Finding  Financing

When searching for financing for your new home, there are different resources you should consider to find what fits your needs best.  Just as you shop around for any other service, you want to be comfortable with who will be holding your financing over the next 15-30 years.  Often people start with the places they know and already conduct business to see the services these places offer.  Here are three options to look into: Financial Institutions, Mortgage Brokers and Credit Unions.

• Financial Institutions – Some commercial banks, mutual savings banks, savings and loan associations and insurance companies serve as traditional sources for mortgage loans.  Many people begin by applying with their local bank with whom they already conduct business. Savings and loan associations often have favorable terms for their account holders.
• Mortgage Loan Brokers – These groups or individuals charge a fee to match borrowers with lenders, occasionally they make direct loans. 
• Credit Unions - Federal credit unions can write 30-year conventional and government insured mortgages. Some will even make loans.

Questions to Ask Lenders

When searching for financing, here are some questions to ask lenders about mortgage loans. 

• What interest rate do you offer?
• Do you charge points?  What are points?
• How long can I lock-in the financing at the current interest rate?
• What other fees do you charge in conjunction with my loan?
• Is there a pre-payment penalty clause?
• Will you require mortgage insurance?
• Are both fixed-rate and adjustable mortgage loans available?
• On adjustable loans:
• How often will the interest rate be adjusted?
• Is there a maximum limit on each rate change?
• How often will the monthly payment be adjusted?
• Is there a ceiling on payment adjustments?

Types of Financing

When looking for a mortgage loan, there are many different options, and the lender you choose can provide you with mortgage types that will probably be best for your personal financial situation.  There may be different fees and additional requirements for mortgages required by lenders.  Below are some of the most popular mortgage types.

Conventional Mortgage

Conventional mortgages are loans to purchase property made by lending institutions and a borrower.  They are usually to be paid over a term of 15 or 30 years.  Loan terms including the length of the loan and down payment amount may vary.  However if your down payment is less than 20% the lender will often require you to have private mortgage insurance (PMI) to protect the lender in case you default on the loan.  These loans can have a fixed or adjustable interest rate.

• Fixed-Rate Mortgage
  Fixed-rate mortgages keep your interest rate constant over the life of the loan, giving you the security of knowing exactly what your monthly principal and interest payment will be. This type of mortgage protects you from rising interest rates, no matter how high market interest rates rise.  Fixed-rate mortgages are best for people who prefer regular payments, are on limited or fixed incomes, plan to stay in the homes and are buying homes when interest rates are low.
• Adjustable Rate Mortgage
  An adjustable-rate mortgage (ARM) has an interest rate that is fixed for an initial period of time and then adjusts periodically based on financial market conditions. During the initial fixed period, an ARM has a lower interest rate than a comparable fixed-rate mortgage, so you can save on your monthly payments during the first part of your loan term. However, you must remember that this low introductory rate will probably rise after the initial period.  Because this type of mortgage offers lower upfront monthly payments, it can help you if you plan to move soon and resell or refinance before the initial period ends.

VA Loan

If you or your spouse is a qualified veteran, you can apply for a VA loan.  These loans are guaranteed by the Department of Veteran Affair allowing veterans to receive mortgage loans up around $417,000 with no down payment. Higher loan amounts may require a down payment.

FHA Loan

There are different FHA loans, probably one of the most popular is the FHA First Time Homebuyer’s Loan.  The Federal Housing Authority (FHA) insures federally qualified lenders against the borrower’s default on these loans.  This allows lenders to offer borrowers loans with down payments as low as 3.5% of the purchase price. 

Balloon Mortgage

A balloon mortgage is a loan that offers a low interest rate for a set period of time, typically 5, 7, or 10 years. At the end of that time period, the loan matures and the balance is due in full to the lender or must be refinanced by the borrower.  The loan is not amortized completely over the term of the loan like the other mortgages; instead it is partially amortized and the balance is paid at the end of an initial period.
For more information on mortgages, visit Keith Tanner at Certified Mortgage Planners.
                                                              
Pre-qualification and Pre-approval

Before looking for homes, it is important to know what you can afford.  Once you choose a lender, you will meet with them or speak over the phone and answer their questions about some of your information such as credit history, employment history and down payment amount. Based on this information they will estimate and let you know what they believe you will qualify to borrow and they may write you a pre-qualification letter.  This pre-qualification letter is needed when you are ready to place an offer on a property.  When entering into a contract, sellers want to ensure the buyer is qualified.  This pre-qualification process does not bind you to work with this lender.  When speaking with the lender make sure to request a Good Faith Estimate, this is their estimate of what you will be paying in closing costs and other costs that may be associated with purchasing a home.
You can also take this process to the next step and allow the lender to view your financial history and run a credit check.  This next step would also be the first step in your application process where you would start to gather the information for the lender.  Here is an itemized checklist of important information that the lender may ask you for.  After the lender has verified the information you gave them, they can provide you with a Letter of Commitment or a pre-approval letter pending specific property information you’ll provide them with once you’ve chosen a home.  There are benefits to getting pre-approved early.  A Letter of Commitment looks stronger to sellers when presented with the contract.  It also allows you to discover any qualification issues early in the home buying process, possibly allowing time to remedy these issues. 

How Much House Can You Afford?

 

How much house you can afford depends on the amount you are able to contribute to the initial down payment and what you can afford for the monthly housing payment.  A monthly housing payment includes four items principal and interest on the loan and property taxes and insurance (also known as PITI).

• Principal – This is the amount of your monthly payment that goes towards paying down the loan amount.
• Interest – This is the rate you obtain from your lender and is the cost of borrowed money.
• Taxes – The local government determines the real estate property taxes based on their appraised price of the property.  Oftentimes lenders will collect estimated property taxes with your monthly payment and put it into escrow until it comes time to pay the tax bill.
• Insurance – Homeowner’s insurance (or hazard insurance) protects your home from damage to the property.  Most lenders require you to keep insurance on your home to protect their collateral on the loan.

Additional Costs to consider:

• Homeowner’s Association Fee (HOA) – Many areas require you to belong to a homeowner’s association and pay dues.  You will want to consider these HOA fees into the cost of owning a particular home.
• Condominium Fees – If you are purchasing a condominium you will need to consider the condominium fee when determining the affordability of the condo.  Also find out what these fees include, maintenance of the common areas, any utilities, amenities, these are important things to know.
• Private Mortgage Insurance (PMI) – Many lenders require you to pay PMI which protects the lender if you default on the loan.  This is often required until you have invested over twenty percent towards the loan.

Finding Money for Down Payment and Closing Costs

Down Payment Sources

• Savings
• Home Sale - Proceeds from the sale of a home you already own
• Home Equity Loan – Obtaining a loan from built up equity in a home already owned.
• Life Insurance – You may have built up a cash value on your life insurance policy that you can borrow from the insurance company.
• Stocks & Bonds – You may not need to sell your stocks and bonds, but may be able to obtain a bank loan using your portfolio as security.
• Company Savings Plan – You may be able to borrow against what you have accumulated in your employer’s profit sharing or savings plan account.

Closing Costs Sources

Besides the cash needed for a down payment, you will need money for the closing costs. 

• Seller – You can ask the seller to pay a certain percentage of your closing costs when you write the initial offer.
• Wrap in Mortgage – Depending on how much you’re qualified to borrow and what the home appraises for, you can try to roll the closing costs into the mortgage.
• Lender – You can ask the lender to pay part of the closing costs, they may do this but put a slightly higher interest rate on the entire loan.

First Time Homebuyer Assistance

There are many programs available to first time homebuyers, to find out more click here.

Additional Tips when Purchasing a Home

No Major Purchases
Do not make any major purchases that would create debt, this means wait to purchase new furniture, appliances, cars, vacations, weddings, etc…  A major purchase (or multiple minor purchases) can change your debt/income ratio and the lender will review your financials again just prior to closing so hold off on spending money until after closing.

Don’t Move Money
A lender needs to know the source of funds for your down payment and closing costs.  They will want to see a couple months of bank statements, stock statements, 401K and any other statements for assets.  They will probably require you to explain any large deposits or withdrawals.  The less you move money around, the less extra tedious paperwork you have to explain to the lender.

Don’t Change Jobs
If you are a salaried employee and do not depend on any additional income from commissions or bonuses, then switching jobs may not negatively affect your application.  However, if you work off of commissions, rely on bonuses, or are self employed, the lender will require two years of your income statements and will want to see the consistency and changing jobs could be disastrous to your qualification.  If you’re thinking of purchasing a home and considering changing jobs, speak to your lender to find out the effects it will have on your qualifying.