Housing Series – Part Five: Shop for Financing
Some of our most asked questions center around home buying and the involved processes. When we think about it, that makes perfect sense. The item in your budget where you’re likely to spend the most is your primary residence. Buying a house is a huge undertaking. There are many important things to know when you’re ready to take the plunge!
How many square feet to buy, how you’re going to finance, what exactly to look for, whether or not you want a realtor for help and on and on and on. That’s why we decided to launch this mini-series. We do have other resources available which discuss home buying. However, our goal with this series is to discuss the home buying steps in depth, one at a time. The process can be overwhelming so our goal is to break it down into more bite-sized pieces.
Step 5: Shop for Financing
Before you start calling lenders to inquire about interest rates let’s review what fees you can control, how these fees and rates work together, and how they can vary between different types of loans. First, there are some fees associated with your mortgage which should be pretty similar regardless of the lender you choose.
Home Inspection – As the buyer you reserve the right to have the home inspected. Once you have an accepted offer you will have a window (specified in your contract) to inspect the home. You (the buyer) will choose and pay for the inspector. It’s important to read reviews or request referrals from friends, family, or coworkers as you choose an inspector. Depending on your area this cost could be $300-$600 dollars. Keep in mind that you might need additional inspections for pests or pools.
Appraisal – Before closing the loan the property will have to be appraised. In the heat of this current market you might be able to waive an appraisal if you have an all cash offer or a large down payment. Do not waive an appraisal. This fee is non negotiable as you need to know you’re getting a fair deal. An appraisal will cost somewhere around $500.
There are some fees which will vary from one lender to another but the largest fee is likely the origination fee.
Origination fee – This is the fee assessed by the lender to include their underwriting expenses and costs to process the documents. Depending on your market this fee could be .5%-1%. This fee doesn’t include the initial application fee.
Application fee – This fee is assessed to pay for the initial loan application. This primarily covers the cost of the credit reports and initial screening costs.
Prepaid interest – Your first payment won’t be due immediately. However, you’ll need to pay the interest which accrues before the first payment upfront.
Points – This fee can add up quickly and is often the most difficult to understand. Essentially, as a borrower you can pay a small fee up front to secure a lower interest rate over the life of the loan. These dollars are not to be confused with down payment dollars. A “point” will cost you a percent (1%) of the mortgage amount and will lower the interest rate by ~.25%. I strongly recommend using a mortgage calculator to determine the breakeven of the cost of said points.
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There are other fees which can add up quickly which include mortgage insurance, funding fees for loans secured by government organizations, and title fees. These fees can vary across the primary loan types which generally fall into two categories, conventional and government-backed mortgages.
Conventional mortgages are those which are not backed by a government agency. These loans require higher credit scores, greater down payment, and are subject to private mortgage insurance if you put down less than 20% of the loan amount.
Government-backed loans require smaller down payments, have lower credit score requirements, and can come with longer term mortgage insurance. Government backed loans can come in the form of FHA loans, VA loans, or USDA loans. Not every loan type is available to every party. Your lender will be able to walk you through the different mortgage types and which could be made available to you.
Now that you have an idea of the different loan types and fees, the next step is to begin searching for lenders. Your agent will have their finger on the pulse of rates through local lenders. You can also look for rates through a bank where you already have an established relationship. Finally, don’t be afraid to ask your family, friends, and coworkers for referrals. Once you obtain a few quotes our team would be happy to help you compare your options.
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