What Buyers Need To Know About Financing

With interest rates so low, even buyers who do not need to finance their property purchases are still doing so and keeping their savings invested at higher rates of return! Regardless of your reasons for financing, having a basic understanding of the financing process is 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, in markets where interest rates are so low, 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.

In addition, there are Conventional Loans (the most common), Government Backed Loans including FHA, CHFA and VA, and Jumbo Loans for higher priced properties.

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.)

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 percent or 10 percent, 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.

In addition to a down payment, buyers need to have saved for closing costs and at least 2 months of payments in reserve. 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 part of what lenders call “closing costs”. They include lender fees, attorney costs, title insurance, homeowners insurance, inspection costs, the appraisal fee, property taxes and fees and costs that need to be paid back to the seller (any taxes, sewer or HOA fees the seller has paid in advance and, if there is oil in the tank, the buyer pays the seller for its value, etc). When speaking with a lender, verify if they mean “closing costs” or “costs at closing” - “costs at closing” will always be higher.

I hope this general overview was helpful. Please contact me if you would like me to negotiate an excellent deal for you in your home purchase!