The best place to start is always at the beginning…
Your first item of business before you look at homes, is to get your purchase money in order. If you aren’t paying cash, you’ll need home financing.
Unfortunately, it is with this first step that many homebuyers fail. Not fail as to be be denied a mortgage. They fail to make an attempt! Don’t get bogged down fearing credit issues or a huge time investment. The reality of the mortgage process is, it begins with a phone call! You call a lender, provide your name, date of birth, social security number, employment info and income. That’s it! It takes a whopping 5 minutes with a pain level of zero.
The lender and/or loan officer you choose to work with is entirely up to you. Need a place to start? Think of your bank or credit union since you already have a relationship with them. Feeling uncomfortable? Ask family, friends and colleagues for referrals. Don’t want to involve them? Contact us. We can provide referrals to experienced licensed mortgage professionals.
Don’t feel that you may be wasting anyone’s time. Lenders get paid when they loan money and loan officers get paid when they originate and close loans. The person with whom you will speak is compensated for their time and effort when your loan funds at close of escrow. No one is doing you any favor to take or return your call. You will become a paying customer.
What you need, what the Seller will need, what “we” need from your lender is a Pre-Qualification Form. It will give us a price range and indication of monthly payment when searching for a home, and informs the Seller you are initially (financially) qualified to purchase their home should you decide to write an offer.
Okay – a quick list and brief explanation for types of home financing:
FHA – Available to most consumers as it is fairly lenient with debt to income ratios and credit criteria. It currently requires a 3.5% down payment plus closing costs paid by either you or negotiated to be paid by the Seller. FHA charges both upfront and monthly MIP (Mortgage Insurance Premiums) to insure the lender against default.
VA – Available exclusively to active or honorably discharged military personnel. It’s true! No down payment requirement! No monthly Mortgage Insurance Premium! Closing costs can be rolled into the loan amount or negotiated to be paid by the Seller! VA has certain costs that cannot be paid by Veterans, and eligibility can be restored and used more than once. For those who qualify, VA is currently the best mortgage product available.
USDA – Primarily used to purchase homes in rural areas. The term “rural” is quite subjective and this type of loan may be available exactly where you want to live! No down payment with closing costs rolled into the loan or paid by Seller if negotiated.
Conventional – Requires high credit scores and down payment amounts of no less than 3%. Monthly mortgage insurance premium if down payment is less than 20% of purchase. Closing costs paid by you or negotiated to be paid by the Seller.
ARM – Adjustable Rate Mortgages usually begin with lower than market rates for a fixed period of 3, 5, or 7 years then adjust annually. Adjustment annual caps and lifetime caps with highest and lowest rates disclosed.
Hard Money – DON”T DO IT unless you’re an Investor who will “hold” short term. Hard money loans require high down payments and have stratospheric interest rates. They are used most often for fix-up properties or those where an exact value is uncertain.
Seller Financing – Generally requires a large down payment and interest rates that are at least “market.” Must adhere to Dodd-Frank Act: fully amortizing, rules for balloon payments, fixed interest rate for a minimum 5 years, adjustable after 5 years with “lifetime” caps if the Seller has three or more transaction withing a 12 month period. Other rules apply. For more information, read: http://www.realtor.org/sites/default/files/seller-financing-impact-of-safe-act-dodd-frank-act-2011-07-05.pd
Portfolio Loans – These loans are held by the lender and not sold on the secondary market. Underwriting requirements (e.g. credit, down payment, cash reserves, employment history, etc) will vary.
With regard to home financing, there are many options available to you. We have only touched upon those most widely known. Your lender will certainly know more and offer “the best” after considering your income, credit, and debt.
Take the first step. If you don’t have cash, you cannot purchase.