Last week our Hot Topics took us through the why’s of finding a lender you trust before you find the home you love. First things first and if you are not an all cash buyer then finding your dream Denver home for sale, just to lose it from not being prepared with a proper plan of action in place is heartbreaking.
This week we are going to explore your options that you have with your loan. Before we get too deep here let’s just clarify there are as many home loan options out there as there are homes for sale in Denver. So, this is a broad view with some guidelines to help you ask the right questions to help you decide which loan program is right for you and your situation. This is not a substitute for sound guidance from your attorney, accountant and of course your lender.
So, when you decide the time is right to buy a home and you will be utilizing one of the many loan programs out there. Which is right for you? They all have their advantages and disadvantages depending on the situation. Ultimately it’s important to keep a few things in mind. First is the more skin you have in the game the less risk for the lender and ultimately to less cost to you as the borrower. The least amount of money you put up means more risk to the lender and therefore the more expensive over the long haul the loan will be. However, that’s not always to your disadvantage. In fact, I have many clients and myself included who over the years have taken advantage of low interest rates, borrowed from the bank and used their money instead of my own.
So, as I said earlier there are so many different loan options out there that we cannot possibly go over all of them or even get too in-depth on any one of them without putting you to sleep. so let’s touch on three of the most popular options out there today Conventional Loans, FHA (Federal Housing Administration) and VA (U.S. Dept. of Veterans’ Affairs)
Conventional – Many years ago Conventional loans meant you saved up your pennies until you gathered at least 20% down payment plus about 3% of the loan amount set aside for closing costs to purchase a home. This may or may not make sense for you. If you are in the position to have the money available to you to cover the upfront money and you plan on being in the home for at least 10 years then this may be a great option. If you don’t have the money upfront but you are in a good job and you are out-pacing the current housing market, meaning you are saving faster than the real estate market is appreciating you may do better to save up the money. However, be honest with yourself; It’s very difficult to save up that kind of money, especially for first time home buyers in Denver, and you may be better off looking at a couple different options. Today there are many options even with a “Conventional Mortgage” you can borrow more than the 80%. However; if you borrow more than 80% of the purchase price the bank will require you to carry an insurance policy which covers their losses should you default on your loan. Commonly known as PMI (Private Mortgage insurance) or MIP (Mortgage Insurance premium) We’ll talk a little more about PMI in the next section which is FHA loans.
FHA – “Federal Housing Administration” – OK, so we do not have a living situation where we are saving more money and garnering wealth faster than the housing market and home ownership is fading away and getting harder to obtain. So, we are out of luck and are going to pay rising rents and our landlord’s mortgage for them for life right? Not so fast, FHA might be a way for you to get your foot in the door. You hear it all the time… “What about first time home buyers programs??” FHA loans are one way you can become a homeowner and not have 20% plus closing costs. In Fact you can put as little as 3.5% down plus closing costs. so instead of 80,000 down payment on that 400k home you need to only put down 14,000. WHAT? from 80K to 14K on the same home?? What’s the catch right?? The catch is two-fold first and foremost is you will pay PMI there is an upfront cost that you pay at closing AND you are borrowing more money meaning your loan amount is higher and your costs on that loan will be higher. Then of course each month you will pay the mortgage insurance until you get to a point where you have either paid down or the market values rise to a point where you could re-finance the loan to a conventional loan where you would not have the PMI. There was a time where once you got below 80% you could do an appraisal and get the PMI dropped. There may still be a few lenders who will but most likely you will need to refinance the loan. There is another option if you serve or served in the military next we will discuss VA. For more information regarding FHA Loans
VA – “U.S. Dept. of Veterans Affairs. – Calling all veterans – Now, the VA loan is another option if you do not have the 20% upfront for down payment. The VA loan is great because not only do you NOT need 20% in fact in some cases you need ZERO dollars for down payment. Now part of the risk is taken on by the VA, they actually will guarantee your loan to your lender. Meaning if you default they will make up the bank’s losses. What’s even better is unlike FHA you do not pay mortgage insurance. However, there is a “funding fee” and that funding fee is paid as part of your closing costs. The fee varies and if you use the VA loan program more than once you can but the funding fee goes up as well. The VA loan has some other quirks to it as well, the appraisal is more strict on the home and has to meet certain safety guidelines and so the home you want to buy may not qualify for a VA loan. This was the case for my first home I bought, it was a condo and the VA was more strict than FHA on the condition so in the middle of escrow I had to switch from VA to FHA. So, if you are going to use the VA loan that is something to keep in mind, you may have a hard time buying a “fixer.” More VA loan info
I hope you enjoyed this week’s Real Estate Hot Topics – If you have questions on who to talk to for your loan call or e-mail me I have access to some great loan officers and can get you in touch with them. I’d love to get you started on your journey to homeownership. Call me direct at 720-688-5110 or shoot me an e-mail; firstname.lastname@example.org
Next week we will jump back to helping out sellers with pricing their home and which is the right way to go?? Price it high and work your way down to where the market is “OR” price it low and let the buyers bid it up to the market value. Is there a right or wrong answer? Tune in next week….