How Much House Can You Afford?
Finding the Right Lender for North Florida Properties
Once a contract becomes binding, you probably will have to arrange for financing. Depending on the terms of the contract, the purchase of the home may be contingent on your being able to get financing at certain terms by a certain date.
The Real Estate Professional might provide you a list of lenders. Most home buyers get loans through savings institutions and mortgage bankers and, to a lessor extent, from commercial banks, credit unions, or other private sources. In some cases, the seller may be willing to offer financing. Sellers often can offer a loan to a buyer at a competitive interest rate and attractive terms. Check on specifics.
Types of loans
In general, three broad categories of loans are available:
- Private versus government loans - Most mortgage loans are made by savings institutions, banks and mortgage companies. On government (FHA and VA) loans, the government does not actually loan the money but rather guarantees (or insures) to repay the lender if you default for some reason. Generally, a lender will require you to buy mortgage insurance, particularly if you make a low down payment. This insurance may be paid at closing or added to the loan amount. VA loans require no mortgage insurance, but only qualified veterans may apply for them. Mortgage insurance protects the lender, to a degree, in the event of default.
Government loans have important advantages - they generally require a lower down payment than conventional loans and often have a lower interest rate or points. One the down side, government loans limit the amount you can borrow, often take longer to process, and sometimes have higher closing costs.
- Fixed rate versus adjustable rate - On a fixed rate mortgage, the interest rate stays the same over the life of the loan, usually 15 or 30 years. That means your payment will not change except for adjustments for taxes and insurance.
Adjustable rate mortgages go by a variety of names, but basically these loans have interest rates or monthly payments that can go up or down over time. These mortgages typically start out with a lower interest rate, lower monthly payments, and lower fees and points than fixed rate mortgages. They often appeal to first-time home buyers, younger couples who expect their incomes to grow in the coming years, and people who might not have much cash for down payment and closing costs.
If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the interest rate cap; the maximum rate you will be charged no matter how high rates go in the market. Don't confuse rate cap with payment cap. When the payment is not enough to cover interest, the excess interest is added to your principal balance, so your debt increases instead of decreases. Also ask about the index that will be used to calculate future interest rates and how index charges will affect your mortgage.
- Assumable versus new loan - Some loans, particularly FHA and VA loans as well as some adjustable rate mortgages, are assumable. That means a buyer can assume an existing loan usually on the same terms as the previous owner.
Assuming a loan may save some costs and time. As the buyer, you may pay the lender a fee at closing for processing the assumption.
The true price of financing
When shopping for a loan, don't judge the loan by the interest rate alone. Compare several items in the entire loan package, including:
- Points on a low-interest-rate loan can be double those for a loan with a higher interest rate, causing you to pay more up front and in cash.
- Total fees charged by the lender. Some lenders will absorb the cost of many services, while other do not, so ask in advance.
- Term. In general, the longer the life of the loan and the more fixed the payment, the more you can expect to pay over the life of the loan. For example, a 30-year, fixed-rate loan will cost more in interest than a 15-year, fixed-rate loan.
- Penalties. Ask what penalties will be charged if you pay off the note early. A prepayment clause could require you to pay a penalty if you pay off the loan early, such as refinancing the loan at a later time.
Loan approval process
When you apply for a loan, the lender will ask about your finances. You will already have most of the facts and figures in the financial information you compiled earlier. The process can take several weeks.
From the lender's viewpoint, approving the loan is only part of the risk; the other part is the property itself. The lender may require an appraisal to verify that the home is worth the loan as well as a physical survey to discover any encroachments on the property. Repairs may be required. Insurance must be purchased. Verifications of employment, deposits, and other matters must be obtained. Loan documentation and conveyances instruments must be drawn and approved. In addition, the title company must research the title and arrange for paying off any liens, taxes, and other costs. All these conditions and other conditions must be satisfied before a transaction can close.
As another protection, the lender may require insurance protecting the home against hazards such as fire and storms. (Flood insurance will most likely be required if the house is in the flood plain and would be a separate policy.) Hazard insurance may be included in a homeowner's policy that covers other risks such as theft and liability. Even if not required by a lender, it is probably a good idea for you to seriously consider all types of insurance. Discuss these issues with your insurance agent.