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This
is undoubtedly the biggest area of concern for most first or second time
home buyers. There is really nothing to be worried about if you get the
facts, and understand how the common forms of home finance work.
You will need to contact a good lender at the very beginning of your
home purchasing experience, but these basic guidelines will help you to
understand some of the terms you will encounter and what to expect
before you contact a lender.
First we will talk about the good old conventional loan. The word
"conventional" just means that the loan is privately funded,
and insured if needed. No government involvement at all. The
ideal conditions of a conventional loan would be a down payment of 20%
of the sale price. Why 20%? Lenders refer to the amount of money they
loan in comparison to the sale price of a home as a "loan to value
ratio", when you put down 20% and the lender funds 80%, the loan is
an 80% "loan to value"
ratio. 80% is the standard ratio where
lenders will feel safe with their investment. Above the 80% ratio,
lenders will generally charge you mortgage insurance, also known as MIP
or PMI. This insurance premium is insuring the lender for the portion of
the loan above the 80% ratio. More simply put, the loan is a bigger risk
to the lender, and they require you to purchase some insurance in case
you default on the loan. Although this adds some expense to your getting
a home loan, this is very typical and will allow you to purchase a home
without that elusive 20% down payment. Conventional loans are now widely
available with as little as a 5% down payment because of this type of
insurance.
Another form of conventional loan that eliminates the mortgage insurance
is the 80-10-10 or the 80-15-5.
The loan to value ratio in each of these loans is 80% (hence the #80) a
second mortgage is also taken on the property at the time of purchase
for either 10% or 15% of the homes value, and the remaining 5% or 10%
would be the down payment. The second mortgage has a higher interest
rate, but when the second is paid in full, you are left with a first
mortgage at an 80% ratio and you have paid no insurance premiums. This
option makes good sense for many homebuyers without the 20%. You will
need a fairly good credit rating to qualify for one of these programs.
In general, you will need to meet some requirements in order to qualify
for a conventional loan. Lenders use two basic qualifying tools, the
"front end ratio", in a nutshell this just means that the
monthly payment on your home should not exceed a certain percentage of
your monthly income, and the "back end ratio", that your total
monthly debt, including your monthly home payment should not exceed a
certain percentage of your monthly income. A good guideline to follow
for getting a conventional loan would be a 28% front end ratio and a
36%-40% back end ratio.
If you are sitting there with your calculator, you can see that other
debt such as credit cards and car payments can easily decrease the
amount of money you can borrow for your new home. If you are not close
to being within these guidelines,
I will say that I have recently seen lenders s-t-r-e-t-c-h that back end
ratio pretty far for buyers with very good or exceptional credit
ratings. For those folks with near perfect credit, 100% financing
programs are also available.
Or maybe you can use a government loan. With as little 3% down
and less than perfect credit, you may qualify for a government insured
loan, such as an FHA. (federal housing administration) The ratios for an
FHA loan are currently 29% on the front and 41% at the back. You will
still need to pay the mortgage insurance with a down payment of less
than 20%, but this loan may be the answer to buying a new home if you
can not qualify for a conventional loan of any type. FHA loans have
maximum sales price limits that vary according to county and change
somewhat regularly. FHA loans will generally charge the going market
interest rate and have no prepayment penalty.
The government also offers home loans to veterans. Although not
as widely used as in past years, a VA loan may help a veteran to make a
100% financed purchase. A VA loan is guaranteed by the government and
the result is that the borrower does not have to pay mortgage insurance.
There is a funding fee associated with a VA loan, but it may be added
into the loan.
I could make an entire web site
devoted to financing, but these general guidelines and terms will
give you some idea of what to expect and how to talk effectively with a
lender. Please feel free to call me with your questions, I always offer
a no pressure and no-nonsense atmosphere for you to get honest answers.
Click here for additional terms and a list of things your lender will
need.
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