The Basics of Home Finance
Financing your home purchase typically involves a “Conventional”, “FHA” or “VA” mortgage. As a rule only a small percentage of home purchases are funded with cash. Most real estate contracts of sale have contingency clauses for financing but home buyers (even experienced home buyers who may already own a home) are well advised to arrange for a home loan BEFORE they start looking at homes.
Remember, home Sellers are cautious about signing a purchase agreement on their property with anyone who does not already have a loan commitment. So in order to compete favorably with other potential buyers for desirable properties it is important to have a a mortgage “pre-approval” letter ready to attach to your offer. Normally you can obtain these pre-approval letters by completing a formal mortgage loan application with a Lender.
So… first things first, Select A Lender and you will be on your way. You and your Lender will explore all the mortgage options available and you will determine which one is best for you. Insist that your Lender provide you with a “good faith” estimate which will detail all of the costs associated with the new loan as well as the details of your monthly payment. Once you have been approved your Lender will provide you with a written commitment letter advising exactly how much you are able to borrow. Then you can go shopping for a new house with confidence that your financing is in place.
Normally you need three things to buy a home, including a stable income, good credit and some cash. But these days even if you have only one or two of these things you may still be able to find a way to purchase a home. After all, if you have enough cash your income and credit won’t matter. You can simply pay cash for your home or get what is called a “no document” loan if they are available.
Determine the Type of Loan
So what if you have good income and credit, but lack money for a down payment and closing costs? Several options are open to you. For starters, veterans can obtain a VA-guaranteed loan with no down payment at all. And if you can find sellers who agree, the VA will allow them to furnish the cash outlay you need, covering everything from bank discount points and closing costs to your pre-paid items for taxes and insurance.
Any buyer can apply for an FHA-insured mortgage, with down payment of three percent or less. New regulations sometimes allow the down payment to be furnished by a relative. Some of your closing costs (prepaid mortgage insurance premiums for example) may be financed along with the rest of the loan. And a cooperative seller may agree to cover some of your other costs.
Or perhaps you will be able to find a seller willing to handle the financing but this is less likely in a strong real estate market. In any event you would still need strong credit in most cases before a seller is likely to take such a risk. Small income properties owned by elderly landlords who are tired of managing tenants are possibilities.
The vast majority of new home loans are “Conventional” or so called “Conforming” loans arranged through Banks and other mortgage lending institutions. These are the loans most favored by Sellers as they generally have fewer “Seller” requirements and / or Seller costs. You and the Lender you select can determine which of the available loan options best fit your individual needs.
Some Costs of the New Loan
There are a number of costs associated with a new mortgage loan including but not limited to the down payment, closing costs and of course the monthly payments. When you know the amount of down payment and closing costs you can afford, and how much mortgage money you will be able to borrow, you will know what price home you can afford to buy.
The Down Payment
A down payment is the money you pay up front toward the purchase. The more cash you pay as a down payment, the less money you will pay each month on the mortgage, and the lower the interest costs will be over the life of the loan. Typically, conventional lenders have required as much as 20% to 25% down but for those with sufficient income and excellent credit lower down payments are possible.
Keep in mind that that loans which require less than 20% down payment generally require some form of mortgage “insurance” which can add significantly to your costs both in terms of your monthly payment and or your closing costs.
The Closing Costs
The closing costs are simply this: the costs of borrowing, the costs of establishing the loan and the costs of preparing the necessary documents to finalize the transaction. These costs can be very significant and should not be overlooked by first time home buyers.
The Costs of Borrowing
Included are what Lenders call “Discount” points, a one time charge to adjust the yield on the loan to what market conditions demand. Each point equals one percent of the mortgage amount. In other words, two and one-half points on a $100,000 mortgage would cost $2,500.00.
The Costs of Establishing a Loan
These might include the loan origination fees, appraisal fees, and credit reports. Premiums for hazard and mortgage insurance are usually paid at closing. Also, prepaid interest will be collected for the period between closing and the end of the purchase month.
The Costs of Document Preparation
Title costs pay for the search of public records to determine if the property you want to purchase is free from any other ownership, liens or other encumbrances. Recording and transfer fees cover the legal recording of the deed and mortgage with the local governmental agencies as well as the transfer taxes ( doc stamps).
Determine your monthly payment
Before you can determine how much home you can afford you will need to determine the monthly payment you can qualify for and be comfortable with. Click here for guidelines which can assist you in Analyzing the right Monthly Payment for You.
Some Advice for First Time Home Buyers
When you are ready to make a major purchase like a home, you naturally want to sit down and figure out how much money you can afford to spend. You will quickly see that without at least a “ball park” figure in mind you will waste a lot of time in searching for a home. As you can easily see this process can be rather complicated for anyone and that is why we suggest that you seek the advice of competent professionals.
The good news is that in recent years, many new programs have offered special opportunities for those who can’t meet the usual credit qualifications for mortgage loans. Some of these programs are Federal and others are state-sponsored or even local in nature. Some require you to receive credit counseling and attend education seminars on how to manage money. The point is that you should not be discouraged by the complexities of the process as there are devoted Lenders and agents like the Bill Leighty Group who are ready and eager to help you.