Knowing your financing options is an important part of preparing to buy a new home. Sure, you can just go to the bank where you do your checking, saving and investing and speak to a mortgage manager there – and that might be a logical first step. But mainstream banks and mortgage companies are not your only recourse.
Before doing anything else, do some detailed research into the home buying process. Financing a new home purchase can be complicated – so you need to know what you are getting into. Weigh the pros and cons if you are eligible for any non-conventional mortgage options – one may be better suited to your personal situation than another.
Get advice from a trusted real estate agent. Discuss and narrow down criteria – price range, neighborhood, desired amenities, etc. This will help you determine how much house you can afford.
Consider talking to friends, family or colleagues who are in the same position or recently have been. Find out if there any disadvantages to using a particular financing option in their experience. You might also do research online, using blogs that chronicle home purchase experiences or platforms that compare and rate different types of home purchase financing options. All the information you could possibly need is out there somewhere.
Finally, get your documents in order. All of the options outlined below (with the exception of cash purchases) have roughly the same requirements when it comes to paperwork. Collecting your tax, payroll and other types of personal data so everything is organized and ready to share will put you ahead of the game.
Conventional Mortgage Loans
Conventional mortgages are financed by banks and their affiliated lenders, or accredited mortgage providers. Most of these institutions offer the same basic interest rates for mortgage loans: prime plus a percentage. These types of loans are available to anyone who requires one. But that doesn’t mean that everyone will qualify. And there are variables that may make it worth shopping around for the best possible deal.
For example, a larger down payment in cash (20-30%), may qualify you for a better rate. Similarly, if you have a large and steady income, enjoy a great credit rating and have manageable existing debt, any bank will likely extend competitive terms.
not all lenders offer the same interest rates and costs — and some have stricter or more lenient underwriting standards than others — it’s important to compare lenders and shop around. For instance, some lenders will cover closing costs for borrowers, but the trade off is a higher interest rate.
Mortgage pre-approval is always a good idea – for several reasons. It sends a strong signal to vendors that you are serious and ready to purchase a home. It is also the beginning of a relationship with your lender or financial institution, one that can set the stage for negotiating future terms.
Pre-approval can also be an important tool for determining how much house you can afford and calculating the monthly expenses for carrying a mortgage. Knowing your buying power ahead of time can streamline the purchasing process and eliminate a certain amount of stress due to doubt.
If you have a less than stellar credit history, are retired, have served in the armed forces, are in a lower income bracket, are considering a rural property, are a first time home buyer or have large cash reserves, you are not limited to getting a conventional mortgage.
Mortgages that are insured by the Federal Housing Administration (FHA) are available to first time home buyers, or buyers with lower credit scores and income who might have a tougher time getting approved by more conventional banks and lenders.
These types of loans are popular and useful because they allow down payments as low as 3.5% for home buyers with credit scores as low as 580 (out of 900). Other advantages include no prepayment penalties and the opportunity to get someone to take over the mortgage if you choose to leave the property (only if the mortgage is considered “assumable” that is). These advantages are less likely to be available with conventional mortgages.
Possible downsides are that borrowers must pay mortgage insurance premiums, which allow the FHA to step in if a borrower defaults. These can be a significant extra cost. Home buyers must also work with an FHA-approved lender which can limit the choice.
But there is one more significant advantage to working with the FHA on your home purchase. It’s called the FHA 203K program and it allows for additional funds to undertake renovations and repair work as part of your mortgage financing package. This can be extremely useful for the purchase of rundown or neglected properties that need work to become fully habitable.
If you’re a veteran consider applying for the Veteran Affairs (VA) Home Loan Benefit. It is just one of the many helpful benefits offered to those who have served and are transitioning into civilian life.
VA home loans are provided by private lenders, such as banks and mortgage companies. VA guarantees a portion of the loan against loss allowing the possibility of more advantageous terms than a conventional mortgage.
These may include the waiving of a down payment (unless it is required by the lender). And there is no private mortgage insurance premium requirement even if there is no or down payment.
VA rules limit the amount you can be charged for closing costs and they may be assumed by the vendor entirely if that is negotiated. Furthermore the lender can’t charge you a penalty fee if you pay the loan off early. If you should run into trouble making payments, VA may be able to offer short term assistance.
VA home loans are available to veterans who been discharged honorably whether or not they are first time home owners. They are also assumable (which means the mortgage can be taken over should you move on from the property, provide the new owner qualifies).
The process of getting a VA home loan is outlined in detail on the VA web site. An initial application required to ascertain veteran status but there is not a great deal of extra paperwork attached to this generous and helpful program.
There are several types of financing programs to assist home buyers in eligible rural areas. The US Department of Agriculture’s Direct Loan Program assists low-income applicants obtain housing by providing payment assistance to increase an applicant’s repayment ability. Payment assistance is a type of subsidy that provides relief by reducing the mortgage payment for a short period of time.
A USDA guaranteed home loan is a zero down payment mortgage for eligible low and moderate income rural home buyers. This type of loan is offered to eligible home buyers by the USDA Rural Development Guaranteed Housing Loan Program and provide a 90% loan note guarantee to approved lenders. The home in question must be the buyer’s principle residence and the loan may also provide funds targeted for repairs, renovation and retro-fitting for accessibility.
Cash will always be king – and though all-cash purchases are uncommon, this also holds true when financing a home purchase with dollars.
Not everyone is in a position to buy a house with 100% cash up front and no mortgage. Besides eliminating debt interest payments and the need for things like mortgage insurance, there are other benefits associated with cash sales. For one, it eliminates the need for paperwork or applications and their associated waiting periods. Cash can be extremely attractive to vendors and may put your offer over the top if there is a bidding war on a particular house. In fact, offering cash may result in a lower bid being accepted. And cash sales typically close faster with fewer associated costs.
On the other hand, when there is volatility or uncertainty around interest rates and local real estate markets, it may not make sense to tie up a lot of cash in a home sale. Those funds may be put to better use invested, or parked as a liquid reserve. There may also be tax and other implications to forgoing a mortgage – mortgage interest is generally tax-deductible.
Loan Terms & Conditions (Length, Interest Rates – Flexible vs. Fixed)
The practical details of home financing are of the utmost importance and they manifest as the terms and conditions of the mortgage or home buying loan on the table, regardless of who is offering it. There can be a big differential in the kinds of terms surrounding a home purchase and you and your realtor and lawyer may have to do some legwork and comparisons to ensure that they are the best for your personal requirements and situation. But the type of mortgage, the interest rate you are paying and the length of time it is guaranteed for (as well as the total amortization period for repayment) can greatly impact your finances on a month to month basis.
Type of Mortgage
Mortgages come in two basic flavors – fixed and variable rate. As the name suggests, a fixed interest rate means that the interest rate does not fluctuate even if bank rates go up or down. It is the fixed rate you’ll pay for the current term (usually 3 to 5 years). Locking in a good rate when interest rates are low can save you thousands should rates rise; but should they go down you will continue paying the same (now higher) rate until it’s time to re-negotiate your terms.
Variable mortgages, on the other hand, will always adjust the interest rate along with the market or prime rate. However the monthly payment is fixed for the term of the loan so your expenses are never a surprise. Many people prefer them and believe they provide a better rate over the long run.
The interest rate attached to your mortgage is everything since it will determine the size of your monthly repayment. It’s important that this figure be manageable for you based on your income, debt load and whatever other monthly expenses you might have. Typically mortgages link repayment interest to the market or prime rate set by the banks. It is also determined by a number of other factors, mostly based on what the lending institution thinks of you as a borrower. So your current income and past debt history will certainly be scrutinized. The best rates come to those with a higher income, little accumulated debt and a great credit rating. The size of the down payment you are making will of course also be taken into consideration.
Mortgages can be held over a short term for a lower interest rate (by those who expect that interest rates will be lower still when it comes time to renew), but most conventional mortgages are held for a longer term (up to 5 years) so that the repayment schedule is fixed and predictable for the period leading up to renewal. Negotiating a new rate when the term is up can be nerve-wracking, but it is advantageous to try for the lowest rate possible.
Another aspect of mortgages to keep in mind is the overall length of time over which the mortgage will be repaid. Your monthly payment will be higher if you want to pay your mortgage off faster than the maximum 25-year amortization period. Consider too whether the terms of your mortgage allow for prepayments or extra payments. Many do not or require penalties.
Call The Wright Choice Team today at 804-307-2589 to tour available homes for sale in the Chesterfield County area.