Financing Your Home
Financing your home purchase starts with speaking to a loan officer to determine two very important things:
- If you can get pre-approved
- What kind of loan programs you qualify for and your maximum loan amount
What kind of loan you have, what your down payment is, and how much you can afford to pay a month will all factor into financing your home purchase.
- What is a pre-approval?
- What kind of loans are out there?
- Are there programs that offer financial assistance?
What is a pre-approval?
To be “pre-approved” means you have a letter from a loan officer stating that they have run your information through a preliminary approval process and “pre-approved” you to buy a home.
There are more steps for final approval, but a pre-approval letter lets a seller know that, according to the information you have provided, you are able to buy the home, which is a great comfort to sellers who are always nervous about sales falling through. In a competitive market, sellers want to know that you have been pre-approved before they accept an offer. If you’re in a situation where a home has multiple offers from buyers, you’ll definitely want to have your pre-approval letter ready to go. Buyers with a pre-approval letter are much less risky for sellers.
You can either get pre-approved before finding a real estate agent, or have your agent direct you to a loan officer who can guide you through the process. Remember, your real estate agent should have verified contacts for loan offers who communicate well, are knowledgeable, and know how to navigate the pre-approval for a variety of home buyers. Every buyer’s situation is unique.
What kinds of loans are out there for financing your home?
There are a wide variety of options for home loans. Ultimately, you and your loan officer will determine what kind of financing is best for you and what you qualify for, but here are a few example options.
FHA loans (Federal Housing Administration) have been helping people finance their home purchases since 1934. These loans are insured by the U.S. Department of Housing and Urban Development (HUD) so that lenders can give buyers better deals and work with buyers who might otherwise not be pre-approved.
FHA loans are great for home buyers who may be seen as higher risk borrowers (lower credit scores, less money for down payments) and have a better chance of being pre-approved for FHA loans.
They’re also very popular with first time home buyers.
|FHA Loan Advantages||FHA Loan Disadvantages|
|Your down payment can be as low as 3.5%||FHA loans may rule out higher priced homes and certain properties|
|Closing costs and fees can be included in the loan||FHA loans are not considered the “cheapest loans.” They usually have higher interest rates and fees|
|Sellers can also contribute to the buyer’s closing costs in an FHA loan|
|“Gift” down payments (a gift of money from a relative towards your down payment) are allowed|
|FHA has loans available that will allow buyers to include lump fix-it-up costs in the loan|
|FHA loans are more forgiving if you’ve declared bankruptcy in the past|
Conventional Home Loans
Conventional loans are not government-backed loans, like FHA loans or VA loans. They’re backed by private lenders and, therefore, tend to be best for well-qualified buyers.
|Conventional Loan Advantages||Conventional Loan Disadvantages|
|Rates and fees are typically lower than FHA loans||Require down payments of 5% to 30% of purchase price (typically 20%)|
|Require less paperwork||Require higher credit score|
|Quicker approval time||Difficult to acquire with a history of bankruptcy|
|Usually offers option to pay taxes and insurance directly||Tend to have higher interest rates|
|Offer interest-only or adjustable rate options||Closing costs must be paid at settlement|
|Mortgage insurance may not be required||Origination fees might be higher|
VA Home Loans
VA Loans are available to servicemen and women, veterans and eligible surviving spouses of the armed forces to help them buy, fix up or retain a home. A portion of the loan, which is provided by private lenders, is guaranteed by the Department of Veterans Affairs (VA). This provides lenders with extra confidence and makes loans to our country’s serving military and veterans more attainable.
|VA Loan Advantages||VA Loan Disadvantages|
|Down payment is not required||VA a funding fee paid directly to the VA to keep the program going for future generations. Not required for all VA loans|
|Private Mortgage Insurance (PMI) is not required||Can not be used for second residences|
|Allowable debt-to-income (DTI) ratio is higher||Acceptable co-borrowers are limited to one's spouse or another service member|
|No penalty for prepayment||Some sellers shy away from buyers with VA loans|
|Eligible for VA loans just two years after foreclosure or bankruptcy|
Seller Funded Loans
Borrowing from the bank may be the most obvious option, but it’s not the only option. Some sellers may be willing to finance the sale of their own home to buyers who don’t qualify for bank loans due to low credit scores, lack of credit, or being self-employed and lacking documentation of income.
|Seller Funded Loan Advantages||Seller Funded Loan Disadvantages|
|More flexible credit requirements and loan terms||May have to pay a higher interest rate|
|May help rebuild credit||May pay higher price for home|
|Smaller down payment may be negotiated||Will need to qualify for re-financing at the end of the loan term|
|May pay less in closing costs|
|May get into home faster|
The seller assumes all the risk in this situation, which is why it’s rare to see a seller funded loan.
Programs that Offer Financial Assistance for Financing Your Home
If you need further assistance in buying a home, there are home buying grants and down payment assistance programs.
Minnesota Mortgage Programs, offered through the Minnesota Housing and Finance Agency, have several programs that help Minnesotans get into a new home.
The Agency’s programs provide a list of benefits, including fixed-rate loans that come with several down payment and closing cost options. Tax credits may even be made available through their Mortgage Credit Certificate (MCC) program.
The Minnesota Housing and Finance Agency has a list of participating lenders and several brochures that explain the programs in more detail.
Have more questions? Contact us and we’ll be happy to help.