Written By: Travis Carter : Loan Options
Purchasing your first home is the first step to building wealth. Most young families see a home like an expensive car purchase without ever considering the power of real estate in their overall financial goals.
When you rent a home, you pay a set monthly rental fee to the landlord and at the end of the agreed on lease, you can either move, or renew the lease at the agreed upon rents. The problem with paying rent is that it changes! As the economy around you changes and the value of the dollar rises and falls. The amount of rent needed to pay for your housing is likely to increase year over year. In addition, you are not building equity in anything. You are simply paying your landlord every month for the right to use his home. Granted, there are some protections that come along with signing a lease. You can’t be thrown out on the street without notice, for instance. On the flip side, you are not building equity either.
When you purchase a home your payment is fixed. You lock in to a payment for 15, 20, or 30 years. As the economy changes around you (Inflation, appreciation, etc..) your payment will remain the same.
Typically as the cost of goods and services increases so does income. These are the basics of economic growth. From that information you can conclude that if the cost of rent increases so should your annual income. When you purchase a home, the economy will likely still increase your income but your monthly payment will always remain the same meaning more monthly disposable income. These are the basics of building wealth with real estate.
In addition to saving money every month as the cost of living increases around you, you will also build wealth through equity. Every month you will be paying down your mortgage as your home’s value increases simultaneously. Equity is the difference between the home’s fair market value and the outstanding balance of all loans on the property. When you sell your home you convert equity into cash.
Home value’s increase over time. This is called appreciation. The free market determines the value of a home and thus there is no way to know exactly how much your home will increase in value over time but the chart below should help you understand the relationships between rent, income, and home values.
So we talked about the why, now lets get into the how.
The four C’s is a common term for experience mortgage professionals. The C’s are Cash, Credit, Collateral, and Capacity (Income) .
The money you have available will play a big role on what loan programs you qualify for. If you do not have any money in savings, you will need utilize a no money down home loan like USDA or VA.
USDA loans are offered to home buyers trying to purchase a home in a rural area. They provide funding to home buyers with no money down and closing costs can even be financed. If you live in a rural area and do not have any money saved, USDA might be the right home loan program for you.
VA loans are home loans backed by the Department of Veterans Affairs. These loans are offered to our armed services veterans and are one of the best home loan programs available today. VA does not require a down payment, closing costs can be financed, and VA has restrictions on what fees. a Veteran can be charged. If you are a Veteran and want to obtain the best possible home loan program, a VA Home Loan might be the right loan for you.
If you have built up a savings account over time and would like to purchase a home you are likely in a better position than most home buyers. Mortgage Lenders and Banks like to see savings as it shows the ability to manage money responsibly and that you do have extra income left over for other payments.
Conventional loans are a great options for home buyers with a large down payment saved up. Conventional loans offer the lowest monthly payments and the best interest rates but do require more money down that USDA, VA, or FHA Home loans.
If you have built up a savings account and want to pay off your home as quickly as possible, a Conventional Loan may be the right home loan for you.
The Down Payment
Now that you know how much you need to put down, lets talk about how much you should put down.
The reality in home lending is that the interest rates offered are some of the lowest interest rates available in any market. With such cheap money available, sometimes a down payment isn’t the best option. Lets assume you have $100,000 in stocks and bonds and this is paying you a rate of return (on average) of 5.25%. That is $525 annually that will compound over time to build more wealth and result in higher returns year over year. If the interest rate on your new mortgage will be 4.5% , it probably isn’t the wisest choice to sell your investments to make a down payment. You would be giving up 5.25% annually in compound returns in order to negate an interest rate of 4.5%. Although this calculation can be complicated, we recommend talking to a financial planner for more details or consulting your mortgage professional.
There is always more to home purchase than the monthly mortgage payment and interest rate. Planning to incorporate the real estate as a tool to use in your overall financial plan is the most important aspect of purchasing a home.
Your current credit profile will help determine if you currently qualify for a mortgage and which home loan program suits your credit profile best.
Conventional home loans require a better credit score to receive the best available interest rates and terms.Typically you would need a credit score above 680 for a Conventional home loan, however, many Government backed home loans will finance a home with a credit score as low as 580. If your credit socre is below 580, don’t worry. We have credit consultants on staff to help you raise your credit score and help get you prepared to purchase a home.
One overlooked factor in calculating your credit score is the balance vs high limit ratio on your credit cards. We have worked with many home buyers that have raised their credit scores over 100 points by simply paying down their credit card balances.
If you have collections on your credit report, you will need to take other factors into consideration. Government home loans such as FHA, VA, and USDA do not take into account medical collections. If you have cash available and want to improve your credit score, do not focus on the medical collections. It is always best to pay off bad debt such ass credit card collections, loans, and utility bills first. If you have total non medical collections above $2,000 you might be asked to pay off some of the colllections to qualify for a home loan.
To complete a full credit checkup with one of our representatives. give us a call at (518) 324-5544.
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Travis Carter – Branch Manager
I have been in the mortgage business for over 18 years. Since joining my first mortgage company in 2000, I have focused on providing a better mortgage experience. I have managed and trained 30+ mortgage professionals since starting my career. I specialize in first time homebuyer loans including FHA, VA, USDA, and Conventional financing. My goal is to never stop learning and test new financial strategies so I can pass this knowledge on to my clients.
If you have questions or would like to apply for a first time homebuyer loan, I can be reached at firstname.lastname@example.org
In addition to the cash and credit you have available, you will also need to consider what type of home you plan to purchase.
Government home loans like FHA, USDA, and VA have minimum property requirements that need to be met in order to purchase the home.
Some of the requirements are minor while others will require more work if the property needs repair now. All utilities must be on and working. In most cases this means buying a foreclosure is not possible using a government backed home loan. Banks typically winterize a home before selling a home in foreclosure. Handrails are another common issue with government home loans. Any stairs or steps typically need some kind of handrail for safety.
An experienced real estate agent or mortgage professional should be able to look at the property and advise what repairs (If any) would be needed to qualify for Government backed financing.
Some loan programs allow you to purchase up to a four unit property with little to no money down. Buying a multifamily home is a great way to let someone else pay your mortgage.
FHA Home Loans allow a first time home buyer to purchase up to a 4 unit property with only 3.5% down. In addition, closing costs can be financed by utilizing seller concessions. If you wanted to purchase a $250,000 4 unit property you might only need $8,750 to close the purchase.
VA allows 100% financing on up to 4 units. VA is considered the best available loan program today. If you are looking to invest in a multifamily apartment building and put no money down, VA might be the right loan program for you.
Manufactured homes are more difficult to finance in 2019. We offer all of the same loan programs for manufactured housing as we do for stick built (Standard construction.).
The appraisal is a report completed by a licensed appraiser to determine the market value of a property. The appraisal is required on every home loan and will be ordered by your financial institution. Typically, the appraised value of the home must support the agreed on purchase price. Although the loan process can be derailed by a property that does not appraise correctly, typically, the slaes prices is renegotiated when the apraised value comes in less than the sales price.
A borrowers capacity is the amount of home you can afford. Capacity is determined by analyzing your monthly income and calculating your debt ration. Typically, all monthly debt payments including your new house payment cannot exceed 50% Of your total monthly income.
To document your income you will need to provide your paystubs, tax returns, and W2 forms. If you receive monthly benefits you will need to provide copies of your award letters or other proofs of your monthly income.
So now you know your loan program options but you will also need to contend with closing costs. In some areas closing costs can exceed 5% of the property sales price. This means that a $100,000 home purchase could have closing costs as high as $5000. Title insurance, homeowners insurance, attorneys, appraisals, and the state transfer taxes are just some of the fees you will be charged. Fortunately closing costs can be covered by seller concessions (Seller paid closing costs).
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