2022 Financing Facts, So You Know

With interest rates on the rise, buyers planning to finance their property still have options! So having a basic understanding of the financing process can be very helpful.

There are many financing vehicles available to you and having a conversation with a lender is the best way to decide which will work best for your situation.

Typically, buyers choose a 30 or 15 year, fixed mortgage. This simply means that the mortgage interest rate remains the same throughout the life of the loan and the loan is paid back in regular installments over a 30 or 15 year time period. There are also adjustable rate loans available to you, where the rate varies over the life of the loan, and as rates are rising, this might be something to explore with your lender. Especially if rates go down in the Spring, as predicted.

In addition, there are Conventional Loans, Government Backed Loans including FHA, CHFA and VA, and Jumbo Loans (for higher priced properties). The rates on these loans can vary and there are different criteria for you to meet for each loan.

We will be talking about Conventional Loans and FHA Loans in this post. (For information on VA Loans, see my post, “Housing For Veterans”. For CHFA loans, go to https://www.chfa.org/ for more information.)

As you may know, buyers need to have a down payment to make a home purchase. With a Conventional Loan, this can be as low as 3% of the purchase price. The minimum FHA loan down payment is either 3.5% or 10%, depending on your credit score. For anyone with a credit score of 580 or higher, 3.5 percent is the minimum required for a down payment. Anyone with a credit score of 500 to 579 will have to have 10 percent for a down payment.

When putting less than 20% down on either type of loan, the buyer will need mortgage insurance. Conventional loans under 20% pay Private Mortgage Insurance (PMI). Once the borrower has had the loan for a minimum of 7 years and they have 20% equity in the property, they can petition to have PMI removed. FHA borrowers pay government backed mortgage insurance (MIP), which often is much higher than PMI. In addition, it remains for the life of the loan, regardless of the equity the borrower has in the property. These are things to consider when deciding on the best loan for you.

Some buyers are now choosing to buy down their interest rate by paying points on the loan. Prepaid mortgage points are a one time fee, paid at closing, to get a lower interest rate on the loan. This can be particularly attractive if the seller is giving a credit at close toward closing and prepaid costs..

So, in addition to a down payment, buyers need to have saved for closing costs and at least 2 months of payments in reserves. Closing costs are generally 3-6% of the sales price. Closing costs can vary by lender and some of the costs at closing are not included in what lenders call “closing costs”, so be aware. Costs at closing include closing costs: lender fees, points, attorney costs, title insurance, homeowners insurance, and the appraisal fee but also can include: property taxes, sewer fees, HOA fees (some of which the seller has paid in advance) and, if there is oil heat, the buyer pays the seller for the oil in the tank’s value. Lastly, your home inspection is paid within the first two weeks of getting into contract and that can be anywhere from $450-$1,500, depending on the property. When speaking with a lender, verify if they mean “closing costs” or “costs at closing” - “costs at closing” will always be higher.

Working with a professional will make the process easier so that you are informed and prepared. Please contact me at 203.671.5684 for your home purchase!