buying a home: home loans

The scariest part about buying a house for me was the financial part. And not in the way you may think. I am not afraid to buy something so expensive. I am afraid that someone will tell me I am not worthy to buy a house because my financial snapshot isn’t good enough. Because of this we have spent the last 4 years improving our credit and saving so we can complete the dream of being homeowners.

I had a lot of questions along the way about the kind of loans that are out there and the requirements. Happily some beliefs were shown to be wrong, like you may not have to put down 2o percent. Finding this information proved a little daunting because it is all written in legal financial terms. I am going to give it to you in plain english.

Do you watch HGTV, do you wonder how people convince a bank to loan them $30,000 more than the purchase of the house to do renovations? I did. My brother solved this one for me as he was shopping for his house. They went with an older fixer upper and gave the option of a renovation mortgage some thought. A loan that allows you to finance your early repairs into your mortgage. This can be a great option is you don’t have a fat bank account to tap into.

For most of us renovation loans aren’t what we need. There are a few more common types of mortgages and you will likely fall into one of these categories if you are buying a house.

Types of mortgages

Conventional - is the traditional loan. You pay 20% of the purchase price when you sign the final papers to purchase the house. This is great because you don’t have to pay private mortgage insurance (PMI). Which can save you thousands over the life of the loan.

Conventional Insured - similar to the traditional loan, but you only have to pay 10% of the purchase price when you buy. You will have to pay PMI but after you have paid a portion of the mortgage, about 70%, you can file papers to have it removed and lower your mortgage at the end of the loan.

FHA - FHA stands for Federal Housing Authority. An FHA loan is a loan that is insured by the federal government, limiting the risk to the lender/bank. This encourages lenders to lend to people who look like more of a risk and people who can’t afford a high down payment. Not just first time home buyers but some repeat buyers as well. With a FHA loan you can have less than perfect credit and put down as little as 3.5%. You will be required to pay PMI for the life of the loan. The only way to get rid of the PMI would be to refinance the loan at a later date.

Renovation - this is a loan that allows you to borrow more than the purchase price to cover cost of renovation. This is useful if you are buying a fixer upper. Beyond that I know very little about this type of loan. There are a variety of options in this category so discuss this with your lender if you think this might be a good option for you.

Terms

Interest rate - this is annual percentage of the purchase price that you will pay in interest to the bank. This is how they make a lot of their money.

APR - This is the interest rate plus your other fees on the mortgage. Fees such as closing costs, PMI and other misc. fees. Your APR will be higher than your interest rate and could vary from lender to lender. When you shop around after they tell you the interest rate ask what the APR will be. The variance comes from closing costs, PMI costs and other fees that vary based on lenders.

PMI - Short for private mortgage insurance. This is an insurance for the lender that if you default on the loan they have some insurance that they will get back the money they are lending. Unlike other insurance, like car insurance where you get and pay for insurance to protect your investment, you foot the bill for PMI Find out what you need to know about getting a home loan. Preparing you to have conversations with lenders so you get the best deal.instead of the bank because you would be the reason their investment went south.

Process

Apply - The first, and most obvious, thing you will do is apply for a mortgage. If you do this before you shop it is referred to getting pre-approved. This can be helpful because you will know what you can afford before you start shopping. It also makes your offer more enticing because the person selling the house has more assurance that you are going to be financed.

Gathering - Now it is time to gather documents, weird letters from employers and anything else the lender asks for. This process will vary per lender but a safe bet is you will need up to two months of paystubs, two years of tax returns and all bank statements. Just when you think you are done they will probably call and ask for one more thing.

Underwriting - Sometimes during pre-approval your file will go to an underwriter. The underwriter is the person that gives the final yes or no about your approval. they assess the risk and decide if it is a good one for the company. Typically this part of the process doesn’t happen until after you have put in an offer. I will cover it a little more in a post about putting in an offer.

Here is my disclaimer: I am not a financial planner or a lawyer, all situations are different, if you have questions you should talk a mortgage broker or your real estate agent to get the answer that is best for you. I am simply helping you go into those conversations armed with knowing your options.

If you have other questions about home loans leave them in the comments and I will get you an answer.