Lenders like to see at least 20 percent of the property’s price as a down payment. If you can put down more than that, the lender may be willing to approve a larger loan. If you have less, you’ll need to find loans that can accommodate your particular situation. Various private and public agencies – including Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs – provide low down payment mortgages through banks and mortgage companies. If you qualify, it’s possible to pay as little as 3 percent up front. For more information, check their websites at Fanniemae.com or Freddiemac.com. With a down payment under 20 percent, you will most likely wind up having to pay for private mortgage insurance, a safety net protecting the banks in case you fail to make payments. PMI adds about 0.5 percent of the total loan amount to your mortgage payments for the year. For example, if $200,000 is being financed, PMI would cost $1,000 annually.
Whatever property you buy and however much you borrow, you will be repaying the loan for many years and a lot of money is involved. In fact, most people would be shocked if they added up the amount of interest they pay during the term of a loan. It follows, therefore, that even a slight reduction in the interest rate you pay or an improvement in the terms can make a significant saving in the total amount that’s repaid.
Because of the large sum involved and the long repayment period, it really is worth spending some time finding out what’s available, researching the subject and checking out a range of options. That way, you can be sure you’re getting the best deal and may save a considerable amount of money over the term of the loan.
Every purchase offer that is financed includes a clause stating that the sale is contingent on final financing approval. When a buyer makes an offer on a property, they submit a formal loan application, which includes proof of earnings, assets and expenses. Income and asset documents can include two years of tax returns with applicable W2s and 1099s, the previous two months’ pay stubs, two months of bank, stock and retirement account statements, a list of real estate owned with addresses and value, and a list of automobiles owned. Documents to prove expenses include copies of the previous two months’ rental checks or mortgage payments, loans (auto loans, credit cards, lines of credit, mortgages and school loans), money judgments, child support or alimony payment obligations and other items as applicable, such as a copy of a divorce decree.
Once the formal loan application is submitted, the bank runs a comprehensive credit report and reviews and verifies all information and documents provided by the borrower. If the bank has questions or concerns, the issues will be presented for the borrower’s clarification. If the borrower has any collection actions on their credit report, the lender will most likely require a written explanation to justify any unpaid accounts. Soon thereafter, an appraisal is ordered at the borrower’s expense, and the title company performs a title search on the property. In the case of a home purchase, the borrower should at this time arrange their own professional inspection, review any applicable homeowner association documents, and obtain an owner title insurance policy, if required. At the conclusion of processing, the borrower signs disclosures together with a loan commitment.
The lender often locks in the loan rate for a period of a week to 90 days before closing. The buyer must provide the lender with proof of hazard insurance for the property being purchased and must meet any lender-specified conditions before the loan is funded, such as providing additional documents or proof of funds. A bank representative reviews documents and either signs off for approval or suspends or denies the loan.
If it happens that you are a cash buyer, then the entire process of pre-approving and arranging financing can be skipped. The advantages to buying a property with cash seem pretty obvious, but there are some that you may not have considered. Paying cash puts you in a prime negotiating position for purchasing a property since most other buyers will have to obtain financing. The vast majority of sellers would rather know that it is a done deal than worry that their buyer’s financing is going to fall through at the last minute. This means that you may be able to negotiate a better price on the property in question. Another benefit to a cash purchase is that there is no need to wait 30 or 45 days to close as there are no appraisal or loan funding contingencies. Once the property inspection and other contingencies have been satisfied or released, closing can take place in as little as seven days, as long as the title is clear and the seller agrees to it. If there is a mortgage on the seller’s side, their obligation to their lender will have to be satisfied before title can be released.
