It’s a buyer’s market right now for people wanting to purchase homes. Housing prices are affordable and mortgage rates are low. But if you don’t have a sizable down payment saved up, you could end up straining your finances.

Use a Mortgage Payment Calculator

Before applying for a home loan you should go on a fact-finding mission to determine how much house you can afford. While it’s fun to visit open houses and browse through homes for sale at various Web sites, it’s just as important to crunch the numbers with a mortgage payment calculator to see what your monthly bill is going to look like.

Your Down Payment Matters

So much attention gets focused on mortgage rates that many people don’t really stop to think about how the size of their down payment is a key factor in how money they’ll shell out for housing payments for the next 30 years or so.

During the housing boom, mortgage lenders often enticed borrowers with home loans that required zero or low down payments. Millions of home buyers jumped into these mortgage loans, desperate to get a piece of America’s homeownership dream even though it meant high monthly payments or mortgage rates that would adjust up in the future.

Who Can Get Low Down Payments?

Mortgage lenders are reluctant to offer many borrowers low down payment mortgage loans these days. Some borrowers may be able to qualify for low down payments, but many mortgage lenders are looking for 20% down to underwrite home loans at the best mortgage rates.

FHA Changes Down Payment Rules

Even the Federal Housing Administration is rethinking its 3.5% down payment option. It recently announced a policy change to only allow people with credit scores of at least 580 to qualify for the 3.5% down payment. Borrowers with lower credit scores must put down at least 10% on a mortgage loan.

Beyond Home Loan Principal and Interest

When using a mortgage calculator be sure to plug in your estimated costs for homeowners insurance, property taxes, and homeowners association (HOA) dues. Depending upon where you buy a home, these costs could add a significant amount of money to your monthly housing bill.

Are You Ready to Get a Mortgage Loan?

Your fact-finding mission should determine whether or not you are ready to apply for a mortgage loan and buy a home. After running all the numbers through your calculator and looking at how much debt you can afford to carry on your current income, it may be prudent to postpone a home purchase. But if you feel that you are ready to take the plunge, shop around and compare quotes from several mortgage lenders to find the best deal.

Fannie Mae is offering buyers of its foreclosed homes help with mortgage closing costs.

Mortgage Closing Costs or Appliances

Homebuyers who purchase a HomePath property owned by Fannie Mae will receive 3.5% of the final sales price toward closing costs on a home loan or appliances. Homebuyers also can choose to apply the incentive to a mix of closing costs on a mortgage loan and appliances.

To receive assistance you must purchase a property listed on HomePath.com before May 1, 2010.  Offers must be accepted on or after Jan. 28, 2010.

The HomePath Web site has photos of available homes and detailed property descriptons. Only properties purchased as your principal residence qualify for the program.

Reducing Inventory of Homes

 ”Attracting qualified buyers to the market and reducing the inventory of vacant homes is critical to stabilizing neighborhoods and helping the market recover. Many families are taking advantage of the federal homebuyer tax credit to buy a new home so this is a great time for Fannie Mae to offer some additional help,” Terry Edwards, Executive Vice President of Credit Portfolio Management, said in a statement.

Fannie Mae sold 89,691 foreclosed homes in the third quarter of 2009, according to the Washington Post. 

Talk with Fannie Mae Listing Broker

People who are interested in getting a mortgage and with assistance from Fannie Mae should discuss their options with a Fannie Mae listing broker. Mortgage lenders can restrict how the 3.5% incentive can be used.

Fannie Mae Mortgage Help

Fannie Mae also offers financing on some homes. The agency offers mortgage loans with low down payments even if you don’t have the best credit. The home loans don’t require mortgage insurance or appraisal fees. The HomePath Renovation Mortgage is available to purchase and renovate homes.

The down payment for both types of mortgages must be at least 3% and can be funded by your savings, a gift, grant, or loan from a nonprofit, state, or local government, or employer.

Homebuyer Tax Credit

Homebuyers also can claim the First-Time Homebuyer Credit for homes purchased through April 30, 2010. They must close on home loans by June 30, to be eligible for the tax credit, according to the Internal Revenue Service. 

First-time homebuyers are eligible for a tax credit up to $8,000. Existing home owners who have lived in their house for five consecutive years out of the past eight are eligible for a tax credit of up to $6,500.

Expect to pay more money to borrow a mortgage loan insured by the Federal Housing Administration  (FHA). Policy changes at the agency are designed to help the FHA better manage its risk as the housing market recovers.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to under-served communities, and supporting the nation’s economic recovery is critically important,” FHA Commissioner David Stevens said in a statement.

Here’s what you can expect if you apply for an FHA mortgage.

Mortgage Insurance Premiums Rise

The FHA is raising the mortgage insurance premium (MIP) to help build up capital reserves and help spur private lending. The upfront MIP is rising to 2.25% from 1.75%. The FHA intends to shift some of the premium increase to the annual MIP from the upfront MIP so it can have less impact on borrowers.

Mortgage Loans and FICO Scores

 The policy changes now require borrowers to have a FICO score of at 580 to qualify for the 3.5% down payment on a FHA home loan. Anyone who has a FICO score below 580 must make a down payment of at least 10%. The new credit score requirement goes into effect this summer.

Less Help from Sellers

The revised guidelines decrease the amount of help you can get from the seller when buying a home. The FHA is reducing concessions by sellers to 3% from 6%. Concessions include things such as sellers helping with closing costs. This change conforms to industry standards.

More Enforcement on Mortgage Lenders

The FHA also says it plans to report performance rankings on mortgage lenders as a complement to Neighborhood Watch data. The move is aimed at making mortgage lenders more accountable.

Troubled Mortgage Loans

As the economy has struggled more borrowers have turned to FHA mortgages because they require smaller down payments than other loans. About 30% of new home loans are insured by the FHA. Now, the FHA finds itself burdened with a slew of troubled loans.

The FHA says it is still committed to proving mortgages to first-time homebuyers. But the tougher lending requirements mean some people may not qualify for  mortgage loans.

“It will slow the growth in demand.  Any time you put up roadblocks, fewer people will qualify,” Joel Naroff, of Naroff Economic Advisors, told USA Today. “This is just the beginning of clearer and more specific requirements so we don’t get into the mess we got into again. In the short term, it will have an effect, but it won’t be a huge effect.”

More homeowners are choosing to walk away from their mortgage loans rather than make payments on homes that have lost significant value. These strategic defaulters intentionally stop paying on mortgages even though they can afford to make the payments.

The practice has many people debating the ethics of walking away from home loans. Some people see nothing wrong with the practice while others say homeowners who intentionally default are immoral.

Mortgages as Baggage

Strategic defaults have especially risen in Arizona, California, Nevada, and Florida, according to the Wall Street Journal. Those states have high percentages of people underwater on mortgage loans, owing more than their homes are valued at.

Promise to Repay Mortgage Loan

While it may make financial sense to walk away from a home loan, the fact is that anyone who borrowed money signed a promissory note to repay the loan. That promissory note didn’t say pay up unless home values go down or until you get tired of making monthly payments.

Financial Damage

So what happens when homeowners strategically default? First, they end up in foreclosure, and the mortgage lender takes possession of the property. Then their credit scores get hit, plunging as much as 160 points. They also may have other assets seized by their mortgage lender depending upon where they live.

Mortgage Defaults Hurt Community

Strategic defaults don’t just hurt individual homeowners. They also affect the neighborhood where the property is located. Foreclosures significantly impact the property values of surrounding homes. The closer you live to a foreclosure, the more it negatively affects your home’s value, especially if it looks abandoned and poorly maintained.

People who lived withing 300 feet of a foreclosure usually saw their property value drop 1.3%, according to a 2008 study. People within 300 to 500 feet of a foreclosure had a 0.6% drop, according to the New York Times.

Could It Happen Again?

On the positive side strategic defaulters may be able to cut their housing costs while they rent for a while. That could help them save money. But it seems that if these people are willing to renege on a home loan once, they’re likely to do it again in the future if they don’t like the housing hand they’re dealt.

Strategic defaults are likely to continue as more people become fed up with being underwater on their mortgage loans. But anyone who decides to take this step should be prepared for the fallout.

Obtaining a new mortgage loan, auto loan, or other types of credit is going to be tough for years to come. They also may feel disapproval from other people who faithfully continued paying on their home loans even though they are underwater too.

Builder magazine recently had an article about whether or not the McMansion is dead. McMansions certainly seem out of reach for many Americans at a time when unemployment is high, demand for food stamps is up, and being frugal is in vogue.

McMansions Sitting Empty

It’s likely that the inability of many Americans to obtain jumbo mortgage loans combined with a movements to downsize may slow development of these supersized homes. Also, there seems to be an overall feeling among many folks that McMansions are wasteful. About 69% of Americans said the American home had gotten too large, according to a CNNMoney poll.

So should you give up your dream of owning a larger home, even it if can’t exactly be called a McMansion? Not necessarily. But here are a few practical things to consider.

Mortgage Debt-to-Income Ratio

You need a healthy income to afford home loan payments on a large home. Use a mortgage payment calculator to determine how much house you can afford. Keep in mind that you need to have a debt-to-income ratio within underwriter guidelines to get approved for a home loan.

Mortgage lenders usually don’t want you to have more than a 28/36 debt-to-income ratio. In other words, your housing expenses (including taxes and insurance) should ideally use up no more than 28% of your gross income, and your total debt (including a mortgage) should use up no more than 36% of your income.

Other Housing Costs Add Up

In addition to monthly mortgage payments, expect to shell out money for other housing-related costs. Those bills include utilities, repairs, and maintenance. Depending upon where you live you also may have to budget for lawn care, snow removal, or homeowner’s association dues.

Jumbo Mortgage Rates

Mortgage lenders set higher mortgage rates for jumbo home loans. There also tend to be more fees. What is classified as a jumbo mortgage loan differs from one area to the next. In most states mortgages over the conventional loan limit of $417,000 are considered jumbo loans. You are unlikely to qualify for this type of mortgage unless you have excellent credit and a substantial down payment.

Ultimately, the decision to buy a large home is a personal one. But among the things to consider are whether you really require a lot of space, believe your income is going to remain stable, have a lot of family members who plan to live there and share the expenses, and whether or not you have the time and money to maintain a large property.

I recently wrote about how more than 650,000 home mortgages had been modified this year through October because of the government’s foreclosure prevention plan. That number increased to more than 697,000 mortgage loans through November, but most of them were only trial modifications, according to Bloomberg. 

Permanent Mortgage Loan Modifications

Although the Making Home Affordable program aimed to help 4 million distressed homeowners, only 31,382 mortgages have actually been permanently modified, according to the Treasury Department. GMAC Mortgage Inc., JPMorgan Chase & Co., and Ocwen Financial Corp. completed the most mortgage loan modifications.

What’s Holding up the Process?

Home loan modifications have been affected by a variety of factors. The Obama administration has said that about a third of borrowers failed to provide proper proper documentation to get their mortgage loans modified permanently. Loan servicers also have dropped the ball in many cases. Some loan servicers have lost documents submitted by borrowers or not requested the appropriate documents.

Putting Pressure on Mortgage Lenders

The Treasury Department is stepping up pressure on mortgage lenders to get more loans permanently modified. In the meantime, more homeowners are falling behind on mortgage payments. About 7.9 million homeowners got behind on mortgage payments in the third quarter, according to the Mortgage Bankers Association.

Do Mortgage Modifications Have Poor Outlook?

Laurie Goodman, senior managing director of Amhert Securities Group LP, told Congress last week that the mortgage loan modification program is “destined to fail” because it doesn’t address the fact that so many homeowners have negative equity in their homes.

About a quarter of U.S homeowners have negative equity in their homes. That means they owe more on their mortgages than their homes are worth. Previously, estimates had put the number of homeowners with negative equity at around 32%.

Refinance Mortgage

Mortgage loan modifications obviously don’t work for everyone. But if you still need help lowering your monthly mortgage payments, consider mortgage refinancing. Contact your loan servicer to see if you qualify to refinance your mortgage through the Making Home Affordable program. To get refinancing through the government’s program you must be current on monthly payments and have a home loan that isn’t higher than 125% of your home’s value.

If you don’t qualify for that program, search for refinancing deals from mortgage lenders here.

The federal government has released new guidelines that are aimed at speeding up the  short sale process to help homeowners avoid foreclosure. The new rules issued by the U.S. Treasury Department at set to take effect on April 5, 2010.

Distressed Mortgages and Short Sales

Homeowners who have trouble making payments on mortgage loans may be able to avoid foreclosure by arranging a short sale. A short sale occurs when a mortgage lender allows a homeowner to sell a home for less than the amount of the mortgage.

If you use a short sale to get rid of a troubled home loan, it can hurt your credit score. For instance, your Vantage score would fall about 120 to 130 points, according to a Baltimore Sun article. Vantage scores are put together by the three credit bureaus, but aren’t used by lenders. However, they are a good indicator of what your FICO score would be.

Home Loans and Deed-in-Lieu

The program also allows qualified homeowners to complete a deed-in-lieu. That involves giving your home back to the mortgage lender to avoid foreclosure. A deed-in-lieu affects your credit score about the same as a short sale.

Incentives for Short Sales

The new guidelines offer incentives for borrowers, servicers, and investors to complete short sales and deed-in-lieu deals. Incentives include:

• Mortgage loan servicers may receive up to $1,000
• Borrowers may receive up to $1,500 in relocation expenses
• Second lien holders may receive up to $1,000 to release their claims

Improved Documentation

The program also aims to standardize the documentation for short sales to outline the rights and responsibilities of all parties involved. Specific timelines for completing deals are to be included. In many cases, short sales have taken many months to complete, and in some cases the deals have fallen apart.

Selling Properties

Mortgage loan servicers are required under the new rules to give borrowers at least 90 days to market and sell their properties. Homes must be listed with a licensed realtor. Foreclosures are not allowed to occur during the marketing period if the seller is making a real effort to sell a home.

Congress voted this week to extend the tax credit for first-time home buyers, and President Barack Obama is expected to sign legislation today. Here’s what you need to know if you’re hunting for a home loan.

The original tax credit program is set to expire on Nov. 30.  But under the extended program, home buyers will have until April 30, 2010, to sign a purchase agreement. They must close on mortgage loans by June 30.

Tax Credit for More Home Buyers

The tax credit is for first-time home buyers who have not owned a home in the previous three years. The tax credit worth up to $8,000 can be deducted on federal income tax returns. New home buyers are still eligible for that amount under the program.

However, the expanded program is supposed to allow people who have lived in their home for at least five years to receive a tax credit of up to $6,500 when purchasing another home. So if you’ve been looking for a mortgage for a new house, this may be an incentive to get moving on selling your current home.

Higher Income Eligibility

The legislation for the extended program allows people with higher incomes to qualify for the tax credit, according to an article in the Chicago Sun-Times. The credit phases out for individuals who earn above $125,000, up from $75,000. For joint filers the credit phases out if they earn more than $225,000, up from $150,000.

Current Mortgage Rates Are Low

With mortgage rates still so low, buying a home now may be more affordable than waiting until the housing market recovers more. Still, you may experience some tradeoffs for moving now. First, you may not be able to sell your current home at the price you hope to get. It’s a buyer’s market, so you may need to make some concessions or offer some incentives to get your property sold.

Second, if you plan to get a home loan to buy another house, you only have a limited time to close on it to qualify for the credit. If you don’t close by the deadline, you lose out on the tax credit even if you had been counting on it to help with the costs of buying a new home.

Mortgage Quotes

Find mortgage quotes from several lenders to get an idea of how large of a mortgage you can get. Run the numbers carefully to decide if you really want to move at this time. Just because the government is offering a tax credit for home buyers doesn’t mean that purchasing a home is the right choice for you.

When you’re searching for mortgage rates keep in mind that your credit score plays a huge role in mortgage lender quotes. Here are some things to remember about credit scores and mortgage loans.

High Credit Scores Result in Lower Mortgage Rates

You probably already know that having excellent credit means you are offered better deals on mortgage loans and home equity loans. The best scores are above 760, while scores in the low 600s means you’re considered a subprime borrower. Mortgage  lenders consider people with scores below 600 extremely risky, and in today’s mortgage environment they are likely to be denied credit.

How FICO Scores Work

There are different credit scores out there. The three major credit bureaus all have their own proprietary system of determining credit scores. But the FICO score is probably the most widely used by mortgage lenders and other financial institutions. FICO scores are based upon:

• Your payment history, which makes up about 35% of the score
• How much your owe, which determines about 30%
• The length of your credit history, which determines about 15%
• How much new credit you have opened or applied for, which makes up about 10%
• Other things such as the types of credit you have, which makes up about 10%

Repairing Credit Scores

If you plan to apply for a mortgage refinancing or a mortgage to purchase a home, spend some cleaning up your credit first. Make monthly bill payments on time, pay down debt, and avoid opening new credit lines. Also, review your credit report to make sure that information is accurate, as well as to delete outdated information such as old liens, judgments, and discharged debt. Bankruptcies should be removed after 10 years.

Dispute Inaccurate Information

Dispute information by calling the credit bureau and by following up with a letter.  Depending upon the outcome of your dispute you may have to contact the actual creditor who reported the information contained in your report. Keep careful notes of all interactions and correspondence with credit bureaus and creditors so you have a complete paper trail.

Fixing your credit can have several positive results that include receiving better loan terms on a mortgage and reducing the amount of deposits that have to be made with utilities.

Nearly 2 million homes have been foreclosed upon this year, according to the Center for Responsible Lending. Although there are bargains to be found for folks who want to purchase a foreclosure, getting involved with such a deal isn’t for everyone. Here are some things to remember.

1. Get preapproved for a mortgage before you begin shopping around for a foreclosure. That’s because some mortgage lenders won’t underwrite home loans on foreclosed properties. But there are mortgage lenders who allow mortgage loans on foreclosures that are in good condition. If you are fortunate enough to already have a home equity loan, this could also be used to purchase a foreclosure as a vacation home or investment property.
2. Look for properties on real-estate sites that list properties that are in foreclosure, such as Foreclosure.com or RealtyTrac. You’ll pay a fee for using these sites, but will get a good idea of what type of homes are available in your area. You can also contact banks to see if they will give you a list of bank-owned homes for sale. A bank offering a property for sale may be willing to give you a home mortgage to purchase it.
3. Unless you are an experienced real-estate investor, avoid trying to purchase a foreclosure on your own. Find a realtor and attorney who have lots of experience with foreclosures. These people should understand local laws concerning foreclosures.
4. Avoid buying at auction if you are new to foreclosures. You usually won’t be allowed to inspect properties before they to to auction, so you’re taking a big chance purchasing a property this way. Auctioned properties also may have tax liens.
5. Expect to make repairs on a foreclosure. A lot of foreclosures are damaged by angry homeowners or fall into disrepair from sitting empty for a long time. Go into a foreclosure situation with as much information as you can get. Hire an inspector to give a full evaluation of any property you plan to buy.

Yes, there are people who are getting great bargains by purchasing foreclosed homes. But if you want to buy a home this way don’t let your emotions get in the way. It’s essential that you thoroughly research the different ways you can buy a foreclosure, as well as the process for obtaining a home loan for this purpose. You can search for a mortgage here to get an idea of what type of financing is available for a foreclosure purchase.