Buy Your Home
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If
you are a first time home buyer, you may find that all of the
details are very confusing. After all, how do you know what a
"30-year fixed" or "inspection" means? This short primer on
the basics you need to know will help you get through all of
the information.
Advantages for the
Buyer
1. Easy Qualification. The buyer, in many
cases, prefers an installment sale to conventional financing
because it does not require traditional bank income and credit
approval. The buyer may have poor credit because of a
divorce or recent bankruptcy. He may be self-employed
and cannot prove income. He may be new to his job and
cannot meet strict lender guidelines. Even if he could
qualify for a loan, the rate will be astronomical if he has
poor credit. Furthermore, few conventional lenders offer
fixed interest rate loans to people with a poor credit
rating.
As you can see, there are dozens of reasons why
a buyer cannot (or will not) qualify for a conventional bank
loan. The installment sale becomes the perfect solution
for him.
2. Credit Rating. An installment
sale may give the buyer a chance to improve his credit rating
by owning a home and making payments timely.
3. No Loan Costs. One of the
biggest benefits for the buyer is not having to pay the costs
associated with conventional loans. Points, origination
fees, underwriting charges, appraisal, credit reports, title
insurance and the plethora of other "junk" fees charged by
conventional lenders can amount to thousands of dollars at
closing. The buyer is free from these with an
owner-carry installment sale.
4. Fast Closing. A buyer can close
and move into a property within days, since there is no third
party lender holding up the transaction.
Despite the elevated purchase price and interest
rate, there are many benefits to a buyer who engages in an
installment sale transaction.
Buying - Tips
for First-Time Home Buyers
Two years ago, John
McPeak bought his first home. He and his fiancé were also
planning a wedding and planned to spend a good amount of their
savings on the reception. Coming up with the traditional 20%
down payment for their $580,000 dream home wasn't possible.
There were too many expenses right then.
McPeak's mortgage broker
came up with a solution for the financial problem. He could
take out two mortgages, called a piggybacked loan, and be able
to finance the home with only 10% out of his pocket. The
arrangement guaranteed that they did not have to pay private
mortgage insurance, which can be quite costly. There was a
savings of $100 from the monthly mortgage costs.
Finding enough money for
a down payment, especially in markets where home prices have
soared, is the biggest challenge for most first-time buyers.
Lenders recognize this and are creating a growing number of
financing options. You can even find mortgages out there for
as little as 3% down. In other words, you could place as
little as $5,523 down on an $184,000 home, the average cost of
a home in 2004.
That might sound great.
For those without a lot of savings, these deals may make
financial sense. But they do have their cost. To begin with,
you will have a higher interest rate if you don't put much
down. The lender is guessing that you are a risky borrower
because you don't have any equity in your home. You will also
have to purchase private mortgage insurance, which covers the
lender in case you default on the mortgage. The cost is
usually an additional 0.5% to 0.75% on top of your interest
rate. On a $178,577 loan, 97% of the medium home price, you
could pay anywhere from $56 to $84 a month.
But the costs may not
override the benefits to owning your own home. Beside the
emotional benefits, owning a home allows you to build equity
and is the single biggest tax break available to the average
consumer.
Start by paying off your
debt
Many people make the
mistake of focusing on saving money and paying for things with
credit cards and other forms of credit. The best approach is
to use your cash to eliminate your credit-card and other
high-interest debt, even if you have to put less down on your
home.
Credit card debt is the
most expensive form of debt you are facing. It limits your
ability to save money. The average interest rate on a credit
card is around 13%, much higher than a 6% 30-year fixed rate
mortgage. Credit card debt also affects how much you can
borrow. The lender will not allow your monthly debt payments
to exceed 40% of your gross income. This means that you are
able to afford less home.
What can you
afford?
This depends on
how much you can borrow and how much of a down payment you can
make. Most lenders want your housing expenses, including
mortgage payment, taxes and insurance, to remain under 28% of
your gross income. Determine how much cash you have for a down
payment, keeping in mind that you will have to pay for closing
costs. The closing costs can add up to 5% of your new home's
total value. You should also save a little extra for emergency
repairs once you move into the home.
Different types of
loans
Now that you know how
much you can afford, you are ready to start shopping around
for the right loan. If you have a steady job and great credit,
you may be able to put down as little as 3%. Rates vary widely
and a low-down payment mortgage will have an interest rate at
least half a point higher than a conventional loan. With our
97% mortgage example of $178,577, that extra half-point of
interest adds an additional $56 a month to the payment.
The more money you can
find for a down payment, the more options you have. If you put
5% down, you may qualify with a smaller salary than those who
put 3% down. By placing more down, you are showing that you
will not default on your investment.
Private lenders have
come up with a lot of programs designated for first-time home
buyers. Washington Mutual, for example, offers a mortgage with
a 10% down payment with the remaining 10% of the down payment
built into the interest rate, making it tax deductible. This
also eliminates the need for private mortgage
insurance.
Piggybacking your loan
is increasingly common. This type of mortgage is often
referred to as an 80-10-10. You simply place 10% of the
home's value down. Then you take out your primary mortgage,
usually as a 30-year fixed rate, for 80% of the home's value.
Then you take out the remaining 10% as a 15-year fixed rate
second mortgage, at a less favorable rate. When you combine
the two loan payments you reach your total mortgage payment.
The process is a little more complicated and expensive than a
traditional mortgage and has higher closing costs. But it may
be cheaper than paying for private mortgage insurance.
Do you have questionable
credit?
If you don't have
perfect credit, you can still find a mortgage. Consumers with
slightly blemished credit are able to qualify for mortgages
with fairly competitive rates. Fannie Mae, for example, offers
an expanded approval program for those who may not qualify for
fair-market value rates through traditional lenders.
If you credit isn't good
enough for a Fannie Mae loan, you may still qualify for a loan
through the Federal Housing Authority (FHA). The loans are
government backed and have lower credit criteria. You can put
as little as 3% down and finance your closing costs in your
mortgage. The interest rates usually run around a quarter of a
point higher than those in a conventional loan.
There are no income
limits for FHA loans. However, these loans are primarily for
first-time home buyers and low to moderate income families.
There are limits to how much you can borrow. High cost areas
are capped at $312,895.
Down Payment
Assistance
If you still can't find
a way to come up with a down payment, HUD allocates money to
each state for distribution to low and moderate income
families for housing assistance. Most of the funding is used
towards down payment assistance programs. Many young home
buyers may qualify for a grant or a loan of 3-5% of the sale
price for down payment and closing costs.
To qualify, you usually
can earn no more than 80% of the regions median income.
Don't confuse any of
these programs with no-equity loans being offered to people
who already own their homes. No-equity loans are high cost,
high risk home equity loans that aren't advisable.
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