Owning one's own home is the American dream, but financing that dream can easily become a nightmare. It is important to consider all of your of your financing options together with your financial situation. Real estate in today’s market can be very expensive and you don’t want to make a financial commitment that you simply cannot keep. The most common options for financing a home purchase are: FHA loans, conventional loans and personal financing from the seller or a member the homebuyer’s family.
An FHA loan (those that are backed by the Federal Housing Administration) allows a potential homebuyer to make a smaller down payment than what would be necessary with a conventional loan. With an FHA loan, a qualified homebuyer can put down as little as 3.5% of the purchase price. The downside of an FHA loan is the required mortgage insurance. Mortgage insurance is a monthly premium that insures full payment of the total loan amount to the lender if the homebuyer defaults on his or her payments. This premium does not help pay down the mortgage balance even if the homebuyer makes his or her monthly payments regularly. When a homebuyer is not in the position to get a conventional loan (either because he or she doesn't have enough credit or a strong work history), an FHA loan provides the homebuyer with an opportunity to work with a lender and receive interest rates that are in line with the market.
A homebuyer that can put 20% or more of the purchase price as a down payment, has a higher credit score and a stronger employment history can avoid mortgage insurance premiums by applying for a conventional loan. Qualifying for a conventional loan also requires a homebuyer to have enough monthly income with which to pay all of his or her monthly expenses in addition to the monthly loan payment, homeowner’s insurance and real estate property taxes.
Some homebuyers also get loans from members of their family to cover some, or all, of the purchase price. While negotiations with family can seem simple, a homebuyer must make sure that all parties involved with the loan understand every key aspect of the loan. Having a lending agreement that describes exactly how the loan will be paid, what will happen in the event that a payment cannot be made and whether the homebuyer is permitted to pay off the loan before the agreed upon maturity date are just some of the key points that should be discussed and put in writing.
On occasion, a seller that owns the property free and clear of any mortgages can offer to finance a homebuyer’s purchase him or herself. In this instance, a seller will act as the bank, receiving a monthly payment directly from the homebuyer. Seller financing isn’t common and these types of loans are usually short-term. Typically seller financing is done when a homeowner wants to sell their property quickly but potential purchasers are not in a good position to get a loan for the full purchase price. A homebuyer will use this period of seller financing to secure a loan from a lender to refinance. A form of seller financing may also include a lease-to-purchase arrangement where the deed remains in the name of the seller while the homebuyer gets his or her financial affairs in order to apply for a loan directly with a lender. As with loans from family members, a written agreement which details the arrangement between the parties is crucial.
Buying a home can be overwhelming, but the Law Offices of Clarissa R. Cartagena, LLC is here to help make the process run smoothly.
