Cashing in on Real Estate
|
A post by "Carol Phillips" To see more posts click here |
The most popular question that people ask me is how much money they need to buy a house. Therefore, this post is going to be dedicated to what exactly you need financially (in terms of cash, income, debt and credit) in order to be eligible to buy a house. I’m going to be talking in ratios and percentages here, so you may want to get your calculators out since you can’t take a percentage of your finger to count.
The short answer to the question is that you need money for a down payment and closing costs. These are fees that occur in addition to the sales price, so don’t try to subtract them off your mortgage. Closing costs usually run between 2.5% to 3% of the sales price, but can be negotiated to be paid by the seller. (Please make note of the use of “can be negotiated to be paid by_____” and NOT “are always paid by____”. This is a common misconception. I’ll get into this more later.)
Now the amount of the down payment is totally up to you. The lowest down payment I’ve seen that is currently available is a mortgage program that lets you put only 3% down. Please keep in mind, however, that if you have spent any time in any branch of the armed forces, however, you may be eligible for a VA Loan, which is the only loan available with $0 down. FHA loans (which is a different type of loan) requires a 3.5% down payment. So let’s say you’re looking to purchase a home for $250,000. For the down payment, you would need at least $7,500. You also need $300-$500 for a home inspection, if you choose to do one, which is highly recommended.
Now let’s talk closing costs. First of all, let me expand on the term “closing costs”. These are the fees that are associated with finalizing the actual transaction. These include things like commissions, costs of the loan, title charges, and recording fees. I’ll get into the specifics of these fees in a later post. So again, for a $250,000 house, closing costs would be between 2.5% and 3% ($6,000 to $7,500). These are all put together on something resembling a balance sheet (for those of you who remember Accounting 101) for both the buyer and the seller.
Depending on negotiations and the structure of a contract, you can sometimes get sellers to pay for all of your closing costs. Essentially, you wrap the closing costs into the actual loan. Let’s say a seller wants to get $250,000 for their home. You have enough to pay the down payment, but that’s about it. So you tell the seller that you will actually pay him (aka get a mortgage for) $257,000 for his/her house, with the exception that they will then pay you back $7,000.
A note about asking sellers to pay your closing costs: Do NOT expect the seller to accept a low offer if you expect them to pay your closing costs! In my experience, I would consider a “low offer” to be anything less than 15% of the list price of a property that is priced at market value, (price at market value = not over priced). In fact, if you want to get your contract accepted, it may be a good idea to actually go higher than the list price. Crazy you say? I politely disagree. Think about it from the seller’s point of view. If they want to get $250,000 from the sale of their house, and you offer than $250,000 with a $7,500 subsidy (meaning they pay you $7,500 to cover your closing costs,) then they are essentially selling you the house for $242,500. They look at your offer as $242,500 and NOT as $250,000. And that’s when they will reject it, and you will go back to square one.
I’ll get more into how to write a contract to get accepted in another post. Next time we’ll talk about how you can figure out how much you can afford and how much you can get a mortgage for. In the meantime, feel free to comment below, or send any questions to carol.phillips@kw.com. Consider me your own Maytag dishwasher, I’m just trying to help u do the dishes.
Related posts:
- Now Fielding Your DMV Real Estate Questions
- Real World 2010: Gainesville, FL?
- Avalanches Keep It Too Real
- The Real Old Republican Ideas
- The Real Guitar Hero: Les Paul
- Firefighters, Rescue Squad Keep it Terribly Real
- First-Time Homebuyer Tax Credit
- Consumer rights have no place with Verizon Wireless
- Want Alternative Fuel? D.C. Farmers Markets and Specialty Grocers Provide
- Local Ish….
Related posts brought to you by Yet Another Related Posts Plugin.
![[Valid RSS]](valid-rss-rogers.png "Validate my RSS feed")
What are the advantages to doing FHA as opposed to conventional, if any?
Blake, it really comes down to a few things, but overall, it is how much money you are putting down.
Each loan will generally have the same interest rates. However, FHA provides putting a lower down payment at only 3.5-5% compared to a Conventional loan that would require a larger down payment of 10-20%. Basically, FHA provides more flexibility in qualifying. Conventional loans though would not require PMI (private mortgage insurance) costs.
It really comes down to your decision of if you want to put down a larger down payment or not. If you do put down a large down payment, you’ll have a lower overall mortgage payment in the long term. You put down a smaller down payment, and you’ll have a larger overall mortgage in the long term.
Thanks for the input Dave! Unfortunately, banks are always changing their lending guidelines. This was mostly correct this past summer. Now, with all of the competition that banks are having with each other, that is not totally true anymore. It actually comes down to credit scores, debt-to-income ratios and the size of your down payment. I know of at least one conventional loan program that only requires 3% as a down payment.
When you say more “flexible”, I’m assuming that you are referring to credit scores. Yes, usually FHA loans require a 620 credit score, where MOST conventional programs (not all) require a credit score of 720. This is because an FHA loan is 100% backed by the government, so banks are more inclined to lend them to people with lower credit score (viewed as “higher risk”) because they know they will get their money back.
Keep in mind, however, that some conventional programs do actually require mortgage insurance. Usually if your loan is greater than 80% of your loan-to-value (basically, if you put less than 20% down) you will still have private mortgage insurance costs. This usually runs about a couple hundred dollars per month.
Another consideration about an FHA loan is that it is assumable. This means that when you go to sell your houses 5, 10, 15 years from now, someone can actually take over your loan. So if the interest rates when you’re selling in 2013, 2019 or 2023 are at somerthing crazy like 15%, you can not only sell your house, but you can offer your buyer to take over your mortgage, which is at 6%. This is another reason which makes FHA attractive.
Dave, your concluding statement is mostly correct. If you want to put a larger down payment then you obviously have more options then if you want to put a smaller down payment. However, it is no longer black and white that FHA will always be a lower down payment than conventional.
C-Philly, good article. Keep the input coming.
I do my homework asking questions about the flow of the market all the time since it constantly changes. Yes, I was referring to flexibility in terms of credit scores. Everyone should be aware that the credit score is your make or break factor in terms of qualifying for a specific loan. I believe mine is upwards of 770 something; last I checked earlier this year.
And yes, you are right, some convnetional programs do still require PMI, but most I have looked into for myself do not; which is why people stress putting 20% down as the safe preferred down payment method when buying a home. Who wants additional costs if you can avoid them long term?
Also, I have never seen a conventional program before that offers a 3% down payment. Where is this?
The program I was talking about with the 3% down conventional is with a lender I work with at Wells Fargo. I’m not sure if all lenders know about this because it is so new (it was rolled out only a few weeks ago) but the one I work with has already done a lot with the program. The best part about it is that there is no mortgage insurance. Let me know if you want more information. I can send you his information.