How to finance a house purchase

A home is often the largest purchase most people will make in their lives. And with mortgages harder to obtain now than ever, some people worry that their dream of owning a home of their own is out of reach.

Predatory lending in the past few years has resulted in many people being financed who couldn’t actually afford a home. In addition to that, they were hit with high fees and interest rates, resulting in a high number of foreclosures. As a result, sub prime lenders (those who finance people with poor credit) stopped funding sub prime borrowers and in 2007 a bill was passed that would limit lending from these “predatory lenders” who targeted people who were unable to obtain a loan from traditional lenders.

Even with tougher restrictions for borrowing money to finance a home in place, there are many different financing options available now that can help you get into a home.

First Time Buyer programs

Each state will differ, but many states have programs and financing options specifically for first time buyers. This can include 100% or 95% financing, limiting the amount you have down, which is good for people who want a home but haven’t built up savings or equity for 20% down yet.

Fixed Rate Mortgage

A fixed rate mortgage is one that has a fixed interest rate and monthly payment for a period of time; typically, between 10 and 30 years. A fixed rate mortgage is a good idea for people who like the stability of a constant payment and knowing exactly what they will be paying each month, as well as for those who plan on living in the property for more than 10 years.

Should you lock in your interest rate and then the rates lower in coming years, you can always refinance your home for lower payments and a lower rate.

Adjustable Rate Mortgage

An adjustable rate mortgage (ARM) starts off at one interest rate, and then resets later on. How long it remains stable is dependant on the loan term. For example, if you have a 5/5 and 5/1 year ARM, your mortgage and interest rate will stay the same for 5 years. On the sixth year, it will adjust every 5 years, either up or down depending on the current rates.

ARMs are alright for people who don’t plan to be in a home long, but they are also very risky. Sometimes, when the ARM adjusts, homeowners find that their monthly payments almost double, forcing them to either foreclose because they can’t make their payments or to sell their homes and find something more affordable.

Financing a home with bad credit

Many people don’t think they will be able to purchase a home because of a poor credit score. However, there are still options available for people who have a lower credit score. There are lenders out there who will finance you, even with bad credit. In most cases, you will have to have a down payment of around 20%, and your interest rate will be higher until your credit goes up and you can refinance.

Finding the right lender

The best thing you can do is find a lender and then discuss your available options with them. But finding a good lender can be tricky.

Recent laws have made it difficult for dishonest lenders to loan money to unqualified people, but even still, there are some aggressive, unscrupulous lenders who will still finance a home to people who can’t afford it, or will trick them into thinking they are getting a fair loan at a reasonable rate when in reality the borrower will be faced with exorbitant fees, balloon payments, and high interest rates.

What to avoid

The following tips are things you can do to spot, and avoid, dishonest lenders.

· Avoid anyone who guarantees you a loan. While you want a home, you don’t want to be granted a loan when you can’t really afford it. So lenders or advertisements that promise you a loan regardless of income, or who insist that your credit score won’t be a problem, should be avoided as they are most likely shady loans.

· Don’t pay fees up front. You should never go with a lender who asks you for money up front to cover “fees.” Common scams include fees to cover the first payment, guaranteed next day approval for a fee, or other expenses. More often than not, they will take your money and run.

· Be wary of anyone who solicits your business. Anyone who sends you a flier or calls you on your phone offering guaranteed great rates for a limited time, for example, should probably be avoided as well. A good lender won’t need to drum up business.

· Be careful with balloon payments. A balloon payment is a large payment you make at the end of your loan period, making your monthly payments smaller upfront. This is typically a scam and should be avoided.

What to look for

When it comes to financing your house purchase, it is important to follow this advice:

• Shop around. You should shop around for home financing to find the best loan and rate available to you. Go to local banks, credit unions, and mortgage companies. If you are worried about the credibility of a mortgage company, check them out on the Better Business Bureau. Compare total costs, interest rates, and points and fees.

• Ask questions. Financing a home can be complicated, and there are many things to understand. Be sure you ask questions if you don’t know exactly what you are being offered by the lender. Your lender should provide you in writing with the total cost of the loan, the annual percentage rate, monthly payments, and so forth. There are also fees and points that go into a mortgage, so ask about those if you don’t fully understand.

• Look at more than the monthly payments. Most people are interested in knowing how much they are going to be paying each month, but you should also take other aspects of the loan into consideration—whether it is a fixed or adjustable rate loan, whether or not you can make principle reduction payments, and so forth.

Once you have found a lender…

Once you have decided on a lender and are aware of the interest rates, then you will be able to apply for the loan, make an offer, and purchase your house.

When applying for the loan, make sure you have all the necessary documentations, including your Social Security number, information about your previous employers and residences, including dates, most recent pay stubs, copies of credit card statements, and asset information, like stocks or other investments you may have.

The application itself will ask you such personal information as you Social Security Number, your employers (present and previous), children, marital spouses, and so forth. It will also ask you information about your monthly income as well as your personal expenditures each month. Make sure you ask your lender if you have any questions or come across any sections you don’t understand.