Will you be financing your home?
If you plan on financing your home, there are some very important factors to consider as you begin this process. The first thing to realize is that not all loans are the same and not all lenders are the same. So what does that mean? Basically it means that there are MANY different types of loans, even within the traditional VA, Conventional, and FHA loan types. It is also important to understand that there are many types of home loan programs available for consumers, but not all lenders offer all programs that are available. I work closely with lenders who offer a vast selection of these loan programs that could save you thousands of dollars based on your situation.
Considerations that affect your ability to obtain a loan and your interest rate include (but certainly not limited to): Income, Credit History & Score, Debt to Income Ratio, and Down Payment Ability.
Understanding that different institutions have different offerings is VERY important. Lender "X" may prefer to write loans to people who fit into certain criteria based on income, credit, debt to income, and assets. Lender "Y" may take other criteria into consideration and offer loans to people that lender "X" would not, and vice versa. It is important to understand your financial situation and to find the lender that is the best fit for your financial picture. Keep in mind there are many scenarios that lenders look at, for example: People with high income and lower credit, People with higher credit and lower income, People with higher net worth and lower credit, People with lower down payment and higher credit, etc. Once you determine which scenario best describes your situation you will be ready to locate a lender that fits you best. We are here to help you find the best match, if you have questions just let us know.
Things you need to know about and be financially prepared for when purchasing a home are outlined below.
Loan Types: As mentioned above there are 3 primary types of loans each with their own unique factors and criteria. Here is a brief overview of the three primary loan types.
-Conventional Loans are the loans not backed, offered, or secured by the Federal Government. Instead they are offered by private lenders and are subject to the guidelines established by Fannie Mae and Freddie Mac, the two agencies that help standardize lending practices in the United States. You can expect to pay a larger down payment with a Conventional Loan as compared to that of an FHA or VA loan. You also have the option of not paying PMI (Private Mortgage Insurance) if you put enough down, typically in the 20-22% range and this can save you hundreds of dollars each month depending on the amount of your home purchase.
-FHA Loans are issued by FHA approved lenders and are insured by the Federal Housing Administration (FHA). The benefit of an FHA loan is that the qualification guidelines are less stringent than that of a conventional loan. Lower income requirements, lower credit scores, and lower down payments make this an attractive option for many buyers. There is a mandatory PMI (Private Mortgage Insurance) component regardless of how much you put down and PMI exists for the life of the FHA loan. There is however, the option to refinance out of an FHA loan into a Conventional loan to eliminate PMI down the road.
-VA Loans are no down payment loans available for Veterans, Service Members, and select military spouses. They are also provided by VA approved lenders and guaranteed by the United States Department of Veterans Affairs (VA). The VA loan does not require PMI which is another benefit of this type of loan. There is a funding fee of 0.5% and this amount can be financed into the loan to avoid becoming an out of pocket expense.
Important factors to consider include knowing and understanding what closing costs are and how they can affect your loan and more importantly, how much cash will be required to close on your new home. In addition to your down payment, there are other fees that need to be taken into account when purchasing a home. Closing costs are a combination of fees that often need to be paid for at the time of closing and are IN ADDITION to your down payment. These include; attorneys fees, title search, title insurance, deed recording fees, loan origination fees, discount points, etc. There is no exact formula for calculating how much your closing costs will be, but the general rule of thumb is that they vary between 2.5% to 4.5% of the purchase price of your home. They can certainly be higher or lower and are dependent upon factors such as buying down your interest rate which will result in a lower interest rate and higher closing costs.
Other fees and expenses will also be incurred in the purchase of a home and some of these include the appraisal which is typically ordered by your lender and paid for by the buyer in advance of closing. And then there are fees you will incur during the transaction such as; home inspection, pest inspection, surveys, radon gas testing, and other potential inspections that may be warranted based on the location and other factors.
Pre Approval and Pre Qualification letters are in important step in the process and should be obtained from the lender you decide to work with PRIOR to looking for a home. These letters are not binding, but they are generated by your lender based on preliminary information obtained from you early in the loan process. They are to be used as a guide when searching for a home so you and your agent know what price range to search for. It is VERY important to also calculate your own budget and not simply use the amount you are pre-approved for. If the bank says you are pre-approved for up to $650,000 but you are only comfortable paying up to $500,000 it is important that you only look for homes that fall within your own personal comfort level and make sure to let your real estate agent know this as well so that you are on the same page.
When we get started in the process there will be questions that come up and we can address those at that time as every transaction is different.