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How to finance a home in today's market |
Financing a home is critical – and complex – issue for every home buyer. What you know about mortgage plans, rates, points, lock-ins, taxes, even selecting a lender, can actually save you – or cost you – thousand of dollars.
Why should I buy instead of continuing to rent?Purchasing a home is not for everyone. But it is one of the best ways for nearly all people to build wealth in three different ways. Equity. First, a home buyer makes payments on a loan by paying down the loan, your “forced savings” build equity in your home that you do not enjoy when you rent.Appreciation. Second, you build wealth by the principal of appreciation in your home. Whilst real estate markets may experience momentary downturns, homes usually appreciate in value. Over time your wealth grows as your home becomes more valuable. Tax savings. Third you build wealth when you have a mortgage because the federal government lets you take an income tax deduction for all the interest you pay on your mortgage (thousands of dollars a year). That means you build wealth by paying less in taxes each year you pay mortgage interest. And when the time comes to sell your home, you can take the benefit of generous capital gain tax exclusion – not available for other types of long-term investments. What are the basic steps in getting a loan?
How can I benefit from using a real estate professional to buy home?Buying a home qualifies as the largest investment for most families; therefore, it is important you team up with a qualified real estate professional who can help you through the complicated home-buying process. Real estate agents are state-licensed professionals who have met strict educational requirements regarding real estate law and practices. By using a professional, you will find the home of your choice without the hassles of going it alone.Fixed-Rate Conventional MortgageA conventional loan is a loan made to a buyer by a commercial lender without a third-party participant, such as government agencies like Veterans Affairs (VA) or the Federal Housing Administration (FHA). Fixed-rate conventional loans are typically paid off in equal monthly payments spread over 15, 20 or 30 years. The interest rate stays the same for life of the loan; hence, the monthly principal and interest payment remains constant. Shorter terms mean fairly higher monthly payments but generally offer a lower interest rate. Shorter terms also mean more rapid equity growth in your property, faster mortgage pay-off and dramatic savings on total interest payments.Terms of conventional loans vary among lenders. Some can be achieved with no down payment whatsoever. When the down payment is less than 20%, it is more often than not necessary to obtain private mortgage insurance (PMI) to protect the lender from a buyer’s default. Advantage: Quick processing and stable payments. ADJUSTABLE-RATE MORTGAGE (ARM; ALSO “VARIABLE RATE”)The interest rate may go up or down over the years and is tied to a financial market index (such as one-year Treasury bills). Monthly payments may also be adjusted on a periodic schedule. Most ARMs set a maximum alteration (or “cap”) on possible increases to interest rates, monthly payments and/or set a maximum cap on rates for the life on the loan.Advantage: The lower initial interest rate and monthly payment let the buyer to pay less in the early years for a largest loan and help buyers qualify for a more expensive home than with a fixed-rate loan. Caps offer peace-of-mind rate ceilings. FHA LOANStrictly speaking, the FHA (Federal Housing Administration) does not make loans; rather it insures loans, which increase lenders’ willingness to provide low-down –payment loan programs.With a FHA-insured loan, a home buyer can make a small down payment, a feature particularly attractive to first-time buyers. The down payment may be just 3%, or even lower depending on the state where the home is located. Second mortgages are permitted within specific guidelines. Points (prepaid interest) can be charged by the lender. Your real estate agent may negotiate to have the seller pay the points. FHA buyers of single-family homes can finance 100% of closing costs. The FHA charges an advance mortgage insurance premium (MIP) fee which is rolled into the loan, as well as a monthly charge for all loans. Ask a loan officer how much the fee would be in your situation. The FHA sets a limit on the size of loans it will insure. The maximum loan amount varies by location and changes from time to time. Advantage: Low down payment; low interest rates; long terms; many are fully assumable loans; no prepayment penalty; second mortgage permitted under certain circumstances. VA LOANQualified veterans can take out loans up to a specific limit with no down payment (although a tax deductible funding fee may be required). These limits occasionally charge; check with a loan officer for current rules.VA-guaranteed loans can be combined with second mortgages and are fully assumable by any qualified buyer. Rates and points may be negotiated with the lender. Although no down payment is required, buyers pay a loan origination fee. VA/FHA qualification guidelines are more flexible than those for conventional loans. Actual income qualifications are depend on the type of loan requested. Advantage: Usually no down payment; veteran cannot pay commission, broker fee or buyer-broker fees; no prepayment penalty; assumption may make your home very attractive to buyers when you decide to sell. ARE THERE ANY OTHER COSTS I SHOULD CONSIDER BESIDES INTEREST RATES AND DOWN PAYMENTS?Ask the lender for a Good Faith Estimate when you’re shopping. Some of the fees you may encounter include: application fee, appraisal fee, inspections, mortgage insurance premium, title insurance (lender and homeowner).EXACTLY WHAT PRICE HOME CAN I AFFORD?A loan officer can help translate your affordable monthly payment into a total loan amount. Add this loan amount to your desired down payment amount and you get the approximate range of home prices you can afford.Your next step is to shop carefully for the loan that will keep your mortgage payment in line with your budget and maximize you buying power. Different mortgage plans can dramatically affect your monthly payment- and thus the home price you can afford. Also other plans, especially FHA and VA mortgages, may offer you much more liberal qualifying standards- again allowing you more home for you income. WHEN IS THE BEST TIME TO MEET WITH A LENDER?It’s a good idea to organize your finances before you find a home. Pre-approval is a much more involved process than pre-qualifying. In essence, you must go through the complete loan application and have the underwriters approve you for a conditional loan. A loan application is taken and you undergo the financial scrutiny called for in the approval process. The only thing lacking after pre-approval involve selecting a home, getting the necessary inspections and appraisal of that property for the lender’s approval, and final confirmation of your finances.WHAT IS CREDIT SCORING? AND WHY SHOULD I CARE ABOUT IT?Credit scoring is the process where a lender determines how much of a risk you present if the lender decides to loan you money. Severalfactors are used to tabulate your score, including:
TIP: A few ways to protect your credit score include:
CAN I BUY A HOME IF I’VE FILED BANKRUPTCY?Lenders are most concerned about how your credit has been managed recently. Lenders generally like you to wait about four years after bankruptcy has been discharged before applying for a loan. In this time period you can rebuild your credit with a good payment history and appropriate management of credit. There is no need for a past bankruptcy to stop you from purchasing a new home.HOW ARE ALIMONY AND CHILD SUPPORT PAYMENTS TREATED ON MY LOAN APPLICATION?If You Pay. If you pay alimony, it is considered a debt, just like credit cards and other installment debt. Child support payments are also considered a debt and will be calculated in your debt-to-income ratios. The only exception is if you are entering your last year of payments. Lenders will not count monthly payments on loans that have entered their last 10 months.If You Receive. If you receive alimony or child support, these incomes can be used in the qualifying process. You must have proof; however, you have received these payments consistently for 12 to 24 months, depending on the underwriter. Your recordkeeping must be meticulous. Photocopy each check or obtain copies of canceled checks from the bank. MY CREDIT IS LESS THAN PERFECT. HOW CAN I REPAIR MY CREDIT?Step One. The first step in credit repair is to make sure you start making payments on time and manage your credit properly. If your income is sufficient, simply ensure you send in your payments on time. In other cases, you may need to increase your income while you are paying off debt to guarantee you have enough money to make your payments on time. If you are unable to increase your income, make arrangements with your creditors for revised payment schedules that you can afford.Step Two. Quit charging on the credit accounts you’re trying to pay off. You can either close the accounts and continue paying on them, or just cut up the cards so you can’t use the card while you’re paying it off. Closing the account shows the lender you intend not to use it any longer. If accounts are open, the lender knows you could use them and cause a cash-flow problem once again. Step Three. Write a letter to the lender explaining why you had a period of late payments, judgments or whatever else is on your credit report. In addition, explain how you have rectified your situation and what has changed in your financial life to ensure it won’t happen again. Many underwriters are understanding and forgiving of periods of hardship in a buyer’s life. Step Four. Finally, don’t allow anyone to run credit reports prior to your application for your mortgage. Every inquiry on your credit lowers your credit score. The lender suspects you’ve been rejected by other lenders if several other companies were looking over your credit history. Numerous inquiries signal that you have not learned the credit management skills necessary to have mortgage. HOW LONG DO PROCESSING AND UNDERWRITING TAKE? CAN I SPEED UP THE PROCESS?How long it may take before your loan is approved depends on what kind of loan you apply for, the efficiency of your lender, the lender’s workload and your own diligence in supplying required information.WHEN DO I KNOW IF I’M APPROVED?When your application is approved, your lender will send you a loan commitment letter with the loan amount, interest rate and monthly payment in writing.TIP: FIVE CREDIT MISTAKES TO AVOID BEFORE APPLYING1. Applying for more loans or credit cards just before applying for a mortgage loan.2. Purchasing large-ticket items. 3. Authorizing credit reports on your credit. 4. Using up all your cash reserves to pay off all your debt. 5. Switching or quitting jobs just before the application process. WHAT ARE SOME INSIDE TIPS TO GET CASH FOR THE DOWN PAYMENT AND CLSOING COSTS?Co-signer. A co-signer on a loan is a person who applies with you for a mortgage. It also means that person will take on the risks associated with a loan, such as being held accountable for the payments if you default on the loan. In addition, this debt will appear on their credit report.Gifts. You can receive a gift from relatives to use as a down payment. The gift can be in a lump sum from one source, or you may use several gifts to accumulate your down payment. Loans. You can borrow it from your own 401 (k) account for down payment money. While you will lose the investment dollars until they are paid back into the account, you are allowed to pull that money out without penalty and then repay it over time. Keep in mind that the loan is calculated in your debt/income ratios. Check with your financial advisor on any tax consequences before pulling your money out of retirement savings plans. Personal Assets. Cash can also be drawn from other investment and assets you may own Stocks can be sold for cash. As can items such as a second car, boat, etc. If you want to hold on to those items but still need the equity out of them, you can approach your bank or credit union and apply for a loan secured by those items. Again, the monthly payment will be added into your debt/income ratios. What are some creative ways to lower the monthly payment?Buy Down The Loan. By paying a little extra every month for a year or two and specifying that the extra money go toward the loan’s principal, you can reduce the amount of the monthly payments you make later, as well as shorten the length of the loan. Purchase The Home On A Shared-Equity Basis. There are many forms of equity sharing, in which the assisting party, often a relative, owns part of the home and shares in the profits when the home is sold.Set Up A Secured Loan Or Second Trust. The loan will be repaired monthly, with any balance due on the sale of the home. The drawback is that in case of foreclosure, the second trust is paid from proceeds of the sale, if anything is left after the first mortgage is paid. What’s the difference between “earnest money” and a down payment?Earnest money is deposited by the buyer at the time a contract in presented to show you’re “earnest” about buying the seller’s home. Earnest-money checks range around the nation from just $100 to several thousand dollars to as high as 5% of the sales price. The earnest money is typically payable to the listing real estate company and held in escrow until the transaction is closed. At settlement, earnest money is credited toward the down payment.The down payment, on the other hand, is the cash a buyer pays at closing to make up the difference between the sales price and the loan amount. Down payments range from zero to 20% or more, depending on the type of loan. Typically, the lower the down payment, the higher the monthly payment for the loan. Can I get my earnest money deposit or down payment money back if the contract falls through before closing?Your down payment money is not taken until your home actually settles. If something happens with the contract before your closing date, you will not have even written that check.On the other hand, the earnest purchase offer is received by the sellers. Unfortunately, not all transactions go through. If the contract offer is not accepted because you and the seller cannot come to an agreement on sales prices or terms, your earnest money ratified and either party later violates the contract, the resolution seller could claim ownership of your earnest money deposit. In contested situations, cases are often decided by arbitration and sometimes through the courts. What does it mean when your loan gets sold? And how does that work?Numerous lenders today sell the mortgages they make to investors, giving the lender new cash to lend to an additional borrower. Though the transaction doesn’t change your payment, it does mean you’ll send your payment to a new address. Reselling mortgage loan is a common occurrence.Am I stuck with this loan for 30 years?Even as your lender has the option to sell your loan, you also have the option of changing loans companies through refinancing. If interest rates fall considerably over time, you could even save hundreds of dollars each month with a lower payment if you refinance to a lower interest rate.Another option is to pay off your loan early by adding an extra amount to your monthly payment to be applied to the principal of your loan. By adding one extra payment to your loan per year (making 13 payments instead of 12), you would knock years off your mortgage, build equity quicker and save thousands of dollars in interest payments. All agents are bound by law to deal fairly and ethically with both buyer and seller. You benefit from an agent’s service in many ways, such as:
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