Unless you have the cash to buy a home, determining the amount and type of loan and who to obtain it from is one of the most important bits of homework you will have to do. In today’s current lending market, lenders and appraisers for lenders are much more conservative in their processing loans and the valuation of the property securing the loan.
Lets say you found a house that you and your spouse or signifcant other just love and want to buy. Your first step is to determine how much money you have to put down towards the purchase price and closing costs. Typically you will have to put down between 10% of the purchase upon the signing of the contract with the balance of the purchase price paid through a combination of cash that you have available and a loan you anticipate taking out. In determining the amount of the loan you are able to get , you should know that the industry standard of the amount of a loan that a Seller will make a contract contingent on is 75%-80% of the purchase price of the home. This is because the larger your loan to value ratio is (the percentage of the purchase price you wish to obtain a mortgage for) the more difficult it is to obtain that loan. It has been my observation that lenders are not lending more than 80% of the value of the property to be financing. Although not as prevelant in this current economy, a loan that is more than 80% of the purchase price is subject to PMI (Private Mortgage Insurance). PMI is extra insurance that lenders require from homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are required to pay PMI. PMI protects a lender against loss if a borrower defaults on a loan. Lender’s typically will look to avoid PMI by splitting the loan into two parts; a first mortgage that is 80% of the purchase price and a second mortgage or home equity line of credit that is 10% of the purchase price. Speak with a qualified loan representative to review the terms of these loans, the costs of obtaining them and the projected monthly costs to pay them off including escrowed payments of real estate taxes and hazard insurance. Additional costs of projected common charges must be taken into consideration when you are purchasing a condominium unit. Whether you are a buying a home or investment property it is in your best interest to educate yourself on the process and cost of financing. It will make the process less stressful and costly (hopefully).