Tips for Buyers

Guide to Home Financing

So you have found your dream house. Now, how will you pay for it? It’s time to talk about loans and mortgages, a topic prone to make the average home buyer squirm. Fortunately, with such a wide variety of payment options, you can easily find a financing method that can meet your personal needs. Here are a few financing options to consider:

Assumable Mortgage

In this situation, a buyer assumes the mortgage obligation of the seller (with the agreement of the lender). The interest rate doesn't change from the original agreement, keeping it lower than current interest rates. The loan fees are often less as well.

Balloon Mortgage

This type of loan must be paid off after a certain period. The appeal lies in the lower interest rate in comparison to a mortgage that is made for 30 years.

Fixed Rate Mortgage

The interest rate for this common type of mortgage stays the same throughout the term of the loan - usually 15 or 30 years - keeping the principal interest portion of the payment essentially the same. While the payments are generally stable, the initial rates tend to be higher than adjustable rate loans. Often, a fixed rate mortgage cannot be assumed by a subsequent buyer.

Adjustable-Rate Mortgage (ARM)

Unlike a fixed rate mortgage, an ARM’s interest rate is linked to a financial index, such as a Treasury security or a cost of funds, so that monthly payments can vary up or down over the life of the loan - usually 25 to 30 years. Interest rates can change monthly, annually, or every 3 or 5 years. Some ARMs have a cap on the interest rate increase, to protect the borrower.

Other terms relating to adjustable-rate mortgages:

Adjustment period:
The length of time between interest rate changes. Example: one year ARM-interest changes annually.

Cap:
The limit on how much an interest rate or monthly payment can change at each adjustment or over the life of the loan.

Conversion clause:
A provision in some loans that enables you to change an ARM to a fixed rate loan, usually after the first adjustment period. This may require additional fees.

Index:
A measure of interest rate changes used to determine changes in the loan's interest rate over the term of the loan.

Margin:
The number of percentage points a lender adds to the index rate to calculate the ARM's interest rate at each adjustment.

VA Loan

Qualified veterans may be eligible to receive a VA-guaranteed loans.  Rather than lending money, the VA guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risk. If qualified, one can acquire loans up to $203,000 without a down payment. VA loans can be combined with second mortgages and are assumable upon qualifying by any future buyer.

FHA Loan

FHA insures loans rather than lend money. The down payment can be as low as 2.25%. Either buyer or seller may pay discount points. FHA typically charges a 2.25% upfront Mortgage Insurance Premium that can be financed in the mortgage amount or paid in cash. Collected monthly, the borrower must also pay an annual Mortgage Insurance Premium.

Seller Assisted Second Mortgage

In this situation, the seller of a house lends the buyer enough to make up the difference between the purchase price and the down payment plus first-mortgage. The terms including the interest rate are based entirely on buyer/seller agreement. An SAS mortgage is often a short-term (5 to 15 year) loan and is sometimes paid in "interest only" payments until the full balance term date. A buyer can then refinance the home.

Questions For Your Lender

Navigating the loan process can be one of the most difficult tasks of buying a home.  A misstep could end up costing you more than you realize over the life of your loan.  To safeguard yourself, learn what types of loans are available to you and all of their pertaining details.  Here are a few helpful questions to ask of your lender:

What types of mortgage loans do I qualify for? Fixed-rate? Adjustable?

What is the interest rate?

How long do I have to "lock-in" the financing at the current interest rate?

Is a float down lock available if case rates drop after I have locked in?

Are funds for a second mortgage available?

What other fees may be charged to me in conjunction with my loan?

Regarding adjustable rate mortgages:

  • How often will the interest rate be adjusted?
  • Is there a cap on each rate change?
  • How often will the monthly payment be adjusted?
  • Is there a ceiling on payment adjustments?
  • Can the term of the loan be extended?
  • What is the maximum rate I can be charged over the life of the loan?
  • Is there any potential for negative amortization?

Is there a penalty clause for pre-payment? (This refers to additional charges for paying of the loan in its entirety before its maturity. About 80% of all loans in the United States are paid off early.)

How late can a monthly payment be made before a late charge is assessed? What is the "grace" period?

What happens if I miss a payment?

Am I required to buy mortgage insurance?

If I sell my house, can the mortgage be assumed by the buyer at the same interest rate?

Will my loan be serviced locally or will the servicing be sold?

My I receive a written "good faith deposit?”

Improve Your Chances

Imagine finding your dream home. It’s utterly perfect with enough room for the family, a large yard and a white picket fence. After all this time searching, you can’t believe you’ve found such an ideal place. Now imagine that your offer is rejected. Another buyer wins the day. You’ve just had your dream house snatch out from under you.

For many, that is the cold reality of the real estate game. With property changing hands quickly and multiple offers being extremely common, it is important to have an edge when putting an offer down on a home. Here are a few things you can do to ensure that you don’t lose out on a great house:

Make a Strong Offer

When bidding on a home, you should always submit the offer as if there will be multiple offers. It may also pay to offer a larger deposit as well; a larger amount may signify a bigger commitment to the seller. If possible, try to get pre-approved for the purchase to identify the price range for which you qualify. This takes very little time and provides great value. Additionally, take time to minimize or eliminate contingencies to the offer; the fewer contingencies, the stronger the offer.

Be Available

Homes sometimes sell in hours. That is why it is so important to be readily available to the seller. Be prepared to make decisions quickly and be accessible to change the terms instantly. Show the seller just how interested you are by putting together a buyer profile of yourself; this includes time on the job, flexibility, reason for purchasing seller's home, etc. Maintaining the link with your agent is probably the best way to stay informed on property movement. Be sure to provide a method of instant access via office phone, voice mail, fax, pager or cellular phone.

By keeping your offer competitive and staying available to both agent and seller, you can give yourself a powerful edge over less organized buyers.  Through careful planning, you too may be able to buy your dream home.

Mortgage Application Checklist

There can be quite a lot of paperwork to fill out when applying for a mortgage.  Here’s a quick rundown of items that you might need:

  • Copy of your Purchase & Sale Agreement
  • Application deposits
  • Your present mortgage information
  • Two-year employment history and verification of all income sources
  • Information about your checking, savings and credit card accounts
  • Full disclosure of all debts
  • Information about any assets
  • Information regarding any other assets that will be used as funds to close
  • If you are self-employed, copies of two years of past Federal Income Tax Returns
  • If FHA, copy of Social Security card and photo ID
  • If VA, your Certificate of Eligibility or DD214
  • If you are an Employee Relocation Client, include relocation information and copy of offer, promissory note and copy of check on bridge loan.