Relocation

BUYING A HOME   •   FINANCING A HOME   •   FINDING A HOME   •   SELLING A HOME

FINANCING A HOME - FINANCING OPTIONS

Perhaps you plan to pay all cash for your home. Perhaps the seller has agreed to finance your purchase and take back a mortgage for part of the sales price. Perhaps you have already obtained mortgage pre-approval from a lending institution. If you are like many homebuyers, you have found your ideal home and now are researching your options.

There is no one type of mortgage best for everyone. There are several mortgage plans and options available today, and each one fits the needs of a particular buyer and parcel of real estate. Your real estate broker will be able to recommend several possible sources for you, from local or national mortgage companies, to credit unions, to banks, to mortgage brokers. Mortgage brokers typically prepare a loan package and research various programs with different lenders. If a property is unusual or you have less than perfect qualifications, a mortgage broker may be a good choice since they have the ability to access multiple lenders and programs and not be tied to one institution. Their fees may be slightly higher, so consult with your real estate broker as to your situation.

At any time, perhaps 100 different plans will be available in the typical community. Dozens of terms describe particular mortgages: FHA, VA, assumable, purchase-money, second loans, package loans, balloons, portfolio, conventional, convertible, ARM. Picking the right loan takes into consideration many factors beyond the quoted rate of interest. Loan terms also vary, typically from 10-15 years to 20-30 years. With the lower interest rates in today's economy, many consumers are seriously reviewing the benefits of securing a 15- versus 30-year loan. While the payments on a 15-year loan will be about 20 percent higher than on a 30-year loan, you would only make payments half as long and cut your total interest cost considerably.

When you are offered a loan, inquire about closing costs and compare lenders. Certain costs are standard: loan origination fee, discount points, appraisal fee, credit report, funding fees, tax service fees and other legitimate fees. Be careful of "junk fees" which inflate the profit to the lender. Your real estate broker can assist you with an explanation of normal closing costs in your market.

Discount points are linked to the interest rate you will be quoted. Each "point" is one percent of the loan amount. For example, if you borrow $120,000, one point will equal $1,200. Lenders charge points up front when the loan is made and are considered prepaid interest. Sometimes, you will pay an extra point to "lock in" an interest rate for a specified period of time (a 30-60-day lock, for example) while your loan is being processed. During the negotiation of an offer, a seller may agree to assist the buyer and pay a specific number of points to expedite the sale, especially if a buyer is short on cash for closing. Points paid by you as the buyer of your own residence are tax-deductible on your federal tax return as interest in the year they are paid. Points you pay to purchase income property must be amortized along with other costs when you are an investor.

Keep in mind the difference between "pre-qualifying" and "pre-approval." With pre-qualifying, the lender reviews the information that you furnish and gives you an estimate of what you will be able to borrow. With actual pre-approval, the lender will confirm your qualifications and credit-worthiness, provide you with a definite commitment to lend you a specific dollar amount, and state the amount of down payment necessary. In special markets, there may be 100 percent financing available. In other markets, lenders may require a minimum three to 10 percent down payment on a property. The maximum loan amount will be based on your particular situation.

Veterans can apply for VA loans with no down payment, subject to maximum loan amounts that vary with markets across the country. A veteran may purchase a higher-priced home, if they can qualify for the payment and have a cash down payment for the amount needed above the maximum loan amount. For a VA-guaranteed loan, the veteran needs a discharge "other than dishonorable," and must meet the necessary "active duty" period of time. Eligibility for mortgages does not expire. If one's first VA loan is paid off, full eligibility is regained.

For those with moderate income who want to live in rural areas, the Farmers Home Administration or Federal Land Bank provide excellent financing options.

If you choose a conventional mortgage and put less than 20 percent down on the property, the lender may require that you carry private mortgage insurance (PMI). This insurance, for which you pay a small premium, has nothing to do with life, health or home insurance. Instead, it protects the lender in case you default on the loan and the property cannot be sold for enough to cover the debt. PMI rates vary with the amount of down payment and credit-worthiness of the buyer, so compare the costs as you compare your mortgage options.

Be sure to go through your loan application process fully armed with information on your income, debts, credit card balances, bank and saving accounts, employment history (specifically the last two years), social security numbers, copy of sales contract, copy of divorce decree or separation agreement, copies of W-2s and copies of recent paycheck stubs. Depending on your situation, additional information such as tax returns, leases on rental properties, copies of bankruptcy papers or Certificate of Eligibility may be needed. Your lender will provide you with a list of what is needed based on the type of loan you want to secure.