Types of Purchase Loans
100%
Financing or 0% Down Loans
Avoid
Mortgage Insurance with 80/10/10 Financing
No
Cost Purchases
Purchase
Pre-Approvals
No
Income Documentation Loans
Click to compare: FHA
vs. Conventional financing
| Yes, it's true! There is such
a thing as 100% financing- with no money down. Borrowers may keep all of
the down payment in reserve (investments) and pledge the assets
instead. The interest costs are higher in this type of loan, but
the interest the down payment money earns in the investment may well make
this a worthwhile situation. As a rule of thumb, fully leveraging your
real estate purchase would make the most sense if your investment returns
were better than 3% over the prevailing 30 year fixed rate. |
If you purchase your home
with less than 20% down, chances are you will obtain a loan that is
insured by ``Mortgage Insurance'' (MI). Private mortgage insurance or MI
is a type of insurance provided by a private mortgage insurance company
to protect a lender in the event of default on a loan. This type of
insurance is generally required when a borrower has less than 20% equity
in a home; i.e. the loan amount divided by the property value is 80.01%
or greater. As your home appreciates or your loan balance decreases (or a
combination of the two), and your equity in the home exceeds 20%, you may
petition the mortgage holder to drop the MI. This process may be
cumbersome or difficult.
One way to avoid paying MI is to purchase a home with a combination first
and second mortgage. The first mortgage would be limited to 80% of the
home's appraised value. The second mortgage, which would close in
conjunction with the first, would then provide for the difference between
the home's purchase price, less the 80% first mortgage, less the down
payment available . In other words, if you have a 10% down payment
available, your first loan would provide for the 80% mortgage with a
second mortgage of 10%. This is commonly referred to as an 80 -10 -10
transaction.
Another way to avoid incurring MI payments is to find a lender that
offers self-insured programs. This type of loan would have a higher
interest rate in place of the private mortgage insurance premium. While
mortgage insurance premium payments are not tax deductible, the interest
associated with a self-insured mortgage would be fully tax deductible.
The decision of whether to obtain a loan with mortgage insurance versus
the above two options should take into account the combined total monthly
payments of the various options, adjusted for the tax benefits of
interest deductions. |
In a purchase situation a no
closing cost option can work extremely well when the borrower has limited
funds available for closing or when the rate market is declining and the
borrower may want to refinance quickly. No closing cost loans can be used
effectively to free up more cash for the down payment or save for repairs
or other uses. If the seller can not credit for closing costs (due to low
equity or other reasons), a no closing cost loan is the next best
alternative.
In some cases no closing cost loans can give a borrower more cash than is
needed for the direct closing costs. As long as this does not exceed the
lender's guidelines (typically 3% of the purchase price in overall
credits), this cash can be applied to other costs in the transaction. One
important item to remember is that a no closing cost loan will not have
points, and thus no deduction for that cost.
Additionally, the other costs are paid for and no deduction is available.
If you are purchasing a home, points and some costs are generally
entirely deductible in the year you buy. This is true even if the seller
is paying for your points. |
|
A
purchase preapproval is a lender's analysis of you as a borrower without
specific property information. In other words, your loan information is
submitted to a lender for full underwriting and includes all borrower
details, such as employment information, asset information, and credit
history. The lender then approves you as a borrower, subject to a maximum
loan amount, down payment, and interest rate.
Getting pre-approved for a loan is critical in today's real estate
environment. Many Realtors do not want to accept offers from buyers
unless their home loan has already been approved by a lender. By
going through the loan process prior to being in contract on a home, you
can eliminate all of the obstacles to borrowing without jeopardizing an
actual purchase transaction. Once your loan is approved, your real loan
closing will be quick and subject only to a satisfactory appraisal and
title report on the home.
To begin the preapproval process you need to make some assumptions for
your purchase price, loan amount, and loan program. Any of these
assumptions can change once you've found your home, but it helps to do
the following:
1- Complete your application for the
maximum loan amount and purchase price that you're interested in. You can
always reduce these later.
2- Get your loan approved at an interest
rate that is higher than what you expect to take. Again, the loan program
that you decide upon can differ from what you are initially approved at.
The preapproval of your loan will ensure that your real purchase will
go smoothly once you have located the perfect home.
|
Often grouped together
despite their subtle differences, ``light documentation,'' ``no-income
verification'' and ``quick qualifier,'' or ``QQ'' loans are a solution
for many buyers who have income from sources that are hard to verify.
Usually these loans are used by self-employed borrowers who have
difficulty verifying all of their income, or by borrowers with very
complex income structures. For example, a borrower who has income
primarily from rental properties and investments may be hesitant to
verify all sources of income due to the volumes of paperwork this would
require. With a no income documentation loan, the borrower can simply
state his income on the application, and the lender will use this stated
income to qualify the loan. Why do lenders do this? Because they
recognize that by charging a slightly higher rate of interest they can
rely on this stated income of the borrower and cover the additional risk.
Lenders do in fact rely on verifying that the borrower has assets that
logically match the stated income, along with excellent credit.
With a higher cash down payment, typically 25% or higher, along with good
credit, these loans allow borrowers to buy into purchase prices a lender
wouldn't ordinarily qualify them for. Because no-income documentation
loans carry a higher interest rate, they should only be used when
necessary, not simply to avoid the paperwork requirements of a full
documentation loan. |
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