Financing Basics For Buyers

While most people enjoy the home shopping process"that is, visiting new home communities and touring all the beautifully decorated model homes"many potential buyers become a little nervous when faced with shopping for a mortgage. Fortunately, most home builders work with lenders who are happy to spend time with buyers to help them assess their needs and choose the best loan program.

Before you begin shopping for your new home and your mortgage, you should have an idea about how much money you will have for a down payment and closing costs. You should also be familiar with your credit rating. Your credit rating will affect the interest rate you will pay, so it's important to be aware of where you stand. Finally, you will be asked about your employment history and current income, so be prepared to provide numbers and details.

In today's market there are a variety of loan programs designed for all types of buyers. One of the most popular is the zero down loan. That's right"those who don't have a down payment can still purchase a home with this type of loan. Of course, zero down loans typically offer a higher interest rate. Even so, they make a lot of sense for many buyers, especially considering how long it can take to save up the typical 20% down payment.

While it's great that buyers can now purchase a home without a down payment, one of the disadvantages of coming in with less than 20% down is mortgage insurance. Mortgage insurance is usually required on all loans that exceed 80% of the value of the home. How can you avoid this extra expense? One way is to secure an 80/20 loan. An 80/20 loan means you have an 80% first mortgage and a 20% second mortgage. The interest rate on the second mortgage will be higher, however, mortgage interest is tax deductible while mortgage insurance is not.

Buyers who have managed to save 20% or more of the purchase price to put down can choose from a variety of mortgages including fixed rate and adjustable loan programs for various terms. Buyers should investigate FHA loans, conventional mortgages, and even VA loans if they qualify. Choose your loan based on your current needs as well as your future plans. For example, if you plan to move in the next few years you might want to choose a shorter term loan at a lower interest rate. If you know you will be in the home for many years, a 30-year fixed rate loan may be the best choice. If you need the lowest possible interest rate to qualify, you will want to look at adjustable loans that start at reduced rates. Share information about your long term plans with your lender to ensure that your loan program makes as much sense a few years down the road as it does today.

Regardless of the type of loan you choose, there are always closing costs associated with a home purchase. Closing costs vary from county to county, but the average is about 4% of the purchase price. Some typical closing costs include points and other loan charges, escrow fees, homeowners insurance, title insurance, property taxes, legal fees, pre-paid loan interest, recording fees, and more. Closing costs can be added to your mortgage loan or paid at the close of escrow.

We all know interest rates are market driven, however, your credit rating will determine whether or not you will qualify for the best interest rates. To qualify for a conforming, conventional loan of $300,000 or less, buyers must have a credit score of 620 or higher. To get the best rates and pricing for jumbo loans of $301,000 and higher, buyers need a credit score of 680 or better. To qualify for the best pricing on stated income loans, lenders will require a 720 credit score or higher. There is no need to be alarmed if your credit score does not meet these standards. Lenders will loan on credit scores that do not meet the above guidelines. The catch is the rates are far less attractive and there are usually higher closing costs involved.

When it comes to credit worthiness, the most important thing lenders will look at is your credit history over the past 24 months. Lenders do not like to see late payments within this period of time. The past 12 months are the most critical. Lenders look at payments, which go 30 days or more late, outstanding collections, judgments and any other type of lien. Most lenders will require you to pay anything outstanding prior to the close of escrow. The most important factor in shopping for a home loan is DO NOT let every lender pull your credit. Keep in mind that every time your credit is pulled your score goes down.

As for your employment history, the lender will want to see you with the same employer or in the same line of work for the past two years. For people who have recently graduated, schooling will count as time in that line of work. For salaried and hourly workers this is not very difficult. For buyers who have started new businesses or have changed careers this can present a challenge. Fortunately, there are loans available for people in this situation. Stated income loans are a good option for the self-employed or those who have recently changed careers. Stated income loans require buyers to "state" the source of their income without providing official documentation such as tax returns. Be sure to share any concerns regarding proof of employment or income with your lender. He or she should be able to help you find a loan program that meets your needs.

Whatever your situation, there is a loan that will make your dreams of owning that special home come true. Just remember to communicate with your lender and keep an open mind about the many possibilities. Good luck in your home search!