Home buyers, especially first time home buyers ask themselves the question, how am I ever going to be able to buy a home? The challenge can be daunting. The upheaval in the market over the past few years has changed lending guidelines. Although there are still one or two loan programs that that will allow a borrower to purchase a home with little or nothing down, they only allow purchases in narrowly defined situations.
In almost all cases the borrower’s credit history, credit scores and income must meet lender guidelines. The lenders offering the lowest interest rates require the borrower to meet the most rigid standards.
In general, a borrower should expect to put a minimum of a 3.5% down payment on any purchase to be able to qualify for a FHA loan. (There are indications that the 3.5% will soon increase to 5%) In addition to the down payment they can expect to have closing costs of approximately 3% of their loan amount. In some circumstances the seller may agree to pay all or part of the closing costs but that is situation specific.
Conventional loans are still available to those who meet lender requirements. Most require the borrower to make a 20% down payment. Some lenders will approve a loan when the borrower has only a 10% down payment, but interest rates are higher and PMI (Private Mortgage Insurance) will be required.
Types of Loans Available
ADJUSTABLE RATE LOANS have been around for a while. The interest rate and payment amount are fixed for a number of years, allowing buyers to purchase their home and get adjusted to the higher expenses of home ownership. At the end of the fixed period, the interest rate and payment amount adjust according to specific index parameters. The adjustment can be up or down. The borrower should very careful and consider both possibilities and be prepared for the adjustment.
INTEREST-ONLY LOANS are a more recent innovation. This product allows the buyer to pay only the interest on the loan amount for a period of years. At the end of that term the loan reverts to a fully amortized loan, one in which both principal and interest are paid together after the adjustment. The incentive is that payments during the interest-only period are lower than are those of a fully amortized loan. Payments increase significantly at the end of the interest only period. (A loan that is interest only for ten years becomes a 20 year amortized loan.) Here again, the borrower must understand this fact and be prepared when the adjustment comes.
FORTY YEAR LOANS are now available. When you extend the payments for longer periods the payments are lower. However, the total amount of interest paid increases considerably.
PMI Many lenders require a borrower to pay PMI (Private Mortgage Insurance) if the borrower does not have at least a 20% of the purchase price as a down payment. This PMI is an opportunity for the lenders to increase profits at the borrower’s expense. Some, or all of the PMI may be tax deductible. Of course, there are minimum credit score requirements. One way or another, we will get you the best deal in town for your specific circumstances.
The good news is that buyers who could not qualify for the benchmark 30-year fixed interest rate loan are likely to qualify for one of these other programs. Home ownership may indeed be within their grasp. However, you MUST understand all facets of the program that you choose.
If you don’t think you can qualify, give us a call. It only takes a few minutes and you may be pleasantly surprised. Giving clients good news is the most enjoyable part of our job.