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Financing FAQs

How much house can I afford?
When evaluating how much you can afford for your home and mortgage, lenders typically consider that 1. Your maximum monthly mortgage payment should not exceed 28 percent of your gross (pre-tax) income and 2. Your maximum debt load, including your mortgage payment, should not exceed 30 percent of your gross income.

These ratios are typical of those required to secure a conventional mortgage. Lenders will be able to supply details about other types of mortgages, such as FHA or VA loans, which offer more flexible qualification standards. There are many types of mortgages and financial tools available that provide flexibility in interest rates, terms, and down payment requirements. 

What’s the difference between being pre-qualified and pre-approved for a mortgage? 
Typically you will first pre-qualify for a mortgage, then get pre-approved before you have found the specific home you wish to purchase. What is the difference?

Pre-qualification: An informal determination by a lender or mortgage broker stating how much mortgage you can afford.

Pre-approval: A guarantee in writing by a lender to grant you a loan up to a specified amount.

What are the advantages of being pre-approved?
There are two advantages of being pre-approved for a loan as early as possible in your home buying process:

1. Sellers will find any offer you make more attractive if you are pre-approved for a mortgage.
2. The length of time before closing can be shorter if you’ve completed the steps to securing mortgage approval prior to signing a contract on a property.

What factors are considered in financing pre-approval?
Typically a lender will consider income, income to debt ratio, credit score (ie. over 640), length of employment/job stability, available deposit, and two months of insurance and mortgage payments in the bank. 

What is a Foreclosure?
A foreclosure is when a homeowner has defaulted on their home loan payments, then the lender takes possession of the property, which was pledged as collateral for the loan. After a property is foreclosed, the lender becomes the seller and uses the proceeds to recover the mortgage balance.

After three to six months of missed payments, a lender may record a notice of default, which notifies a borrower that he is facing foreclosure and gives him a reinstatement period to make things right by paying off debts or settling any other disputes. The length of the reinstatement period varies by state, with some states giving borrowers a mere five days to settle disputes and debts and others giving borrowers up to 90 days.

If the mortgage's unpaid balance is not paid off within three months, the homeowner receives a notice of sale. The property is then auctioned at a trustee sale to the highest bidder, who must pay in cash within 24 hours. The opening bid is usually equal to the outstanding loan balance and any additional attorney fees the bank may have incurred. Any additional proceeds will be returned to the owners who defaulted. 

What is Short sale?
Short sales are available to borrowers when they owe more than their home’s current worth on the market. Lender approval is required before a short sale can be completed; lenders are not obligated to accept a short sale. Short sales can be used both in situations where the homeowner is current on their mortgage payments and when they have fallen behind.

What are the obstacles of buying a short sale property?

  • The short sale process may take more time than a traditional retail sale to complete and it may be difficult to pin down a firm closing date until the seller's mortgage lender(s) agrees to the short sale. Junior-lien holders such as second mortgages, HELOC lenders and other special assessment liens may also need to approve the short sale. If a buyer is bound by a specific timetable to buy a home, the short sale may not be an ideal route.
  • There are many roadblocks which can derail a short sale. With extra research, a buyer should be able to uncover the possible obstacles and plan for them.
  • Buying the property on an "as is" basis.
  • The seller of the property will normally have to pay some money at closing or agree to an unsecured debt in order to have the short sale approved. If the seller refuses, then a short sale may fall through even if the seller has approved the sale.
  • The approving lender will rarely agree to pay for any extras that a regular seller would normally agree to. This could mean higher closing costs for the buyer.  The buyer will need to shoulder those costs. (For example, the buyer covers the cost for inspections and repairs).

What is the difference between a short sale listing that says "approved for short sale" and "third-party review required"?
"Approved for short sale" means the bank has qualified the homeowner for a short sale and has approved the request to sell the property at a reduced price. 

"Third-party review required" means the homeowner has not sought approval yet from his/her lender to do a short sale or approval is pending review of the homeowner’s application. The process could take longer and there is also the risk that the homeowner will not qualify for a short sale and the property would then need to be sold at a higher price.

What are the requirements/qualifications to buy a foreclosed or short sale property?
Some banks may not accept government loans such as FHA or VA for these transactions, since they typically require more work. Many may require larger deposits, stronger credit and/or "cash-only" buyers to eliminate risks and extra work. Often you need to also offer more than the listing price for acceptance, which is used to attract buyers/competition and serves as a minimum ask.

What is a HomePath Property?
Fannie Mae owned or short sale approved properties make up the HomePath program. You should know the condition of the property, the cost of any needed repairs, and the steps in the loan qualification and closing process before you enter into a purchase and sales agreement for a HomePath property. Fannie Mae accepts offers only through their approved real estate listing agents, buyers may work with any real estate sales professional to submit an offer to the real estate agent who has listed the property. 

If you are a first time home buyer (who has not purchased a home in the last three years) you may elect to take the online HomePath Ready Buyer training course for $75. The course takes about 4-6 hours, after completion you receive a certificate. If you put an offer on a HomePath property your agent may include a copy of your certification and request up to 3% back in closing costs. Your agent should include your prequalification letter with the Real Estate Purchase Addendum and Owner Occupant Certificate in the offer package given to the listing agent. If the home was built before 1978 they may also initiate the lead disclosure form. 

HomePath also offers their own financing for HomePath homes, a HomePath Mortgage or HomePath Renovation Mortgage for the home and light renovations, each requires 5% down. It is possible to use FHA or VA financing, or conventional loans also.

What is a FHA Loan?
An FHA loan is a mortgage loan insured by the Federal Housing Administration (FHA). The federal government insures loans (for FHA-approved lenders) in order to reduce their risk of loss if a borrower defaults on their mortgage payments. This may allow for lower down payment requirements and less stringent lending qualifications. To get a FHA mortgage with a down payment as low as 3.5%, borrowers needs a credit score of 580 or higher. If a credit score is 500 to 579 typically a down payments of at least 10% is required.

Are there Premiums for FHA Loans?
Yes, on all FHA loans an upfront and annual premium required. The upfront premium is 1.75% of the loan amount, paid when the borrower receives the loan or it can be financed and added to the loan amount. The annual premium is paid monthly and varies based on the loan duration, the borrowed amount and initial loan-to-value ratio (LTV). For example a 30-year loan with down payment of less than 5% would be 0.85%. A 30-year loan with down payment of 5% or more would be 0.8%.

Can you get an FHA loan if the home needs repairs or updates?
A home must satisfy FHA requirements in the home inspection for approval, which typically means it must not require major repairs, which interfere with the health, safety or necessary function of the home (ie. failed Title V, bad roof, poor foundation). The FHA does have a loan product for borrowers who need funds to make desired repairs/upgrades to their homes, called a 203(k). The main advantage of this type of loan is that the amount is not just based on the current appraised value of the home but instead on the projected value after the repairs are completed. A "streamlined" 203(k) can allow a borrower to finance up to $35,000 in nonstructural repairs (ie. painting, new fixtures, flooring).

What are mortgage points?
Points may be required by a lender at the closing, in addition to a deposit, to secure financing. Each point is an upfront interest equal to 1% of the borrowed amount. It does not reduce the balance. 

What is Earnst Money?
The deposit made in part with the offer and in part with the P&S which will be held until the closing and used towards the purchase. 

 

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MElissa Atwood Real Estate Broker
Melissa Atwood Real Estate  | Phone: 508-667-5695 |  info@melissaatwoodre.com
88 Sandwich Street Plymouth, MA 02360
Copyright © 2015. Melissa Atwood, All Rights Reserved