4 Ways to Find Financing for Your Dream Home
The largest, most complicated purchase an individual ever conducts typically concerns the purchase of real estate. The real estate industry comes complete with a horde of salespeople eager to earn commissions, inspectors whose jobs are to ascertain the viability of structures and systems, and financial personnel who also seek to earn commissions through lucrative deals that funnel money to their employers. These disparate aspects of real estate come together with a specific lingo that many people don’t really understand.
Before embarking upon the largest purchases of their lives, prospective homebuyers—especially first-time homebuyers—face the daunting prospect of acquiring the down payment and then securing financing for 15 to 30 years of debt. For someone whose household income hovers near the national median of $53,889 before taxes, the task of coming up with a down payment can seem impossible. According to Bankrate, the value for the median existing single-home in Nevada, $348,800, shows a 7.8% rise in the fourth quarter of 2016. A minimum FHA down payment of 3.5% would be $12,208 before closing costs.
Because saving for a down payment relegates home ownership to the realm of pipe dreams for many people, the State of Nevada implemented the Home Is Possible Down Payment Assistance Program in 2014. The program awards grants up to 5% of the loan amount to qualified applicants. Other states may also offer additional assistance programs.
But don’t let the fear of home financing deter you. The following 4 tips to prospective homebuyers can help navigate the financial pitfalls that can turn the American Dream into the American Nightmare.
Understand Your Finances
This tip goes beyond an understanding of your annual income and entails a detailed comprehension of the household budget: income, expenses, cash flow, insurance, existing monthly payments. Such comprehension enables the prospective homebuyer to understand where some costs might be feasibly cut and how much additional stress the budget can withstand. If you’re short on the minimum down payment, trim the budget and economize as much as possible to pay down, or eliminate existing debt and build up savings.
Be sure to close any credit accounts, including credit cards, not being used. Lending institutions will also factor in credit scores, prevailing interest rates, taxes, and insurance into loan approval and monthly payment terms. A poor or nonexistent credit history may negate loan approval and will increase interest rates. Banks reward high risk loan applicants with high interest rates. Impress your lending institution with your financial stability and creditworthiness.
After determining the size of the loan you can afford, organize your documents for submission to the lending institution. Mortgage lenders typically require two recent pay stubs, the previous two years’ W-2 income tax forms, copies of your tax return filings, and bank statements from the past two months. The lending institution will scrutinize this information and determine whether the loan applicant falls within their standard preference. This requires the monthly housing cost to take no more than 28% of the applicant’s gross monthly income, and overall debt obligations to consume no more than 36%.
Depend on Your Real Estate Agent
In the past, real estate agents were legally obligated to represent the home seller’s interests regardless of whether they were working with the seller or the buyer. When that changed to allow realtors to represent homebuyers’ interests, the playing field leveled. Trained realtors have the neighborhood insight and know-how to help prospective homebuyers find the best real estate options meeting the buyer’s non-negotiable, must-have requirements. Additionally, real estate agents can assist with negotiation and the paperwork necessary for loan applications. They can also refer prospective homebuyers to qualified home inspectors, and possibly to reputable contractors if you’re set on getting that fixer-upper.
Probing questions can mean the difference between making a mortgage payment and missing one. Home ownership entails costs like property taxes, utilities, closing costs on loans, refinancing, insurance, maintenance, and more. In addition to asking questions, remember to comparison shop lenders, not just properties. Shark Tank star Barbara Corcoran, who made her fortune in real estate, advises prospective homebuyers to to shop around for the best interest rates and government programs. Individuals who already own their home have little time left to take advantage of the Home Affordable Refinance Program, which is set to expire in September 2017.
Other options exist for prospective homebuyers to find assistance in scraping up the funds for a down payment: VA loans for qualified veterans, active-duty military, and certain members of the National Guard and Reserves; Navy Federal Credit Union financing for qualified members of the military and civil service; USDA rural development mortgage guarantee program, which is not confined to farmland; low down payment mortgage insurance which allows down payments as low as 3% of the purchase price with purchase of private mortgage insurance; and FHA loans that allow people with less-than-optimal credit histories to qualify for loans with as little as 3.5% down payments.
Lenders think long-term and so should you when buying real property. A home is a long-term investment: it’s where you’ll live, play, and maybe even work for years. Long-term also means understanding the tradeoffs between shorter-term, 15-year loans versus longer-term, 30-year loans. Shorter-term loans will have higher monthly payments; longer-term loans will charge higher interest rates. Refinancing a long-term loan may yield saving with a lower interest rate, something to consider when factoring monthly payments into the household’s annual budget.
Anticipate how easy or difficult it will be to sell the property when you’re ready to move. Neighborhood conditions will affect future sale as will the condition of the property. A fixer-upper might be cheap to purchase, but expensive to restore. A new or practically new house may be more expensive at the outset, but offer considerable savings in maintenance and repairs. Other long-term considerations include the financial state of your general area and throughout the nation as a whole. Don’t assume the value of your property will appreciate. During the Great Recession, home prices imploded due to decreased buying power of the general public.