Back to Basics: Smart Financing Options
“The art and science of asking questions it the source of all knowledge.”
We’ve covered a lot of great topics, trends, and breaking news from the real estate market in 2013. Hopefully you’ve picked up some great tips along the way about determining whether it’s the right time to buy, how to decide whether to rent or buy, how to resolve challenging situations, spotting trailing market data vs. actual conditions, and how to capitalize on what may be one of the hottest trends in 2014, new construction (just to name a few).
This month, as we wrap up 2013, we’re bringing the conversation back to basics – how to buy low and sell high. In our last post we talked about how to find the right deal when it comes to distressed properties. This week, we’ll address another topic that prompts frequent questions from our buyers here at the Scislow Group: financing.
The questions we hear most often include: “What if I like a home, have good credit and the income to support payments but don’t have the down payment? What if the property needs a lot of repairs? What programs are available to get me into a home and then fix it up?”
It’s important to find the right answers for your situation. Lining up your goals with the right type of loan product can be the difference between success and failure or, at the very least - an enjoyable experience and challenging one.
While MANY variables ultimately determine what financing would be best for your situation, lets look at just three major categories:
1. Eligibility of the Borrower
As you can probably imagine, different financing programs require different levels of creditworthiness and allow for different debt to income ratios, among other qualifying factors for the borrower. The ability to make a substantial down payment may also indicate which financing program is the best fit. Furthermore, several financing types such as VA and FHA have specific eligibility requirements that rule out some purchasers.
Note: here we’re purposefully looking at the big picture, rather than delving into every detail of each financing program. It’s important to stress that your personal circumstances can be paired with the right financing programs with one our partner lenders, to ensure the right match for you.
2. Condition of the Property
One of the lesser-known considerations about borrowing money for a home purchase, is that the lender has some say in the condition of the property that they will approve a loan for. They do this through inspections during the appraisal process and it is done to protect the borrower AND the bank’s interest.
For example, one of the most limiting types of financing in terms of property condition is a standard FHA loan (an FHA 203(b) loan for the technically savvy). The reason for this is that FHA financing is designed for first time homebuyers. The lender wants to ensure that this type of buyer isn’t placed into an unsafe or problematic house with recurring issues that may suffocate the homeowner with unforeseen maintenance expenses, possibly resulting in their inability to repay the mortgage.
Offering more freedom when it comes to the condition of the property are what we term ‘conventional’ loan products. These are program that typically start at 5% down and go up to 25% down or more. As you slide up the scale on the percent down, the banks scrupulousness over the condition tends to go down. Many of our investors us 25% down programs to perform heavy rehabs where the condition is near unlivable. There are also programs (both conventional and FHA) that allow the buyer to borrow money to make repairs on a home. This provides a very good option for a buyer to purchase a “fixer upper” with the lender’s ok, and then repair the house using borrowed money instead of money out of pocket. These Rehab Loan programs, as they are called, enables the buyer to purchase a property in almost any condition but do carry their own set of rules, regs and guidelines.
3. Available Assistance Programs
Finally, an answer to one of the questions posed earlier – “What if I don’t have the down payment saved up, or feel comfortable using my savings to pay it, putting me in a tough financial spot to deal with any future hiccups?”
Depending on your city/county/state and other criteria, there are bond and grant programs that may assist eligible borrowers with things like down payment dollars, closing costs, or even with a low interest rate loan program. There are of course income guidelines, loan availability, and geographic considerations we won’t delve into here, but there are a large percentage of borrowers that qualify for these programs and many don’t even know it!
The bottom line is, many of these financing scenarios can get very complex. We always encourage buyers to call us sooner rather than later so we can connect them with our lending partners, so they can assess and recommend a program that will help them get the best value out of their home.
Please call us at 952-953-5000 so we can ensure that YOU are getting access to the best lending programs available, as you begin your house hunt!
Let’s get social! What is the most confusing thing you’ve encountered while researching financing options on a home?