Wait… How Much Do I Need To Buy a House!?
“You can always alter and adapt your plan, provided you have one.” - Manoj Arora
If you’re like me, you LOVE looking at homes that you can’t afford. There’s something about a giant mansion with a 4 car garage that gets me everytime! But what if I told you that buying a home doesn’t cost as much as you might think? #doihaveyourattentionyet
Before jumping into any home buying endeavor, you want to see how you can finance your home. Whether you are speaking to a mortgage lender or an educated Realtor, we can fill you in on the latest mortgages offered and the best rates available. Let’s take a look at some mortgage options that are out there and see what’s right for you!
Are you a military veteran? If so, you have the best deal of all! Using a VA loan you have the ability to put down zero percent on a home AND not have to pay PMI (private mortgage insurance). It’s important to note that VA loans aren’t actually lended by the Government, instead private mortgage lenders offer VA loans and they are guaranteed by the Department of Veteran Affairs as long as the loan’s guidelines are met. This is a wonderful opportunity to buy that dream house with no money down.
The next and one of the most popular types of loans are FHA loans. What the heck does FHA stand for you ask!? It stands for the Federal Housing Administration; in essence, these loans are backed by the FHA and have certain guidelines. These types of loans are meant for owner occupants and allow you to put as little down as 3.5% down on a home. That’s right, if you wanted to buy a $100,000 home, your down payment would be a cool $3500! These types of loans are often great for first time home buyers who might not have much saved up but who crave home ownership! Private Mortgage Insurance (PMI) is required with FHA loans. Ummm what is PMI? Well PMI means that you are paying insurance on your loan to insure the lender you won’t foreclose on the loan. Back in the old’n days PMI used to disappear once the owner of the home reached a certain amount of equity in their home; nowadays, however, PMI will stick with you for the lifetime of the loan. The FHA also institutes certain guidelines for your home. Many times fixer upper type homes, or homes that need some work, won’t qualify for regular FHA loans; because of this, FHA loans should be used for homes that are move-in ready and in decent condition.
I know what you’re thinking *sigh* if only the FHA made a loan where I could put 3.5% down but actually save some money by buying a fixer upper and create equity in my investment. *Drumroll Please* Introducing the FHA 203k loan, also known as a construction loan. The FHA 203k loan is kind of like the forgotten middle child of the loan family. He packs a punch, but many people don’t realize that you can put less money down AND roll in rehab costs to your house. So how do 203k loans work? Keep in mind that you are working with the Federal Housing Administration, so your home will need to meet certain criteria. If your property qualifies, it’s best to have a contractor who is well versed in 203k loans come out and make an estimate on the repairs needed. The lender then will get the repair estimate and will roll the costs into your mortgage. Again an important note to mention is that though although this loan is great for investors. it is an owner occupied loan, which means the property needs to be your primary residence, apologies to all the house flippers out there!.
The last type of loan, and probably best known, is the Conventional Mortgage. The common misconception about home buying comes from Conventional Mortgages; the misconception being that you need 20% of the home’s value to purchase a home. As we’ve seen with VA and FHA loans, you can put down as little as 0%-3.5% on a home. Even with conventional mortgages, you can put down as little as 5% down on a home. So what’s the difference you might ask? Why would I do a conventional mortgage and put down 5% instead of an FHA and put down 3.5%? The answer is that Conventional Mortgage guidelines are much more relaxed compared to FHA guidelines. In certain instances, the FHA might not lend on houses that have chipped paint, slight damages around the property, etc. The Conventional Mortgage is also used for the handyperson who just wants to purchase the home and do the work themselves, without having to deal with certain stipulations and possible limitations from their mortgage lender. Keep in mind that even if you do a 5% conventional loan, PMI will still be enforced, and it’s also important to note that rates on conventional mortgages are usually higher than FHA and VA loans. The only way to rid yourself of PMI is buying with 20% down on your home. If only there was a way to beat that PMI….
As a benefit of reading the Oaktree Realty blog, I’ll throw in a super useful tip to saving some money. Many people do not want to pay PMI on their mortgage (I mean who does) but there is a way to get out of it. The answer is through refinancing your home into a conventional mortgage from an FHA, or VA loan. In order to do this you’ll need to create some equity in your home, however, if your home can appraise for more than what you owe on your home, you can save yourself 30 years of paying PMI. The best way to approach this idea is to contact your mortgage lender who will order an appraisal to see just how much equity you have in your home, and if you would be in a position to refinance.
Not sure of the right people to reach out to? Reach out to us! Oaktree Realty is always happy to get you in touch with the right professionals to make your dreams a very realistic reality.