Financing Your Home
When purchasing a home
The most important place to start is with a lender. Before you can go looking for homes, you want to know how much you can borrow. (Of course if you can pay all cash for a home, you can skip this part!) Most people in the U.S. go to a bank or a mortgage lender when they want to purchase a home. A lender can discuss with you the maximum loan you can afford. From there you will know how much you can afford each month for a mortgage payment. The process is rather simple, it’s guidelines are determined by the various programs available.
Simply said you need an 1) income 2) good credit 3) a down-payment or at least closing costs to qualify for a mortgage.
There are three main categories of loans: FHA, VA and Conventional. All three are available in 15 and 30 year terms, with some programs having other loan term options. Within the three main loan categories are these loan types: Fixed Rate, ARMs, and Balloon loans. Both fixed rate and Balloon loans are available with buy-down options.
Mortgage program overview:
Federal Housing Administration (FHA) – Borrowers qualify under FHA guidelines. In most cases, both one-time and monthly mortgage insurance premiums are required regardless of amount of down payment. The minimum down payment starts as low as 3%. Your total housing expenses and all of your other obligated debt should not exceed 41% of your gross monthly income under FHA programs. The down payment can be from a gift or borrowed funds secured by collateral. FHA loans are offered to all and they have lower qualifying standards than conventional loans. Each area of Colorado has a different FHA maximum loan amount, so it is important to know how much that is when planning to finance using an FHA loan.
Veteran’s Administration (VA) - Borrowers who are veterans may qualify under VA guidelines. There is no mortgage insurance, but here is a one-time funding fee. The borrower must be a veteran and provide a Certificate of Eligibility. Qualifying is based on net income, family size, and a provision for utilities and maintenance. Total housing expense and all other debt cannot exceed 41% of gross monthly income. Up to 100% financing is available. VA loans can only be used for "owner occupied" properties and you can use it over and over again, as long as each time the home gets sold and the VA loan is paid off.
Conventional - A conventional loan is any loan not insured or guaranteed by a government agency. For the most part, the standards for underwriting a conventional mortgage are established by the national secondary market investors, primarily the Federal National Mortgage Associations (FNMA) and the Federal Homes Loan Mortgage Corporation (FHLMC). All conventional loans over 80% to value will require PMI (Private Mortgage Insurance). There are many conventional loan programs.
Fixed-Rate Mortgage – Using a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage, usually 30 years. Your principal and interest payment remains stable, making it easier to plan a monthly budget.
Adjustable-Rate Mortgage – With an ARM, your interest rate and monthly payments start out lower than with a fixed-rate, but your rate and payments can change either up or down, depending on where interest rates are that year.
Assumption - You may find a home with a mortgage loan you can "assume" from the previous owner. this practice used to be popular prior to the 1990’s. Many times when a seller was unable to sell his home outright, they would let a buyer "assume" the mortgage. At times the new buyer didn’t make the payments and the previous owner ended up without the house AND a bad credit rating. Now, most knowledgeable sellers refuse to let their homes be assumed and rightfully so! For the seller, it’s just not worth taking the risk. As a buyer, if you find a seller willing to let you "assume" his loan, beware, it may or may not be a good deal.
Buy Downs – A buy down occurs when the interest rate and payment are reduced by paying increased discount points (as in permanent buy down) or when the payment is temporarily reduced by pre-paying the interest (as in a temporary buy down)> When interest rates are very high and a seller is having trouble finding a buyer that can qualify for his home, he will sometimes "buy down" the rate in order for the buyer to qualify for his home. In another example; builders often use "buy downs" as a promotion to get buyers to buy their product. They pay the fees and the purchaser gets a lower interest rate.
Balloon Loan – A loan with an initial interest rate for a five or seven year period that is lower than the fixed rate. Payments are based on a thirty year amortization, but the loan balloons at the end of the five or seven years. This is a good loan for those who may not remain in their homes for more than this initial period. Similar loans are available that remain fixed for a period of time (3, 5, 7 and 10 years) and then converted to an ARM.
Zero Down Gift Assistance Programs – Basically these programs are used in conjunction with an FHA loan. The goal of the program is to assist buyers (not just first time buyers) to purchase a home with no money down. Since FHA guidelines require a minimum of 3% down-payment, the programs uses a "twist" to get the seller to donate the down payment to a "charitable fund" in turn, the charitable fund "grants" the purchaser a 3% downpayment.
These programs initially started during a very "up" market in Denver. It was very easy to pay a full asking price for a home plus 3%. This created a sales price of 103% of the asking price. Sellers were delighted to assist purchasers in doing this, it cost them nothing!
Additional Resources on the process of buying a home
- Colorado Cares – a down payment assistance program that is truly charitable.
- Common Questions From First time Homebuyers – provided by HUD
- Becoming a Homeowner – provided by Fannie Mae
- Home Much Can I afford – provided by Ginnie Mae
A shameless, self-promoting plug…
If you are finding this process a little overwhelming, do not worry. Most people don’t buy or sell a home everyday or every week so your unfamiliarity is very excusable!
Helping people buy and sell real estate has been my career since 1984. I know the territory, the strategy, the system, the contracts and how to negotiate, what’s more, I am good at it! I enjoy the challenge of finding homes that people love and helping them save time and money along the way. My greatest satisfaction is hearing from you that you are pleased with me and my service, it’s sweet music to my ears.
So if you aren’t finding scenarios that fit your needs and need to have questions answered, call me or e-mail me. I’m happy to help. Really!
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We Know the Territory
Are you looking to buy or sell a home? Let us at The Berkshire Group assist you. We will take care of all the important and necessary details while you can attend to moving. Our business is helping you make the right decisions, guide you through negotiations, inspections and close on time. When it comes to Denver real estate, we know the territory. For experienced help with your real estate needs call now...303-589-2022.