Home Buying Tips in Columbus, Ohio (3 of 4)

Frequently Asked Questions About Buying a Home

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FINANCING TIP

Anyone can apply for an FHA mortgage, provided the loan amount doesn’t exceed the maximum loan limit, which varies by county .

Are there any mortgages especially designed for first-time buyers?

Today, first-time buyers enjoy a number of mortgage options that make purchasing a home more affordable by minimizing down payments and keeping monthly payments as low as possible during the early years of the loan.

Most ARMs feature an interest rate that is often below market for the first year, and may only rise gradually after that.

VA and FHA-insured loans call for extremely low down payment (3.5% of the purchase price), and often offer a below market interest rate. Similarly favorable terms can also be arranged with the help of conventional loan PMI ( Private Mortgage Insurance ) or FHA loan MIP (Mortgage Insurance Premium) .

Finally, first-timers who can find a cooperative seller or third-party investor can look into such non-traditional financing methods as a lease/buy arrangement.

Can I get an FHA or VA mortgage?

Just about anyone can apply for an FHA-insured mortgage through banks and other lending institutions. They are particularly well-suited for buyers of low to moderate income; and have low down payment requirements (as low as 3% of the purchase price) .

Similarly, VA-guaranteed loans often require no down payment. These loans are reserved for either active military personnel or veterans, or spouses of veterans who died of service-related injuries.

If there is a downside to these loans, it’s the qualifying process. Though you apply for government-insured financing through a lending institution, the Federal Housing Administration or the Department of Veterans Affairs must insure or guarantee the loan and may require specific documentation or procedures not necessarily required for conventional financing. That may take more time than is generally required for conventional mortgage approval. Additionally, FHA-required insurance (MIP) must be added to your payment. Make sure the lender you select has approved authority by each of these agencies to ensure a quicker loan process.

How much of a down payment will I need to buy a home?

A down payment of 20 percent has been the benchmark for conventional financing, but today, many options are available, some requiring as little as 3.5 percent down. For buyers who qualify for conventional financing but can’t handle the high down payment requirements, lenders offer this financing with PMI, or Private Mortgage Insurance. Designed to protect the lender against default by the borrower, PMI allows you to obtain traditional financing with a down payment significantly lower than the standard 20 percent. By using PMI, you may be able to get a fixed rate or adjustable rate mortgage by putting as little as 5 percent down.

As with an FHA-insured loan, you must pay premiums for PMI coverage, the amount of which are determined by the lender. Moreover, PMI premiums are often lower than FHA insurance, and may be paid as part of your monthly mortgage payment, in annual installments, or in a lump sum at the time you obtain the loan. Your mortgage expert can help you determine which down payment option is right for you and your budget.

How does a lender determine the maximum mortgage I can afford?

The three primary areas lenders examine in determining the size of mortgage you can handle include your monthly income, non-housing expenses, and cash available for down payment, moving expenses and closing costs. There are a number of different ways lenders interpret these variables to estimate your mortgage capacity. The most popular method is detailed here. Most lenders feel a family should spend no more than 28% to 29% of its gross monthly income on housing costs, including the mortgage, insurance, and real estate taxes. Also, these housing costs plus your long-term debts (car loans, student loans, etc.) shouldn’t exceed 36% to 41% of your income. If your down payment is 5 % or lower, lenders may tighten these restrictions even further. If you are buying a condominium, most lenders will also include the monthly condo dues in their calculations.

What are the steps involved in the loan process?

The information your lender needs is not much different than what is needed when you apply for a major credit card: names and addresses of your employer and bank account numbers and balances. The lender will also need other financial information such as installment payments, auto loans, charge cards, and department store accounts. The location and description of the property also are required. Your lender will verify this information with your present and past employers, order a routine mortgage credit report on your current and past accounts, and order a professional appraisal of the property you’re wanting to purchase.

Allow yourself one to two weeks to complete the application process. Then once all the verifications have been completed, your lender will underwrite and approve the loan. Overall, the time from the date of application to the date of move-in is generally three to five weeks for conventional loans , four to seven weeks from the date of application for FHA loans, and five to seven weeks for VA loans.

What’s the point in paying Points?  What are “Points”?

In real estate, the term “point” refers to 1% of the total mortgage loan amount. Buyers often pay lenders this supplemental fee, calculated in points, to get a better interest rate on a particular mortgage.

For instance, a lender may offer you a choice of two 30-year mortgages: the first at 10% with no points, and the second at 9-1/2% with an additional three points. If the loan is for $100,000, those three points will cost you an extra $3,000 up front – but you’ll get a payback of significantly lower monthly payments ($840.85 vs. $877.57) for the lifetime of the loan.

Depending on the market, lenders may advise you to pay the points for the better rate if you can afford it, especially if you plan on keeping the home for more the long term . Like interest, the money you pay for points may be tax-deductible, and the investment may pay for itself through savings generated by lower monthly payments. We suggest you check with your tax professional.

What is APR, and how is it calculated?

The Annual Percentage Rate is a calculated rate of interest for a loan over its projected life. This rate includes the interest, all points (which are considered prepaid interest), mortgage insurance, and other charges associated with making the loan that the lender collects from the borrower. The APR is calculated by a standard formula that all lenders use. This enables the borrower to comparison shop between lenders and/or loan products.

What is a good faith estimate?

Your lender or loan agent must provide you with a good-faith estimate within three days of your application. This is the information you need to make a fair and accurate judgment when shopping for a loan. Your estimate is a written document that shows all the costs that can be estimated in advance by the lender. You need this information so there are no surprises on the day you close your sale on the property to be purchased. You will be expected to pay closing costs , or negotiate for the seller to pay them for you!

You should review all costs, know which are non-refundable in the event your loan is not approved, and be prepared to pay any outstanding fees at closing. You may also want to compare these costs to those charged by other lenders when shopping for your home loan.

What does my monthly mortgage payment include? And what does PI and PITI stand for?

The bulk of your monthly mortgage payment goes toward paying off the principal and interest of your loan. You may hear lenders refer to this as “PI”, for Principal & Interest. In addition, most lenders require that you pay a sufficient amount to cover your local real estate taxes , plus your homeowner’s or hazard insurance. You may hear this “total” payment referred to as “PITI”, or Principal, Interest, Taxes & Insurance. This amount is placed in an escrow account, from which your lender then pays your taxes and insurance bills as they come due. When shopping for a loan, it is important to ask the lender if the monthly payment you are being quoted is PI or PITI.

What are the respective advantages of 15-year and 30-year terms?

The 30-year fixed rate mortgage remains the standard mortgage, with an array of valuable benefits designed especially for buyers who expect to stay in their homes for a long time. Because the borrower pays more interest than principal for the first 23 years, the tax deduction is substantial. And as inflation causes income and living expenses to increase, your unchanging monthly mortgage payments account for a relatively smaller portion of income as the years go by.

As you’d expect, a 15-year monthly mortgage means higher monthly payments than an equivalent 30-year loan… but not as much higher as you may think. At the same rate of interest, payments on the 15-year mortgage are roughly 20-25 % higher than a loan that takes twice as long to pay off. And one of the benefits of choosing a 15-year mortgage is that you can generally get a lower interest rate for an otherwise similar loan. Another advantage is faster equity build-up because a larger portion of your early payments are going to pay off principal. This makes the 15-year mortgage an ideal alternative for couples approaching retirement or anyone else interested in owning their home free and clear as quickly as possible.

Do adjustable rate mortgages offer any protection against rising rates?

Yes. ARMs and other variable rate or payment plans offer lower-than-market interest rates initially, but because they are tied to the interest rates of U.S. Treasury Bills or other indexes, interest rates later in the loan term may rise. However, many such loans offer built-in limits or safeguards designed to minimize the effect of any rapid escalation in interest rates.

One such safeguard is the rate cap. Many ARMs include provisions for the maximum amount your rate can rise, both annually and over the life of the loan. For example, if your initial rate is 8%, the FHA adjustable loan may include 1 % annual and 5% lifetime caps… which means even if rates rise dramatically, you’ll pay no more than 9% next year, 10% the following year, and so on until a maximum rate of 13 % is reached.

ARMs may also allow your rate to decrease when the index it is tied to goes down. As you might expect, decreases are usually capped as well.

A second protective device included in some ARMs is the payment cap. Under this provision, your monthly payments may rise by only a set dollar amount. The potential disadvantage of this type of cap is that it can slow or even reverse your equity build-up. If rates rise dramatically, you could actually wind up owing more principal at the end of the year than you did at the beginning.

Of course, ARM holders can also consider refinancing to a fixed rate loan after a few years. Some ARMs even include a provision for converting to a fixed rate after a set period of time for a set fee .

How can I find out what my property tax bill will be?

Usually, the total amount of the previous year’s property taxes is included on the listing information sheet for the home you’re interested in. Remember, tax rates change from year to year, so the previous year’s bill should be considered simply as a “ballpark” figure of what you would pay. For a more precise projection, call the local auditor’s website for the Tax Estimator feature or call their office for assistance, or simply ask us.