Can be wonderful bargains, depending on the interest rate.

Loan paperwork usually not as involved, so closing often quicker.

Makes your home more attractive to buyers when you want to sell.

Conventional Loans

Conventional loans offer you more creative financing programs (all the ARM programs plus many othersnot mentioned above). Many programs today only require 3% down payment (like FHA) -- such as theCommunity Homebuyers Program, for conforming loans (at present the cap is $203,000 for Fannie Mae and$207,000 for Freddie Mac—it is expected that Fannie Mae will also raise in the near future). Above$203,000/$207,000 is considered a JUMBO loan and at least 5% (and often higher) down payments will berequired.

All conventional loans with less than a 20% down payment require private mortgage insurance (PMI) similarto FHA’s mortgage insurance premium.

Sellers may contribute 3% of the sales price toward the purchasers’ closing costs on a 5% down loan (thisamount may not include any escrows); they may contribute 5% on a 10% down loan; and if your downpayment is even higher than 10%, the sellers may contribute even more. This is not to say the sellers will doit!! This is just what is allowed by law.

VA Loans

Lots of advantages with VA loans.

You must be a Veteran and have your Certificate of Eligibility (obtained from the VA).

You may buy with NO money down;

VA has fixed rates and buy-downs. They did have the 1-yr ARM with 1/5 caps similar to FHA (whichwas very popular). However, Congress deleted it this past October—many lenders are hoping it willbe added again soon.

VA allows for the highest of ratios -- 41% total and the lenders are flexible and will go higher for goodcredit, etc.

VA doesn’t require any type of mortgage insurance. However, they do have a one-time charge for the“funding fee” which may be added to the loan (if the total doesn’t exceed $203,000) or be paid atclosing. The funding fee is 2% of the loan amount for a first-time user and 3% of the loan amount for amultiple user (meaning you’ve used your VA housing benefit before).

In other words—everything works for the Vet!!

Applying for Your Loan

You’ll need a lot of personal information handy when you’re filling out your loan application. For instance:

Social security numbers for you and your spouse, if both of you are applying for the loan.

Copies of your checking and savings account bank statements for the past three months.

Evidence of other assets such as bonds and securities, etc.

A recent paycheck stub or statement.

A list of all credit card account numbers and the approximate monthly amounts owed on each.

A list of account numbers and balances due on outstanding loans such as car loans/school loans.

Copies of your last two years’ income tax statements.

The name and address of someone who can verify your employment.

If you’re self-employed, you’ll need a P&L statement for the current year.

Your Loan Options.

Earnest Money/Down Payment?

Cash on Hand

Most paychecks today go just to pay bills. Some have a little saved, but it’s a struggle. Buying a home mayclean out your savings. However, it is worth it!! You will stop paying your landlord’s mortgage with yourrental payments, you will have a home you can call your own, PLUS you get a tax deduction!!

Earnest Money

Earnest money is intended to make transactions clean and simple for both buyers and sellers and it isrequired by some laws to make a contract valid. Buyers tender an amount of cash to demonstrate that theyare “in earnest” about purchasing the property. The money is deposited in an escrow account by the brokerwith the written understanding that if the buyers fail to make good on their offer to complete the purchase,the earnest money may be forfeited and disbursed to the sellers, compensating them for damage they mayhave suffered from taking the property off the market for a period of time -because “time is money.” Sellersin many states can refuse to accept the ernest money and may sue for “specific performance” should a buyerfail to go forward on a contract. The law governing this deposit specifies conditions under which the buyersare entitled to have the earnest money refunded to them. Typically, this occurs when the sale fails forreasons outside the buyers’ control.

Getting Earnest

When you decide to make an offer on a home, you will be required to make an “earnest money” deposit asproof that your offer is serious. Your earnest money will be deposited in your broker’s escrow account—notgiven to the seller—and if the offer is accepted, your check will become part of your down payment orclosing costs. If your offer is rejected, the broker will return your earnest money to you.

The Down Payment

When you buy a home, your mortgage lender will expect you to pay a percentage of the sales price as adown payment. The higher your down payment, the lower your monthly mortgage payments will be. Yourdown payment will typically be 5% to 10% of the purchase price, which can be quite a chunk of cash. Don’tpanic—there are many mortgage programs (see Finding the Right Mortgage) today which don’t require asmuch as 5% down payment. Conventional and FHA loans may be as low as 3% down; VA requires NOmoney down; and the Housing Development Authority may have a program for first-time buyers only(there are several qualifications) with as low as 1% down payment.

Seller Contributions

The following is a guideline you may use in considering what the maximum is the seller may contribute toyour closing costs and, thereby, reduce the cash you would need at the settlement table. It, in no way, is anindication that the seller will contribute the maximum amount allowed. What a seller may considercontributing will depend on a lot of factors, including:

The sales price you offer for their home;

The equity they have in their property;

Their motivation to sell; andThe cash they need from the sale of their home for either the home they’re buying or possiblyretirement.

You will probably find that the average being contributed today based on a reasonable sales price offered isbetween 1.5% and 2% of the sales price. Please consult with your lender and Realtor regarding this subject.

Conventional Loans (Conforming - Under $203,000 for Fannie Mae/$207,000 for Freddie Mac)

With a 5% down payment, Fannie Mae and Freddie Mac will allow the seller to contribution up to 3% of the sales price (not including any escrows/prepaids) towards the purchasers’ closing costs.

With a 10% down payment, the allowance is 5% of the sales price (not including any escrows/prepaids).

With 20% or more down payment, the seller may pay all the purchasers’ costs.

Please be aware that there are many types of conventional loans in the marketplace today. Some may differfrom the above. Please consult with your lender to get the exact amount considering the loan program youwill be using.

FHA Loans

FHA prefers that the seller only contribute to the loan discount points. If the seller contributes more than the loan discount points, then that additional amount will be added to the sales price in calculating the purchasers’ down payment.

VA Loans

VA allows the sellers to pay 4% of the sales price PLUS two discount points as a contribution to thepurchasers’ closing costs. Vets have a big advantage.

Mortgage Insurance

FHA Loans

The upfront fee is 2.25% which can be financed with your mortgage (even if it exceeds the cap) and there isa monthly renewal rate of .0050% (.0050 x loan amount divided by 12) added to your housing payment.

There is no upfront fee if you’re buying a condo, but the monthly still applies. At settlement, 2 months of themonthly renewal fee will be added to your costs as an escrow amount.

FHA will probably not remove the MIP no matter how much equity you have in your property—some say itruns out in the 22^nd year of your loan. Also, if you sell within the first few years, you might get a refund—don’t bank on either!

Conventional Loans

The rates vary and you will need to check with your lender as to the upfront and monthly rates. For example: on a 5% down payment loan, the upfront could be .0095% of the loan amount which has to be paid at closing(if you have 10% or more down you may finance it with the mortgage), and the monthly renewal rate mightbe .0049% of the loan amount divided by 12. Many lenders today are NOT requiring upfront PMI. With noupfront fee, the rate is .0078% of the loan amount with 5% down payment and .0068% of the loan amountwith 10% down payment. Again, 2 months of the monthly fee will be added to your closing costs atsettlement as an escrow amount.

However, once you have attained 20% equity (some lenders require you to have 25% equity—check withyour lender) in your property, you may be able to get the PMI removed from your loan. Keep an eye onthose tax assessments every year as well as the balance of your loan—if you think you have at least 20%equity, you need to contact your lender (THEY WON’T CALL YOU!) and ask them to remove the PMI. 

They will require you to get an appraisal (through their appraisers of course) which will cost you $300; however, if you’re right, NO MORE PMI!

PMI/MIP is NOT a tax deduction!!

Estimated Closing Costs

Closing costs and settlement costs are the same. When you purchase a home, the following fees are chargedto the purchaser:

Title examinations, title insurance and binder

Document preparation (both by lender and settlement attorney)

Appraisal

Credit Check

Survey

Loan origination fee

Loan discount points

Home inspections (including environmental inspections)

Recordation fees for the Deed and First TrustEscrows (or Prepaids) such as taxes, interest, hazard insurance, & mortgage insurance.

Many of the above fees may be paid by the seller as contributions to the purchaser’s closing costs.

As an estimate of what your closing costs may be, consider 3-5% as an average.

Please check with your lender and/or your Realtor to find out what the actual costs will be on your newhome.

Settlement/ Closing Costs

At the settlement on your new home, you’ll finalize your home purchase by signing all the papers which makethe home officially yours. You’ll have to pay closing costs which approximately 4% of the sales price. Thesecosts may be offset by the seller (see also Seller Contributions to Closing Costs):

Loan originated fees (usually 1% of the loan amount) (not charged if you assume an existing loan;

however, there will be a loan assumption fee = $150-$500 or higher);

Discount points (depends on your interest rate) (not charged if you assume an existing loan);

Settlement attorney’s fees for document preparation, title search, title insurance binder, courier feesto/from lender (approximately $400);

Lender fees for underwriting, tax service fee, document preparation fee (approximately $275 - buthigher for ARMs $450);

Title Insurance - the lender requires that you only cover the loan amount; however, for a smallone-time fee you should also cover yourself up to the sales price. Although a title search has beenconducted to prove the property is free and clean of all encumbrances, sometimes a human erroroccurs. And it may not be during your title search—it may have occurred may title searches beforethat!

A class example: A year after you bought your home, a woman comes to you door and says you are living in her home! Her husband went to the settlement table with his girlfriend and she signed the wife’s name! Title insurance will allow you to keep your home plus pay all legal costsincurred to settle this matter! Isn’t that worth your “peace of mind?”

As an estimate, title insurance is $2.90 (for lender only) per $1,000 of loan amount up to$100,000 and $2.40 per $1,000 above $100,000 plus $50. For lender and owner policies, it is $3.90 per $1,000 up to $100,000 and $3.40 above $100,000 plus $50. Recording Deed: $2.00 per $1,000 of sales price plus $14;

Recording 1^st Trust: $2.00 per $1,000 of loan amount plus $13 (for fixed rates) and $15 (for ARMs).

Over 4 pages add $1 per additional page;

Recording 2^nd Trust: $2.00 per $1,000 of loan amount plus $10;

Survey = $200-$300;

Appraisal = $300 (paid at the time of loan application);

Credit Check = $50-$60 (paid at the time of loan application or before);

Upfront Private Mortgage Insurance or Mortgage Insurance Premiums or VA Funding Fee (seeMortgage Insurance);

Home Inspections—various fees charged for various inspections—all payable at the time of theinspection. See General Home Inspections, Environmental Inspections, and VA Law - OtherInspections/Disclosures.

Hazard Insurance—your lender only requires you to provide fire and hazard insurance on your new home; however, you probably want a full homeowners’ policy to cover your contents and personal liability. You pay for a full year policy and provide your lender with a paid receipt and the declaration/endorsement/policy itself. You should purchase this at least two weeks before settlement; Interest: On most mortgages, interest is paid in arrears while principal is paid upfront.

Example: when making the September payment, you are paying the interest for August and the principal for September. Normally a lender allows you to skip the first month’s payment after settlement (lenders vary using 45-60 days to first payment). Therefore, if you settled on September 15, your first payment would not be made until November 1 (which would pay the interest for October). What happened to the interest for September 15-30? You have to pay it at the closing table!!

To figure this amount, multiply your interest rate times your loan amount and divide by 365 (some lenders use 360) to give you a daily rate. Always include the day you’re settling—you get to pay for that day too!

Tax Escrow: Lenders usually escrow at least 3 months of tax payments. This money is yours and is held for you to allow the lender to pay your real property taxes when they come due.

Hazard Insurance Escrow: Lenders usually escrow 2 months of hazard insurance payments. Again,when the policy comes due the next year, the lender will pay for it out of this account.

Mortgage Insurance Escrow: Again, lenders usually escrow 2 months of mortgage insurance premiums so they have the money to renew it the next year. Again, see Mortgage Insurance.

When you make an offer (write a contract), your real estate agent will give you an estimate of your closing costs and when you apply for your loan, your lender will give you an estimate of the closing costs, so you won’t have any surprises.