The Home Buying Process: Unpacking Loans and Costs

When comparing different real estate loans, it of course behooves one to take a proper look at their circumstances. Here are some factors to consider when comparing real estate loans and or how to qualify for a home purchase:

Interest Rate

Compare the interest rates offered by different lenders. A lower interest rate can save you money over the life of the loan. As a rule of thumb, I recommend working with a local lender who understands the local market but there have been some instances in which clients have found a better rate with a national lender or someone they have worked with previously. 

    When rates are higher, as they are now (June '24), the buyer pool is typically lower which can be a positive as far as pricing and negotiation. Regardless, one of the things you can do from the onset is to look into buying down the rate. Ask your agent/representative to look into whether or not the seller might want to give a credit to buy down the rate which upon acceptance you would then pass on to your lender. The popular 2 for 1 strategy, for instance, brings down the rate by two percentage points for the first year and one percentage point for the second yr, before adjusting to the prevailing rate on year 3. A 5% rate on a $4000 per month mortgage payment can save the buyer $280 monthly over a 7% rate. 

Also keep in mind that in rare instances you may be able to 'assume' a lower mortgage with an an 'assumable mortgage' when purchasing a home, although that process can be complicated. 

Loan Term

Consider the term of the loan (e.g., 15 years, 30 years). Longer loan terms typically result in lower monthly payments but higher total interest paid. In a low interest environment it usually makes sense to go with a 30 year fixed but in a higher interest rate environment one might consider shortening the life of the loan in the hope of getting a better rate. In a high interest rate environment, one always has the option to refinance down the road at a lower rate. In real estate we say 'marry the home and date the rate'. As always,be sure to ask your lender about the various loan assistance programs that are out there. 

Loan Type

There are various types of real estate loans, such as fixed-rate mortgages, adjustable-rate mortgages (ARMs), FHA loans, VA loans, etc. Talk to your lender and compare the pros and cons of each type. To be clear, you wouldn't want to turn down a 30 yr fixed loan at a very low rate over an ARM because adjustable rate mortgages can see saw in either direction. 

Down Payment

Look at the down payment requirements for each loan. A higher down payment can result in better loan terms and lower monthly payments especially when you consider that anything less than 20% will require the borrower to purchase personal mortgage insurance to cover the additional risk on the part of the underwriter/s.

For downpayment assistance programs click here 

Closing Costs

Compare the closing costs associated with each loan. These costs which are typically 2 to 5% of the purchase price in the DC Metro area can vary significantly between lenders.. However, do keep in mind that these costs are not always itemized in the same way. Some bundle more than others so be sure to look at the overall cost and what is included.

Chief among the various costs are:

• The loan origination fee
• The appraisal fee
• The title search and title insurance fees
• The recordation fee (the recording of the property’s title
• The  property ‘survey fee’ to cover the cost of a detailed map of the property
• The annual homeowner’s insurance premium to protect the home against damage and theft
• Property taxes which will be prorated to reflect the number of days left in the tax year

Prepayment Penalties

Some loans may have prepayment penalties if you pay off the loan ahead of schedule. Keep this in mind if you plan to refinance or pay off the loan ahead of schedule.

Lender Reputation

Do your research. Look at online reviews and ratings to ensure you're working with a reputable lender and or better still seek a recommendation or two from your realtor who in all likelihood has the advantage of having worked with several.

TYPES OF LOANS

Conforming loans are more typical in that they are backed by Fannie Mae and Freddie Mac.  To qualify the buyer can put as little as 3% down but keep in mind that you will be on the hook for personal mortgage insurance to cover the risk on the part of the underwriter. A conforming loan requires a higher credit score, currently 620 over a 580 for a non-conforming loan. Conforming loans offer the best rates because they are more lender friendly. 

Non-conforming loans which are tied to a private lender commonly include jumbo loans (those above Fannie Mae and Freddie Mac limits) and government-backed loans like VA (Veterans Affairs) loans, FHA (Federal Housing Administration) loans, USDA loans. Downpayment can be as low as 3.5%. Please note that in many cases a VA loan doesn't require a downpayment or mortgage insurance. However, keep in mind that lenders cannot sell a non-conforming loan back to Fannie/Freddie which makes a non-conforming loan less attractive and hence more costly for the average buyer.

Jumbo Loans 

• Loan that enables borrowing more money than a conforming loan. 
• Fixed or Adjustable rate. 
• Great solution for those with a great credit score, high income earners, solid financial history, interested in a second mortgage and who have the funds for a down payment.

Bridge Loans

• Loan that allows the purchase of a home while another home is being sold. 
• Great for those under contract to purchase a property in need of renovation. 
• Perfect for those under contract to purchase a new home and are not qualified until the old home is sold. Shop around for lenders that provide purchase financing options with no qualifying ratios. 
• Used for those downsizing to an assisted living home or smaller property and does not want/need/qualify for permanent financing.

Rehab Loans

• Can be used to purchase homes that needs renovating and repairs 
• Allows extension of payments over the life of the loan to allow time for renovation rather than paying a large lump sum. 
• Perfect also for refinancing an existing mortgage and add cash needed for renovation.

SUMMARY

As always when it comes to matters outside my job definition/scope, please seek the advice of a specialist. There is perhaps nothing more important than one's finances when purchasing real estate, so make sure you begin your home search with a lender which is the advice I give to all my buyers. As a realtor I am here to guide you through the home buying process and to help you find your home at the best price for the best possible terms. Please feel free to reach out to me or like the post. 

Happy Hunting!