My daughter is under contract for a new condo in the Boston area. She is learning a lot about getting a mortgage now and I am going through that process with her! It is very personal now. I am learning all over again that shopping for a mortgage can be overwhelming. Even if you’ve owned a few homes and have had a few home loans, chances are there are some mortgage options you don’t know about.
Here are some points to remember:
- A 20 percent down payment isn’t a must. The long-held view that at least a 20 percent down payment is needed to buy a home is outdated.
A loan approved by the Federal Housing Administration, or FHA, can have a minimum down payment of 3.5 percent. For a $300,000 home, instead of having to come up with $60,000 (20 percent) down, a 3.5 percent down payment requires $10,500 down.
It is possible that you might be able to roll the closing costs into the mortgage (assuming that the property will appraise with the closing costs included.) If you do roll the closing costs into the mortgage or get the seller to give you a credit for the closing costs, all you would need is the 3.5% down payment. That is a big difference from a 20% mortgage.
- Banks aren’t the only home lenders. Traditional lenders like banks and credit unions are just some of the places to get a home loan.
Savings and loan associations are one option, using the savings deposits of private investors to make mortgage loans. They’re usually locally-owned and managed, and are chartered by the federal or state government.
Mutual savings banks are another option. They’re like savings and loans and were created to help low-income consumers. Unlike commercial banks, they can borrow from the Federal Home Loan Bank System to make investments such as mortgages.
- You’ll likely get more money than you need. After determining your ability to repay a home loan and the cost of the home, the lender will tell you how much of a loan you qualify for. Chances are it will be a larger loan than you want to take on.
New federal laws in 2014 are meant to hold lenders more responsible for the loans they underwrite, but the guidelines still allow larger loans for most people.
That doesn’t mean you have to necessarily borrow that much money. But it could help pay your closing costs, or be used to buy a bigger home. But if you’re getting a bigger loan only because you qualify for it and can buy a better or bigger home, you could be in trouble soon if you can’t afford the payments in the context of your overall budget. Only you know your day-to-day finances—not your lender—so sticking to a loan you can afford is wise.
- A home loan can help cover repairs. If you’re getting an FHA loan, its 203(k) program allows up to $35,000 from the loan to be used for home repairs and improvements.
Chances are the home you’re buying will need (or you’ll just want to change) new carpet or paint, and this add-on loan product can pay for the improvements. The total loan amount is based on the projected home value after the fixes are made. If you are taking on a VA mortgage, these is a similar program for loans issued by the Veterans Administration.
5. If you are buying a condo, rather than a single family home, the rate will likely be higher. When you see the mortgage rates on line, you might be surprised to find that your rate is higher because you are buying a condo. This is not a lender picking on you. It is just part of the mortgage guidelines.
6. You can shop around for a mortgage Your mortgage rate is going to be affected by your credit score, the location and type of your property, the amount you are putting down, and the program that you are using to purchase. You also should talk to several different lenders to see which lender you would like to work with. Don't believe that you have to take the first lender with whom you speak!
If you have additional questions about how to choose a lender, please give us a call at 240-401-5577 or email us at lise@lisehowe.com.
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