. You also pay the appraiser's fee, around $400.

The appraiser's job is to determine the value of the house, and thus make sure you're not borrowing more than it's worth. The appraiser will take a good look at the property, inside and out, floor to ceiling. Any flaws that make the property less marketable will be noted. The appraiser will also consider how the local real estate market is doing and comparable sales data from nearby homes.

If the appraiser says your house is worth as much as or more than the amount you're paying for it, and everything else in your application looks good, your loan should be approved. Most often, appraisal reports come out positive. If the appraisal report says you overpaid, however, you may be in for trouble. The lender won't want to approve the loan, and you may have to dispute the appraisal or ask for a second one. But think twice before pushing too hard: What if you really did overpay? Unless the property is uniquely valuable to you, you may not want to buy it at that price after all. (And you should be able to back out, based on your contract's "financing contingency," to be discussed in Chapter 10.)

Monitoring Your Loan Once You're Approved

After you're approved for the loan, you can focus your energy on other things. Trust us, plenty of other tasks will be competing for your attention. But realize that the loan isn't actually made until the day you close on the house. It's worth staying in touch with your broker or lender, particularly if you have continuing concerns about the terms of your loan or approval. Also be mindful of any date restrictions (for example, lock-in deadlines) as you finish the purchase process.

But before you forget about the details of your loan entirely, make sure you get a Good Faith Estimate (GFE) from the lender. You're entitled to receive this document within three days of applying for your loan.

Beginning January 1, 2010, lenders are required to give you a standard GFE that looks like the sample below. Read it carefully. It spells out some very important details about the loan you're getting-for example, the initial interest rate, the initial payment amount, whether the amount can rise, and whether the loan has a prepayment penalty or balloon payment.

The new GFE is important in another respect too: it prohibits lenders from raising certain costs at closing, and it locks the amount other costs can go up. For example, lenders cannot increase the origination fee (the up-front fee paid to the broker, usually a percentage of the loan amount), and can only increase title insurance costs by up to 10% over the estimate on the GFE. This prevents lenders from tacking on "junk fees" at closing. The U.S. Department of Housing and Urban Development (HUD) estimates the use of the new GFE will save borrowers an average of $700 at closing.

CD-ROM.

The Homebuyer's Tool Kit on the CD-ROM contains a blank "Good Faith Estimate." A partial sample is shown below. contains a blank "Good Faith Estimate." A partial sample is shown below.

Sample From Good Faith Estimate (page 1)