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Home Buying Financing

Updated on March 26, 2015

Home purchase

Financing Your Home Buying by George Bogosian

Understanding your financial limits at the outset will help lead to success in the entire home buying process. Before you start looking for a house to buy, a trip to your local bank or mortgage lender is needed. Using various financial calculators is useful and I have a mortgage calculator at the end of this writing for you to use. Personal financial software, like Intuit, can also be useful. Your lender can play a very useful and important role in your house ownership journey. Use their experience and expertise to your benefit. They have been through this experience many times with others, so ask as many questions as you need to. They play a supporting role and they want you to be well informed.

Usually in less than an hour they can give you a dollar amount, (pre-qualify yourself for a loan amount) that the lender will be willing to loan based on your income and current debt. This allows you to be shopping in your price range. This does not mean that the bank has committed to funding your home purchase. Not until you have completed a formal application process and it is approved by the bank is your loan funded. Remember that you may be qualified for more of a mortgage than you are comfortable with handling, so borrow within your comfort level.

There are World Wide Web lenders on line that after filling out their on line forms you will be given a response to mortgage lending amounts. The devil is always in the details so be sure to read the fine print.

Your price range is determined by adding the amount you can borrow to the amount you have for a down payment. Now at this time the lender should give you a pre-application checklist. It consists of additional information the lender will need from you to begin your formal loan application. Each mortgage lender will have different requirements, but obviously they are looking for your ability to repay the loan, no surprise there! Lenders ask themselves, is this a good loan to approve? In addition to your income they will look at your credit record, your employment history, W-2 forms, tax returns, assets, etc. The lender will verify all information that you provide. It is important to highlight your strengths with the lender during the first meeting. Remember, your first impression to the lender is important, so dress like success. Maintain eye contact and speak with confidence. If you are unknown by the lender, letters of recommendation on your character and/or letters from past and present employers will be helpful. Build confidence with the lender. Any information you feel will help obtain the loan should be passed on to the lender; even if it isn't a question you have been asked.

Build on your strengths. Create a successful personal profile.

There are varying down payment amounts required by lenders on different loan programs, but usually 5-20% will do. Remember that a small down payment will cost more over the long haul because you will be paying interest on the borrowed money. A larger down payment should save you money in interest payments. There may be extra costs with smaller down payments so ask your lender. Most down payment money must come from the buyer’s own savings. Gifts or other moneys from different sources may be used as additional down payment. Check with your lender to see what loan programs and down payment requirements are available. Some loan programs do allow certain percentages to be in the form of a second mortgage or gift moneys from family members. Moneys offered as a gift are just that…. and repayment must not be required. Other loans allow the seller to pay some of the buyers closing costs. These types of programs help people who qualify for a loan but have limited funds for the down payment and closing costs. If you have more money available for a required down payment lenders often allow more flexibility with the qualifying factors. If you have credit problems or other money related problems talk with your lender to see if a larger down payment would help you secure the loan.

While the interest rate you will be paying is an important consideration, the amount of down payment and the closing costs of the loan are factors to consider when house buying. Closing costs can vary widely, but they usually run for 3-5% of the house purchase price. Ask about those costs in your buying area.

Whether to get a fixed interest rate or an adjustable interest rate mortgage depends more on personal comfort than anything else does.

Some people prefer a fixed rate so that rate and payment amount is locked in for the term of the loan. There is simple security in knowing! While others want to take advantage of the lower rate that a variable rate offers. The cost of Treasury bills, commonly known as “T-bills”, is one factor that affects the difference between a fixed or variable rate loan. Usually rates will vary a few percentage points and often carry upward limits, know as “caps”. Many people feel comfortable knowing that the rate is fixed for the length of the loan and will opt for a fixed rate loan and pass up the lower rate. A fixed rate mortgage is probably best suited to low and moderate income buyers. The volatility of adjustable rates makes them less predictable and inappropriate for some people. If you want a short-term loan, then an adjustable loan, having a lower rate, could save you money. To date, you are able to use your mortgage payments as tax deductions.

Using other peoples money, the lenders in this case, is the philosophy of some and for some people the tax deductions are worth the cost of both the fixed rate and the long term (30 years) mortgage. Some people are not in a hurry to pay off their mortgage based on the allowed tax deductions. Additional fees, called points, may also be charged for the loan. This is a one-time fee. One point equals one percent of the loan amount. So, two points on a $100,000 loan equals $2,000 dollars. You may be able to negotiate these fees.

The majority of loans written today are the standard 30-year loan, but there are many other loan programs available. Using a larger down payment will also save you money. Many can greatly reduce your overall cost of the loan by using fewer years to repay the loan. Ten, fifteen or twenty-year loans can save you money if your income allows you to take advantage of these programs. These loans will obviously require a larger monthly payment but will greatly reduce the total cost of the loan. Understanding the basics on compound interest is an education on money and its cost. Example: Moving from a 30 year loan to a 15 year loan on a $200,000 loan with 7% interest will save you $155,444.00 in interest payments. Welcome to compound interest! Go online with a computer and type in “loan interest calculator” in a search engine and you will find a calculator that will give you lots of information about loan costs. You simply type in your numbers of loan amount, interest and years of the loan and you will become educated. You can play with the amounts, years and interest numbers to see the different calculations. It’s a valuable tool!

Your lender will have the details, so ask about the different loan programs available. Lenders can be very useful in explaining and helping you through the financial maze, so use their services to your benefit. Remember, lenders are working to protect themselves and with that intent you are also protected. There is competition in the money lending business, so it pays to shop around. Remember they are offering to lend you money with a price attached, so check with a few lenders. You are buying money; the question is, what are the terms and what does it cost? So shop wisely!

What types of loans are available? There are conventional loans, and government loans, Federal Housing Administration (FHA) loans. Many Veterans Administration (VA) loans and, Rural Housing & Community Development Service loans (RHCDS) require no down payment. FHA loans, have income limits. Other loan programs are often available on a regional level. Many states support some form of loan program, such as first time homebuyers programs. Some of these loan limits and requirements will change geographically, so you need to check in your area for the specifics. Around 30% of a lenders loans will be non-conventional loans and many of these loans have fewer requirements. So you see, many people qualify for these loans.

Lenders want you to use a limited amount of your income to go to your housing costs, which may include escrows for taxes, insurance, utilities, maintenance, and your principal and interest. Usually 28-33% of your income, depending on the category of loan, can be the percentage lenders limit you on your income to spend on housing and total debt. Some loans, like VA loans allow a higher percentage. Lenders don't run sales, but in a slow real estate market lenders are sometimes more flexible about loan requirements, also, during their slow period, usually the winter months there are fewer loans made. Loaning money is the sales business and they need to eat too. These are good times to be borrowing money.

The most important qualification factor on a loan is credit. No credit is better than poor credit! Using credit cards is not a good way to establish credit. Taking out a small loan and repaying it on time or before it is due is a good way to begin a credit history. The lender simply wants to be sure that you can meet your financial obligations as agreed. Once again, no surprise there!

The lender will have the house appraised by one of their independent appraisers after you have a signed purchase and sales agreement and made formal application with your lender. Past appraisals will not do. This simply assures that the price you agreed to pay is in line with comparable houses in your area. It safeguards you against paying too much for the house.

Let’s not forget private mortgage insurance, called PMI.. The lender usually requires this if your down payment is small. It protects the lender against a foreclosure and pays the lenders costs of this action.

The lender does not require mortgage Life Insurance, but you may choose to purchase this coverage. Programs vary, but in essence the insurance pays off your mortgage should you die, and leave your family with no monthly house payments. Obviously, this is an additional cost but may well be worth its price. Ask your mortgage lender about the details. Compare prices with a local insurance company.

Having your fantasies about your dream home is fine...

but keep things in perspective and understand current market values and what can you really afford to buy!! Don't forget, additions and renovations to the house can be made in the future. If your finances are tight, do not burden yourself with a financial commitment that will make your life miserable for years. If you have the necessary money for your home be sure you can afford the upkeep, repairs, painting, yard care, taxes, insurance and possible changes you might want or need. Obviously, the financial responsibility does not end with the purchase of the home, it begins. Many people have bought the house of their dreams only to find that their yearly expenses are more than they care to spend. Carefully evaluate how the cost of home ownership will affect your life. There are many things to do with your money than spend it all in the home that you own. Home ownership has wonderful emotional and financial benefits. It can also be a burden, so be sure to find your balance, both financially and practically. We cannot overemphasize the importance of understanding your financial limits before you go shopping for a home, it will make the experience much more enjoyable and productive! Remember, house buying is both an emotional and financial investment. Understand your limits in both realms.


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