|
Loan product developments in recent
years have greatly expanded the choices for all home buyers. Today's
market offers borrowers strategies to maximize buying power, save cash for
repairs or improvements, get a loan with little or no income verification,
or even buy a home with no down payment. This article will discuss some of
the new ways that buyers can take advantage of the expanding loan market
to secure the best financing for their purchase and covers the following
topics.
·Purchase Preapprovals
·No-income documentation loans
·80/10/10 combinations
·100 Percent loans
Purchase PreApprovals
A purchase preapproval is a lender's
analysis of you as a borrower without specific property information. In
other words, your loan information is submitted to a lender for full
underwriting and includes all borrower details, such as employment
information, asset information, and credit history. The lender then
approves you as a borrower, subject to a maximum loan amount, down
payment, and interest rate.
Getting preapproved for a loan is
critical in today's real estate environment. Many Realtors do not want to
accept offers from buyers unless their home loan has already been approved
by a lender. While this seems like a ``catch 22'', that is, how can I get
my loan approved if I haven't even found a home?, the tool is very useful.
By going through the loan process prior to being in contract on a home,
you can eliminate all of the obstacles to borrowing without jeopardizing
an actual purchase transaction. Once your loan is approved, your real loan
closing will be quick and subject only to a satisfactory appraisal and
title report on the home.
To begin the preapproval process you
need to make some assumptions for your purchase price, loan amount, and
loan program. Any of these assumptions can change once you've found your
home, but it helps to do the following:
·Complete your application for the
maximum loan amount and purchase price that you're interested in. You can
always reduce these later.
·Get your loan approved at an interest
rate that is higher than what you expect to take. Again, the loan program
that you decide upon can differ from what you are initially approved at.
The preapproval of your loan will ensure
that your real purchase will go smoothly once you have located the perfect
home.
No Income Documentation Loans
Often grouped together despite their
subtle differences, ``light documentation,'' ``no-income verification''
and ``quick qualifier,'' or ``Q Q'' loans are a solution for many buyers
who have income from sources that are hard to verify. Usually these loans
are used by self-employed borrowers who have difficulty verifying all of
their income, or by borrowers with very complex income structures. For
example, a borrower who has income primarily from rental properties and
investments may be hesitant to verify all sources of income due to the
volumes of paperwork this would require. With a no income documentation
loan, the borrower can simply state his income on the application, and the
lender will use this stated income to qualify the loan. Why do lenders do
this? Because they recognize that by charging a slightly higher rate of
interest they can rely on this stated income of the borrower and cover the
additional risk. Lenders do in fact rely on verifying that the borrower
has assets that logically match the stated income, along with excellent
credit.
With a higher cash down payment,
typically 25 percent or higher, along with good credit, these loans allow
borrowers to buy into purchase prices a lender wouldn't ordinarily qualify
them for. Because no-income documentation loans carry a higher interest
rate, they should only be used when necessary, not simply to avoid the
paperwork requirements of a full documentation loan.
Avoid Mortgage Insurance with
80/10/10 Financing
If you purchase your home with less than
20 percent down, chances are you will obtain a loan that is insured by
``Mortgage Insurance'' (MI). Private mortgage insurance or MI is a type of
insurance provided by a private mortgage insurance company to protect a
lender in the event of default on a loan. This type of insurance is
generally required when a borrower has less than 20 percent equity in a
home; i.e. the loan amount divided by the property value is 80.01 percent
or greater. As your home appreciates or your loan balance decreases (or a
combination of the two), and your equity in the home exceeds 20 percent,
you may petition the mortgage holder to drop the MI. This process may be
cumbersome or difficult.
One way to avoid paying MI is to
purchase a home with a combination first and second mortgage. The first
mortgage would be limited to 80 percent of the home's appraised value. The
second mortgage, which would close in conjunction with the first, would
then provide for the difference between the home's purchase price, less
the 80 percent first mortgage, less the down payment available . In other
words, if you have a 10 percent down payment available, your first loan
would provide for the 80 percent mortgage with a second mortgage of 10
percent. This is commonly referred to as an 80 -10 -10 transaction.
Another way to avoid incurring MI
payments is to find a lender that offers self-insured programs. This type
of loan would have a higher interest rate in place of the private mortgage
insurance premium. While mortgage insurance premium payments are not tax
deductible, the interest associated with a self-insured mortgage would be
fully tax deductible.
The decision of whether to obtain a loan
with mortgage insurance versus the above two options should take into
account the combined total monthly payments of the various options,
adjusted for the tax benefits of interest deductions.
100 Percent Financing or “0”
Percent Down Loans
Considering a new purchase and hate the
thought of taking cash out of your skyrocketing investments? Ask your
mortgage source for a quote on 100 percent financing. Put no money down!
You can keep all of the down payment in your investments and pledge the
assets instead. While the interest costs are higher in this type of loan,
the opportunity costs of the down payment money may well make this a
worthwhile situation.
As a rule of thumb, fully leveraging
your real estate purchase would make the most sense if your investment
returns were better than 3 percent over the prevailing 30 year fixed rate.
To summarize, there are many ways to
approach financing a new home and starting with a preapproval is a must in
today's competitive real estate market. Several new techniques are
available for your home buying flexibility and it pays to educate yourself
on the buying process first. Remember that today's mortgage market offers
new opportunities to the homebuyer that never existed before.
Hal Schupp, CRS, GRI, Designated
Broker for Vail Realty, has been a Tucson, Arizona, Licensed Real
Estate Broker since 1987 and has created 100s and 100s of sales of Tucson
properties. |
