Financing A Home

Homeownership has always been an essential piece of every American dream.  Even today amidst an overall reserved financial outlook, countless Americans are looking into or currently financing a home for the first time.  Maybe it’s the multitude of properties for sale at bargain prices, the tax incentives from the Obama administration, or simply, just the right time for you.  Whatever your reasons, taking a crash course in real estate finance may be in order, along with a concise analysis of your personal financial picture.  Of course, the media continually runs pieces on consumers lamenting on overwhelming mortgage rates and other homeownership pressures, but in reality, an informed consumer with an objective and honest appraisal of their personal finances is well on their way to a smooth transition from mortgagor to free and clear homeowner.

The Sliding Spectrum of Options for Financing a Home

After getting a general idea of the location, form, and most importantly, estimated cost of your ideal home purchase, finding the funding to make that purchase is next.  Depending on your personal financial picture, some financing options are clearly more beneficial than others are.  Below is a general list of common home financing options available, ordered from optimal to least optimal.

Paying Cash

In an ideal situation, a potential homebuyer has the ability buy a home without any attached purchase loan or mortgage.  By avoiding mortgage obligations and outside lenders, potential homeowners offer themselves a slew of benefits, including zero outstanding fiscal obligations, zero application fees, and zero points added to a principal loan amount.  Additionally, items such as origination fees, application fees, appraisal fees, credit check costs, title insurance costs, processing fees, and some other lender specific fees undoubtedly are all avoided entirely.  Plus, potential buyers possess a significant amount of leverage when it comes to negotiating final sale prices on a given property.  Surprisingly, a large swath of no purchase loan, or cash, home buys are occurring across the nation.  Whether as a response to consumer fears over traditional mortgage lending, or bargain seekers finally finding properties at depleted sale prices in light of a saturated real estate market, many to most markets across the U.S. in early to mid 2009 were experiencing over one-third of new home sales made with no purchase loan attached.

Convention Mortgages

Initially, conventional mortgages were the only financing opportunity for potential homeowners not able to buy outright.  The average conventional loan is at a fixed interest rate over the term of the loan, which can range for any number of years, but typically fifteen to thirty is standard.   Seems pretty straightforward, right?  Check out the loan qualifications section below to get a better picture of the true costs, in light of your personal financial situation

Adjustable Rate Mortgages

Arguably the impetus of the real estate crisis from questionable lending to subprime buyers. However, ARM’s offer consumers a loan for the principal amount, plus associated fees and costs built in typically, with a variable interest rate at some point during the duration of the loan.  Variations and hybrids of mortgage types can create loans that involve a set number of years at a fixed rate, which are followed by another set number of years at the current and variable market rates.  Again, caveat emptor is the best advice regarding variable rates, especially regarding a loan that potentially may not be paid in full until three decades down the line.

Exotic Mortgage Lending Vehicles

These types of loans, such as wraparounds, balloon payments, shared appreciations, RRMs (renegotiable rate mortgages), reverse annuity, and GPMs (graduated payment mortgages), have all, in one form or another, come under serious media, industry, and government scrutiny amidst the subprime lending crisis.  An informed homebuyer with proper financial advice will very rarely find any of these arrangements suitable, save for very specific personal circumstances.  In most cases, much like the adjustable rate mortgages, the uncertainty regarding future mortgage costs over slightly better rates simply has no marginal benefit in the long run.  Even with exotic lending vehicles pegged to a fixed rate, consumers are better off, as a whole, considering more traditional lending approaches with predictable, fixed rates.

Assumable Mortgages

On a case-by-case basis, some homeowners may find a property the like with a sale involving an assumable mortgage.  In essence, the new homeowner will take over, or assume, the mortgage of the initial mortgagor, which may sometimes be at a lower rate.  With a reasonable amount of due diligence, potential buyers can assess the original loan agreement and current state of the loan to determine of this method is right for them.  Again, very property specific with regards to being a good or bad financing strategy.

FHA Insured, VA Guaranteed, and others

Depending on your personal qualifications, some individuals may prove eligible for home loan assistance from public and government entities.  Speaking to a financial planning professional is the easiest method to ascertain whether or not any of these assistance programs can help you.

Loan Qualifications and Considerations 

Each lender will view an application for a home loan differently.  However, there is some consensus regarding loan qualification and other considerations for consumers.  This can include:

• Lenders will typically pre-approve individuals with credit scores over 600 with a proven income, however, this pre-approval by no means guarantees a loan approval.  Essentially, you are pre-approved to seek approval with a given lender.
• Depending on numerous factors, such as credit score, credit history, income, co-signor status, outstanding debt obligations, and amount of down payment provided, lenders will approve, or deny, consumers, as well as establish mortgage rates. 
• Typically, the more down payment  amount one can make on any mortgage lending vehicle is best for assuring approval, as well as obtaining optimal interest rates.  Down payment requirements widely vary based on personal financial outlook, however, three percent all the way up to twenty percent is common on a whole, with down payment requirements closing in on twenty percent figure being much more accurate for younger, first time homebuyers. 

How to Seek Professional Financial Advice

Having a financial advisor assist you during a mortgage-shopping period is highly beneficial.  In most cases, the average consumer’s financial literacy levels are fall below what is required to navigate the modern lending arena confidently.  Having someone that knows exactly what they are doing representing your best interest is never a bad thing.  Additionally, knowing exactly what you are personally getting into, as far as financial commitments and other considerations, is important.  Independent, non-biased advice from a financial advisor will go a long way in helping you make the right decisions in the end.  Lastly, as with everything in real estate, all terms, rates, fees, and other cost are negotiable, and for potential homebuyers, having that little extra amount of leverage a financial advisor can provide may mean thousands of dollars at the end of the day.