Mortgages & Financing
When considering homeownership, financing is a large part of the process. If you're buying in cash, most of the below won't apply to you. Your interest rate (current rates; daily rates from the past past month M-F; rates over the long term), monthly HOA/condo fees, mortgage insurance, taxes, & # of years to pay your mortgage are some common factors, though there are exclusions in each case (i.e. some can buy in cash & also get their taxes waived). Here you'll find information on determining your price range, what savings, credit, time in a job field that you need, and loan options to consider.
For the only preapprovals that I'm aware of that do not involve a hard credit inquiry (which has a negative impact on your credit score), click here for US Bank or here for Lower. Be advised that you will likely be contacted by them after doing the preapproval, and one way to get them to not contact you, if you would prefer a local lender, is by saying that you are leaning towards a local lender (which I would often recommend), and to please take you off their list.
What's my price range?
Prior to starting your home search, it's best to consult a lender about what home price range you can afford according to the loan that you will be taking out. To see a general idea, you can also use a calculator. After you know what you can afford, it's good to assess what home price range you'd like to consider in case you want to purchase a home under what you can afford. When your Realtor® searches for homes, he should include some homes slightly above and slightly below your price range. For homes above your price range, sometimes sellers will sell for less than what the home is listed as. Also, sometimes the mortgage that you qualify for can be raised through various practices such as a paid off debt (that can even be financed into your mortgage in the case of a VA loan).
Finances: What you need
Some sections also found in "What do I Need to Buy a Home?"
With some loans, you pay close to what you would to rent out a new home. An example would be a VA home loan where the seller agrees to pay all closing costs. On the other extreme, you have some purchases in all cash. I've handled both extremes in my time as a buyer's agent. You also need money for an earnest money deposit (not legally required, but customary & expected in VA - usually around .5%-1% of the purchase price) as well as money for a home inspection (usually between $250-$350). Closing cost (generally around 3.5% of the sales price) is commonly paid for by the seller in today's market as part of negotiations, although some sellers such as many bank owned homes cap at 3% closing cost assistance available. Additional costs of closing which the seller can sometimes pay for can include a home warranty and home insurance which can each be around $500-$750.
This amount will depend on your preferences and what loans and other programs you qualify for. For a VA loan and in some other cases including some instances with the USDA, you won't need any down payment. At the time of this writing, there is a VHDA 3% down payment assistance grant for first time home buyers, which gives 3%/3.5% of the downpayment needed to buy a home with an FHA loan, or all of the downpayment for a Conventional 97 loan. .5% for a down payment is less than many security deposits. If you do not qualify for a VA, USDA, or subsidized loan, and have good credit, a conventional loan requiring 3%, 5%, or 20% may be your best option. By paying 20%, you avoid having to pay PMI.
FICO Credit Score above 500
While some lenders will only accept buyers whose credit is 620 or 640, others, including some at Greg Garrett Realty.com, will accept buyers with a score as low as 500. If your score is below 500, contact Adam Garrett so that he can put you in contact with a lender who can help you get a loan and at the same time boost your score free of charge. That said, Adam recommends that you boost your credit first in most cases to be eligible for a more traditional loan including more programs to reduce home costs for those with credit scores above 640. Adam can also help you to boost your score if you would like, and he also suggests that you check the "Credit's Impact & How to Build It" section of this website.
Job(s) for the past two years (usually)
Exceptions to this rule include those coming out of college who have a job in their field of study with a contract who may be able to purchase a home sooner. Another exception is those who have had multiple jobs that are not in the same career field for two years who may not be able to purchase a home. Another exception of those who will not be able to purchase is those with breaks between jobs of more than 1 month. Talk to your loan officer to see about other exceptions.
Loan Types for non-cash buyers:
Conventional - Requires a 0% (Garrett Mortgage if you haven't owned a home in the past 3 years & otherwise qualify), 3% (Conventional 97) or 5% down payment (traditional conventional). Good for those who do not qualify for a VA or USDA loan with credit scores above 700 and those who want their PMI to be dropped after 20% equity is in the home (unlike FHA which does not drop PMI for the life of the loan - because of this policy difference, those with less than 700 credit scores should still consider conventional if they plan on being in the home for more than 5 years). With Garrett Mortgage there are also no PMI conventional loans without increasing the rate. Another benefit of conventional is that the requirements to count 75% of your rental income as income qualifying for your next home purchase isn't nearly as stringent as FHA loans. For conventional properties, you only need a few months mortgage of cash reserves, and there is no equity requirement.
FHA - Requires a 3.5% down payment. Good for those who do not qualify for a VA or USDA loan with lower credit scores, especially first time home buyers, who can't qualify for a conventional loan. One drawback is that they require 25% equity in a purchased home before rental income from that home is counted towards your total income when considering purchasing another home. To see more, click here.
VA - No downpayment required. Good for anyone eligible for it usually unless they qualify for a USDA direct loan. Up to 2 VA loans at a time. Keep in mind that the VA funding fee, which can be paid upfront or rolled into the loan, varies from 1.5-3.3% at the time of this writing based on factors like being active duty or reserves, how much of a down payment is being put down if any, & in some cases is waived.
See a more in depth comparitive of Conventional, FHA, & VA here, although keep in mind that there are some exceptions that are mentioned above that are not listed on the comparative, such as 0% down conventional or FHA loans & no PMI conventional loans.
VHDA Loans - No downpayment required with their plus loan, where the downpayment is financed as a second mortgage. Their FHA Plus loan is good for first time eligible buyers who are not VA eligible, will remain in their property for at least 5 years, and don't have 3.5% for a down payment. For a brief overview of this & more VHDA options, click here or here.
USDA - No down payment required. Good for eligible people in this area considering northern York County, Gloucester, parts of James City County, Smithfield, and other rural and semi-rural locations. Work on the house can be financed into the loan, and rates as low as 1%.
ARM's - In today's market, I do not recommend ARM's because we are currently at a place of historically low mortgage rates, as you can see here. While they may be tempting in light of the currently lower rates than today's fixed rates and the possibility of qualifying for more, I do not advise them, as the likelihood of them averaging above today's rates is relatively high in light of historic trends.
New Construction - While those purchasing new homes already built can most often do so with traditional financing, for those that want to buy land and wrap a mortgage into the loan, there are some options available for as low as 0% down, contrary to popular belief because of the high volume of lenders that require 10% or 20% down for a new construction loan in which the buyer is purchasing the land and having a home built.
Land - For those looking to buy land only, while many banks will not perform such loans, a number of credit unions such as Langley Federal will, where the buyer is required to put 10-20% down with rates around 8-10% (as of Jan 2019) for a 10-15 year loan.
Renovation Mortgage - Excellent option for those looking for a deal who don't mind some extra time and hassle. There are FHA, VA, & conventional renovation loans. Conventional are the most flexible and include not just the ability to make repairs but also the ability to make upgrades as long as it will appraise, even putting a pull into the backyard, etc.
See more low & no down payment options and other ways to save including as low as 0% interest loans and up to 20% down payment assistance loans by filling out a form for your personalized report here .
For some great ways to improve your credit and save $, including in ways that could make someone previously ineligible able to buy a home, click here for my "Even More on Credit & Finances" page.
Disclaimer: The above informational is general. Consulting a loan officer is always recommended prior to proceeding with choosing the right loan for you. For instance, an FHA loan with the VHDA down payment assistance grant and the VHDA Mortgage Credit Certificate could be better for you than a conventional loan without those even if you have good credit. Adam Garrett, the author of this page, is a REALTOR®, not a mortgage lender.
See my Mortgages playlist here
See my Finances playlist here
Note: The content on this site is not provided by a bank or issuer. Opinions expressed here are author's alone, not those of a bank or issuer, and have not been reviewed, approved or otherwise endorsed by a bank or issuer.