The deadline for the first-time homebuyer federal tax credit is looming - all settlements must take place prior to Dec. 1. Multiple steps are required to buy a home, starting with becoming “financially ready” by saving money for a down payment and paying bills on time, and ending at the settlement table with the passing of the keys.
While each step has its own importance and brings potential buyers closer to becoming homeowners, the most crucial element in today’s real estate market is to arrange financing.
“So much has been written about tight credit and strict loan requirements that a lot of people are afraid to even try to get a loan,” says Craig Kay, a Realtor with Weichert, Realtors in Potomac. “But everyone interested in buying a home should start by going to a lender and getting prequalified for a loan. People should not be afraid to ask questions and get help in arranging financing. There are plenty of options out there.”
Step 1: Prequalify for a loan
One of the most popular financing options for people is to apply for a loan insured by the Federal Housing Administration (FHA).
“Most of our customers now are interested in FHA-insured mortgages because they allow for a down payment of just 3.5 percent,” says Glenn Benson, a managing partner with Midtown Mortgage Co. in Bethesda. “The down payment can be a gift from a relative, and borrowers can even have a nonoccupant co-signer for the loan, such as a parent.”
Jon Okun, also a managing partner with Midtown Mortgage Co., says FHA loans are attractive to buyers who make a good income but have been working a short time and have not built up substantial savings.
“FHA loans are easier to qualify for than conventional loans, requiring a credit score of just 620 and more lenient debt-to-income ratios,” Mr. Okun says. “FHA loans don’t adjust the interest rate if you have challenged credit, either. Conventional loans typically require a credit score of 740 or above. If your credit score is lower, then you may be charged a higher interest rate.”
Mr. Benson says the FHA considers the total financial profile of borrowers. That means if borrowers have a lower credit score, they may be able to qualify if they have substantial assets or a high income in relation to their debts. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75 percent of the loan amount, which is typically added to the loan balance. In addition, FHA borrowers must pay a monthly mortgage insurance premium of 0.55 percent of the loan amount.
“Conventional loans normally require 20 percent as a down payment, and then there will be no mortgage insurance requirement,” says Mr. Benson. “If you are making a down payment of 20 percent, the entire payment can be a gift, but if you make a 10 percent down payment, then at least 5 percent of the funds must be from your own accounts.”
Private mortgage insurance (PMI) is required for homes financed conventionally with less than 20 percent as a down payment.
Buyers should be prepared to pay closing costs in addition to making a down payment, although Mr. Okun says that sellers are now frequently offering to pay the closing costs in order to attract buyers.
“The lower the sales price, the less inclined sellers are to give additional closing cost assistance,” Mr. Okun says.
Step 2: Search with a pro
With so many homes on the market, buyers should seek the professional help of a Realtor to narrow their home search and ensure they are getting a good value.