How Much Money is Needed to Buy? Why Get a "Pre-Approval" Buying a Rental Property "Tips to Avoid Mortgage Fraud," a newspaper article by Steve Emory Simple Online Calculators

How Much Money is Needed to Buy?

It can be as little as 3%-5% of the purchase price and sometimes zero. There are no true100% financing loans any longer but there is a FHA program that can work at times. Even if you are considering this type of loan, you should understand the basics. You are "paying" for these items in other ways on 100% loans even if you don't write the check. The first thing to understand is where the money goes when you buy a house. There are three parts to the total cash needed in the average purchase detailed below:

You need to add up all three parts to determine how much is needed to buy. There are strategies to lower this amount. There is a loan that will finance most of these into the loan. You can have the sellers pay the closing costs and pre-paids and finance 100% of the price. There are ways to lower costs, lower pre-paids and more. Give us a call to go over the pros & cons of these different options.

Downpayment

This is normally a percentage of the purchase price. Common downpayments are 3%, 5%, 10%, 20% and more. Downpayments can be gifts on many loans.

When you put less than 20% down, the lenders normally require mortgage insurance (MI or PMI). This is an extra fee added to your payment each month to pay the lender in case you stop making payments and the house is foreclosed. You can avoid MI with small down payments in a few different ways. You can do 80/15/5 (a 1st/2nd combo) or 80/10/10 or even one loan without MI by paying a slightly higher interest rate sometimes (lender paid MI). The monthly fee for MI changes with the loan amount and in 5% increments of the down payment. The more down payment percentage, the less the cost. Twenty percent down will satisfy MI requirements. You can usually cancel MI when you reach a loan balance of 80% of the current value at the time you wish to cancel.

Closing Costs

Closing costs are made up of appraisals, credit reports, Title Insurance, escrow, recording, flood certificates, tax service, processing, underwriting, other small fees and points (origination, discount, broker fee, loan fee, etc). HUD has a booklet on Buying Your Home: Settlement Costs and Helpful Information available on-line or or from any lender that can give you more details. The closing costs on the average transaction, excluding points, will be about $2,000. In general, when you pay points (points are a percentage of the loan amount, 1.0 point is 1% or $1,000 on a $100,000 loan) you get a lower interest rate than if you do not pay points. Be careful of the "Zero Costs" advertising of some mortgage lenders. They are just raising the interest rate enough to cover the normal costs. There are always costs, just maybe charged in different ways. The cliché "There is no free lunch" always applies to financial dealings and especially home loans. If a loan officer tries to convince you something is truly free, go somewhere else for your loan. Lenders allow sellers to pay all or part of the buyer's closing costs on a home purchase. This is a great way for a First Time Buyer to save on the initial cash needed up front.

Pre-Paids

Pre-paids are made up of property taxes, homeowners insurance, daily interest through the end of the month and the setting up of any escrow accounts for paying property taxes and insurance. In Oregon, you can estimate your pre-paids between $2,000 and $3,000 if you want property taxes included in your payments. One way to lower the pre-paids is to close near the end of the month since this reduces your daily interest. Another way is to exclude property taxes from your payments, but this requires a down payment of 20% or more. The seller may also opt to pay all or part of your pre-paids. This is a great way for a First Time Buyer to save on the initial cash needed up front.

Why Get a Pre-Approval?

There are three major reasons to get a pre-approval. One, so you feel more comfortable making offers on a home. You know the approximate payments and cash required. You know there will be no "surprises". You don't want to overbuy or underbuy either. Two, so the listing agent feels more comfortable letting their seller accept your offer. Many agents will not even consider offers anymore without a pre-approval letter from a reputable lender. Too many transactions without true pre-approvals fall apart before closing. Three, it will save you time & money of course. You can do your shopping for a loan officer and loan in advance. You will know some special options you have to lower your costs or payments before you make an offer. You won't be "rushed" into a bad choice.

Be sure you are getting what you expect from a pre-approval. Many websites give you the option to print a pre-approval after you've entered some basic information about yourself. Don't waste your time with these. An inexperienced loan officer might tell you they can get you a particular loan without really gathering the necessary information from you. Often times, they cannot. Unfortunately, there are also those who will be dishonest about costs, rates or how much you can buy just to get your business. All of these can end up frustrating you and result in failure.

A good pre-approval involves a loan officer running credit reports and reviewing some personal documentation of yours. The more data they have, the better your pre-approval. Also the loan officer has to have the experience necessary to understand the pitfalls of any loan to be sure it will work for you. They have to enter the data properly and according to guidelines.

Buying a Rental Property

Also known as Investment Property loans. There are MANY ways to finance them. These loans are treated very differently from owner occupied purchases. Rates and costs generally run a little bit higher, and there are different underwriting guidelines. Rates will vary substantially between these two. Most people find that putting 20% down is a good place to be for long term goals as it gets you a decent rate and "cash flows" work out though you get a better rate at 25% down or more.

You do need to ask yourself, are you in this mainly for fast turns of less than 5 years and counting on appreciation growth, or are you in this for the long haul through retirement and want decent cash flows and stability.

Of course everyone says they want it all. This is not possible, but we can plan for one approach or the other as your main thrust.

This will determine what type of loan products you go for. Short term goals usually desire the lowest possible payment no matter the loan type. We normally do 5/1 or 3/1 ARMs. Sometimes even interest only payments to really get the payments down. Big risks to do all this for long term plans.

Long term goals, we usually do 20%-30% or more down, with simple 30 year fixed type loans. This is the most safe and stable way to by a rental.

You can also blend some of these options to suit your needs. When you meet with your loan officer, we will go over your goals for rental property and your risk tolerance. We can then offer you some options that will work for you.