How Financing Details Affect Your Offer
Most buyers do not have enough cash available to buy a home, so they need to obtain a mortgage to finance the purchase. Since you will probably make your purchase contingent upon obtaining a mortgage, the seller has the right to be informed of your financing plans in order to evaluate them. That is one of the major reasons that financing details are included in your offer. Your offer should also contain information on whether you are obtaining a fixed rate or an adjustable rate mortgage. It should also state whether you are obtaining conventional financing or obtaining a VA or FHA loan. If the seller has multiple offers they will consider the amount of earnest money, amount of down payment, seller concessions (costs the buyer asks the seller to pay such as closings costs) to determine which offer to accept. In a multiple offer situation make the strongest offer you can to encourage the seller to accept your offer.
As part of your offer, you will need to disclose the size of your down payment. Once again, this allows the seller to evaluate your likelihood of obtaining a home loan. It is easier to get approved for a mortgage when you make a larger down payment. The underwriting guidelines are less strict.
The down payment amount depends on the type of loan. FHA requires 3.5% down if the home buyer´s FICO® score is at least 580. If the home buyer´s FICO® score is less than 580 then they will be required to put 10% down. VA loans require zero down. Conventional loans typically require 5-20% down depending on the FICO®. Note if a home buyer has less than 20% down then they will have to pay Private Mortgage Insurance or PMI. See the PMI section for more information. There are some other programs available from USDA and others that require less down payment. Down payments are typically required to be on hand at the time of the offer. Some portion of the down payment may be paid by a family member. Down payments cannot be contributed by an unrelated third party except for special programs. Consult your mortgage professional for more information.
Another reason for including financing information in your offer is to protect yourself. If interest rates suddenly become volatile and rise quickly, as sometimes happens, you may looking at a mortgage payment much higher than you anticipated. By putting a maximum acceptable interest rate in the offer, you are protecting yourself from such an occurrence. At the same time, the seller will probably want to see that you have some flexibility in the financing terms you are willing to accept. If interest rates are currently at eight percent and you indicate this is the highest rate you will accept, you would be able to cancel the contract without penalty if interest rates rose past that point. The seller would suffer because they have lost valuable marketing time and may have made their own plans based on successfully closing the transaction.
Types of Mortgages or Loans – The most common loans are conventional, VA and FHA. VA financing is available through Veterans Affairs and only to the military. FHA financing comes from the Federal Housing Administration and is available only to first time home buyers. Conventional financing is available to anyone with sufficient credit and down payment to qualify. There are other types of loans available. Consult your mortgage professional for information on the available loan programs.
Loan Limits – The maximum loan amount for a conventional loan is $417,000 and is set by the Federal Housing Finance Agency. You can see more information at: Https://www.efanniemae.com/sf/refmaterials/loanlimits The maximum amount for an FHA loan varies by state. You can find out the information for your state on: ttps://entp.hud.gov/idapp/html/hicostlook.cfm
There is no maximum VA loan, except that the loan cannot exceed the lesser of the appraised value or purchase price, plus VA funding fee and energy efficient improvements, if applicable. However, lenders usually won´t make a no-down payment loan larger than $417,000 ($625,500 in Alaska, Hawaii, Guam, and U.S. Virgin Islands) due to secondary market limitations. http://www.va.gov/
Consult your mortgage professional for more information.
Fixed Rate Mortgages – A fixed rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, usually 15 or 30 years, as opposed to adjustable rate loans (ARMs) where the interest rate will adjust. Other common mortgage loans are interest only and balloon payments. Foreclosure – A foreclosure occurs when the owner stops making the payments on the home loan. After a period of time the bank will take the property back which is also known as a foreclosure. The timing and laws of the foreclosure process vary from state to state and depend on the type of loan. In some states it can take 6-12 months while others take only 90 days. Consult with your attorney, mortgage or real estate professional for more information on the foreclosure process.
Adjustable Rate Mortgages – Adjustable Rate Mortgages (commonly called ARMs) provide a lower initial interest rate that will reset sometime in the near future. These loans are useful if a buyer expects their income to increase as it allows them to buy a more expensive home today. The rates can adjust in as little as one year or up to five years. Home buyers should be cautious about these loans. If the interest rate increases and your salary does not the home may become unaffordable.
Conventional Mortgage – Conventional mortgages typically require 20% down. They can be used to buy townhomes, single family homes, duplexes, triplexes and fourplexes. The maximum loan amount is currently $417,000. If a buyer wishes to buy a more expensive property then they would have to put more money down or get a jumbo loan.
FHA – FHA stands for the Federal Housing Administration which is part of HUD. FHA loans have been around since 1934. HUD helps people by administering a variety of programs that develop and support affordable housing. Specifically, HUD plays a large role in homeownership by making loans more readily available for lower and moderate income families through its FHA mortgage insurance program and by making HUD Homes available. HUD/FHA does not make loans or grants to homeowners. All of the HUD/FHA insured mortgage loan programs are handled through HUD-Approved mortgage lenders.
FHA History – Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development’s (HUD) Office of Housing in 1965. When the FHA was created, the housing industry was flat on its back:Two million construction workers had lost their jobs.Terms were difficult to meet for homebuyers seeking mortgages.Mortgage loan terms were limited to 50 percent of the property’s market value, with a repayment schedule spread over three to five years and ending with a balloon payment. America was primarily a nation of renters. Only four in 10 households owned homes.During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war.In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privately-owned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA’s emergency financing kept cash-strapped properties afloat. The FHA moved in to steady falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s. By the third quarter of 2001, the nation’s homeownership rate had soared to an all time high of 68.1 percent.
Fix Up or Renovation Loans – In order to qualify for financing a home must meet the minimal guidelines of the loan program. For example a home in poor condition that needs appliances, plumbing, flooring, roof, etc will not qualify for a regular FHA loan as it will not meet minimal FHA guidelines. If the buyer does not have the cash to buy the home and make the repairs needed so it will qualify for FHA financing there is another option called a Fix Up or Renovation Loan. FHA offers two different fix up loans referred to as 203K and 203B loans. These loans allow the buyer to finance the cost of the repairs and the purchase price into one loan. The advantage to the buyer is the ability to buy a home and make repairs without having to come up with cash out of pocket.
A 203K loan is for homes needing a lot of repairs – typically between $5,000 to $35,000. The home will be given two values by an appraiser – the current or as is value and the fix up value or what it will be worth when the repairs are completed. In order for the home to qualify the appraiser´s opinion of value after repairs must equal the purchase price plus the cost of repairs. The buyer must be able to qualify for the higher amount. The money to make the repairs is held by the title company and released only after the repairs are complete. All work is completed after closing and must be completed within 30 days.
A 203B loan is for a home that needs small repairs of less than $5,000. For example if the home is in good condition except for the roof that cost $3,000 then a 203B loan would be the solution. Just like with the 203K loan, the money to make the repairs is held by the title company and released only after the repairs are complete. All work is completed after closing and must be completed within 30 days.
Conventional mortgages are also available for fix up homes with varying terms. In general the same rules apply – the home must appraise, the buyer must qualify, the money is held until the repairs are complete and the repairs must be completed within 30 days of closing.
Interest Only Loans – As the name suggests, you pay only interest for the first five, ten, maybe even fifteen years of the loan, thereby lowering your initial monthly payment. Once you do begin paying principal, you’ll have to play catch-up to pay down your debt before the loan term is up. These loans are not for everyone. Consult with your mortgage professional to see which loan is the best choice for you.
Jumbo Loans – The maximum loan limit is generally $417,000. Anything about this limit is considered a Jumbo loan. Jumbo loans can go as high as $729,750. Loan limits vary by county. Typically the larger loan amounts require a higher down payment and have a higher interest rate.
Closing Costs and Financing Incentives
There may be times when, as part of your offer, you request the seller to pay all or a portion of your closing costs, or provide some other financial incentive. One common request is asking the seller to provide funds to temporarily buy down your interest rate for the first year or two. Such incentives can be especially effective if a buyer is tight on money or pushing their qualifying ratios to the limit. Whenever you ask for incentives such as these, you will probably find the seller less willing to negotiate on price. After all, what you are really asking for is to have the seller to give you some money to help you buy their house. The end result is that, for a little relief in the beginning, you are willing to pay a little more in the long run.
Another occasional request is to have the seller “carry back” a second mortgage to help facilitate your purchase of their home. In cases when the seller does not need all the proceeds from their sale in order to purchase their next home, this is an option. The advantage to the buyer is that by combining your down payment and the second mortgage from the seller, you may be able to avoid paying mortgage insurance and save yourself some money. If such a carry-back is part of your offer, you should include the terms you wish to pay on such a second mortgage. Keep in mind that your first trust deed lender needs to know this information so they can underwrite your loan, and they have certain minimum requirements. The minimum term of the second mortgage can be five years. The minimum payment can be “interest only.” Longer mortgage terms and payments that also include principle are also acceptable.
If you are one of those rare individuals making a cash offer to buy a home, it makes sense to provide some documentation with your offer that shows you have the funds available. A bank statement would be fine. If you have to liquidate stock or some other asset, your offer should give a timetable on when you will provide proof you have converted the asset to cash.