Evergreen and Conifer Colorado Real Estate .::. BUYER FINANCE GUIDE .::. Claudine Pardi

Direct: 303-670-6381
Toll Free: 800-831-0416

The first step toward buying a house is to determine how much house you can afford. Knowing your affordable price range will bring your house hunting into focus.

How much house you can afford depends on two things:

How much you can afford for the monthly housing payment.
How much you can invest in the down payment and closing costs.

MONTHLY HOUSING BUDGET
Generally, lenders figure that home buyers should not pay more than 28% of their gross income for P.I.T.I. payments (principal, interest, taxes and insurance), or 36% for both P.I.T.I. payments and monthly debts combined. Most lenders will require that loan applicants meet both guidelines before approving a mortgage loan.

The best way to determine your housing budget is to call a mortgage lender. There is no obligation to use that lender.
A list of mortgage companies may be found here.

DOWN PAYMENT AND CLOSING COSTS
You must have enough cash available for the down payment and closing costs. The obvious source of money for your down payment is either your savings (including IRA’s or Keogh accounts) or the proceeds form the sale of a home you already own. Other sources include a gift from a relative, sale of stocks and bonds, company profit-sharing or savings plans, and the sale of other assets. Also acceptable are funds borrowed from CD’s, stocks and bonds, real estate (not including the subject property) and life insurance policies.

When you make application for a loan, the lender is required to provide you with a Good Faith Estimate of the costs of settlement services within 3 days.

Closing cost items include:

Title insurance for your lender*
Tax Certificate
Recording of documents
Documentary fee to State
Tax Reserve*
Premium for hazard insurance
Insurance Reserve*
Origination fee*
Discount points* Survey*
Appraisal Fee*
Credit Report*
Tax Service Fee*
Loan document preparation fee
Title company closing fee
Mortgage Insurance Premium*
(if you put less than 20% down)
VA funding fee* (if VA loan)

*All amounts determined by your lender. There may be additional fees or the same fees as shown above but with different names.

TYPES OF LOANS
You have an almost unlimited number of financing options from which to choose. The best way to find out about these options is to talk with a lender; however, here are some examples of those commonly used.

FIXED RATE MORTGAGES
Conventional - A conventional loan is a mortgage made between a lending institution and a borrower without government participation, such as VA or FHA. Most types of conventional loans are paid off in equal monthly payments spread over 15, 20 or 30 years. The interest rate stays the same for the life of the loan, therefore the monthly principal and interest payment also remains constant. The amount of the down payment may vary among lenders, however a loan can be obtained with as little as 5% down. Typically when the down payment is less than 20%, it is necessary for the loan to have private mortgage insurance (PMI) to protect the lender.

FHA - Strictly speaking, FHA does not make a loan. Rather, it insures loans, which makes lenders willing to finance home purchases on more favorable terms than conventional financing. With an FHA-insured loan, the home buyer can make a small down payment, usually less than 5% of the purchase price. Maximum loan amounts vary with the county in which the property is located. FHA charges an advance Mortgage Insurance Premium (MIP) of approximately 3.8% of the loan amount. This premium can be added to the loan amount or paid in cash at closing. In addition, a monthly premium of approximately .5% is charged.

VA - The Veteran’s Administration acts as a loan insurer, guaranteeing a certain percentage of a home loan for a veteran, up to $184,000. The biggest benefit is that no down payment is required, however a funding fee is charged.

ADJUSTABLE RATE MORTGAGES
An adjustable rate mortgage (ARM) has a floating interest rate which is tied to specific economic indicators and is re-evaluated at a set interval (usually annually), then adjusted up or down. Many ARM’s set a maximum adjustment on possible increases to interest rates. A primary benefit of an ARM loan is a lower first year rate than on fixed rate loans. This results in the borrower being able to qualify for a greater loan amount.

ASSUMABLE LOANS
A buyer can “take over” or assume the mortgage obligations of the seller. A non-qualifying assumable loan (rare these days) does not require the buyer to qualify for the loan with the lending institution, however the seller may require a credit report and/or other information from the buyer. A qualifying assumable loan does require a full qualifying process with the lending institution similar to obtaining a new loan. On FHA and VA loans, the interest rate remains the same, however on most conventional loans, if assumable, the rate will escalate to market rate. Assumptions can be attractive when the rate on the loan being assumed is lower than the prevailing rate of interest and the buyer has sufficient down payment to equal the difference between the new purchase price and the existing mortgage balance.

OWNER CARRY FINANCING
Sellers may loan their equity back to the buyer to assist the buyer in the purchase of the seller’s home. One form of owner financing (sometimes called a balloon mortgage) bases monthly payments on a 30 year loan, but requires the balance of the mortgage to be paid at the end of a short period, usually 5 to 7 years.