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Home Buying in Today's Economy

Mortgage rates are lower now than they've been in decades. You have to go back to around 1961 to find a time when 30-year mortgages had rates this low, according to Keith Gumbinger, a vice-president at financial publisher HSH Associates in Pompton Plains, N.J. Why? The federal government is trying to jump-start the housing market by buying up mortgage-backed securities. Even with lower rates and more affordable homes, there are key points you need to consider before buying in today's real estate market.

All lender rates are not the same.
When the economy was better, most lenders' rates clustered within a 1/4 point of one another. Now, they are all over the map, and rates are constantly changing from day to day. For example, one day in late December 2008, Wells Fargo was offering 30-year conforming loans at 5.0% plus one point, while Bank of America was offering the same kind of loan at 6.625% plus one point, according to Cameron Findlay, chief economist of LendingTree.com, a division of Home Loan Center.

For new loans, fixed rate is best.
The best deals right now are on fixed-rate loans because these are what the government has been targeting for stimulating the housing market. The securitization of adjustable-rate loans has mostly dried up, so banks don't want to originate ARMs. Therefore, they don't offer attractive rates on them, says Keith Gumbinger, a vice-president at financial publisher HSH Associates in Pompton Plains, New Jersey.

Get your financial house in order.
Even though the two mortgage finance giants (Fannie Mae and Freddie Mac) are now under government conservatorship, credit standards for the loans they'll buy or guarantee are still tight. You'll need a FICO score of at least 720 for the best interest rate. Mid-600s may be acceptable for an additional fee. And you'll need at least 20% down. Piggybank second mortgage loans that were used to cover up to 20% of the financing shortfall on home loans are now history. Even private mortgage insurance (PMI) is much harder to get because the issuers have suffered such big losses.

The only way to get around the down payment requirement is if you qualify for a FHA loan or a VA loan. With a FHA loan, you could buy a house with as little as 3.5% down. And, if you are active duty military, a reservist, a veteran or unmarried surviving spouse of a deceased veteran, you may be able to get up to 100% financing on your home through a VA loan. But, even with a government-backed loan, you will still have to meet lender DTI requirements and have full documentation on your income.

According to LendingTree.com, for a Fannie or Freddie conforming loan, your monthly mortgage payments cannot exceed 28% of your gross income, while all debt payments (including student loans, etc.) cannot exceed 36% of your gross income. For a FHA loan, the corresponding figures are 29% for mortgage debt and 41% for all other debt. And, you'll still need full documentation on your income.

Make sure you have enough money to not just buy, but also maintain your home.
It's not all just a matter of keeping up with the mortgage payments, but also having enough to cover routine maintenance and for when something breaks down. Rick Sharga, marketing vice-president at RealtyTrac says, "Most people getting into the market for the first time seriously underestimate the cost of maintaining a home, from taxes to upkeep. What happens if that water heater blows? Do you have enough money to pay for it without missing a mortgage payment?"

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