Financing A Home

Real Estate

FINANCING A HOME

METHODS OF FINANCING

  Almost everyone who buys a house borrows money to pay for it. This is done most often through a note and   mortgage, but is sometimes done by contract for deed.

mortgage involves making the house itself the security for the loan. The buyer receives the deed from the seller   and becomes the legal owner. The buyer gives the lender the right to foreclose and obtain possession of the
house   if he/she fails to repay the loan. This is called a mortgage. Payments are generally made monthly, which   include part of the principal and part of the interest.

contract for deed is a contract where the seller, in effect, lends the buyer the money to buy the house. The
seller remains the legal owner of the property as security until the contract is paid. Contract for deed sales are   usually made when a mortgage loan cannot be obtained, and the buyer and seller are both eager to do business.

 

CONSIDERATIONS

  Rate of Interest. Interest rates vary depending upon the nature of the loan and the economic conditions. Shop for   the best possible rate available when considering a purchase of real property.

  Length of Mortgage Period. The longer the mortgage, the lower the monthly payment. However, the total interest   paid is more. Most home mortgages are for 15 to 30 years. Some loans are obtained with a “balloon” payment,   which permits smaller monthly payments for a time period, and then the unpaid balance is due.

  Acceleration Clauses. One should pay careful attention to what will happen if payments are not made timely. In   many cases, the failure to meet payment requirements causes the entire debt to become due.

  Prepayment Clauses. This permits paying off the mortgage before the end of its term. This right is necessary if   refinancing is to be possible, or if the borrower wants to sell before the mortgage is paid. Some lenders charge a   penalty for prepayment.

  Due-on-Sale Clause. If a mortgage contains this clause, the mortgagor is required to pay off the mortgage debt,
at the lender’s option, when the property is sold. This eliminates the possibility of the buyer assuming the   mortgage without the lender’s consent.

  Insurance and Taxes. The borrower will be required by the lender to maintain insurance on the property as a   protection against loss. The borrower may be required to pre-pay the property taxes to the lender, either in a
lump sum or on a monthly basis as a part of the payment to the lender. The insurance premium may also be part
of the monthly payment.

  Downpayment. In most cases, to obtain a mortgage loan, a downpayment is made. The amount depends upon
the lender and type of loan.

  Fees. When a borrower asks for a mortgage loan, the lender incurs a number of expenses, including such things
as the time the loan officer spends interviewing the borrower, office overhead, the purchase and review of credit   reports, title searches, legal and recording fees, and so on. The general practice is for lenders to charge 1% to 2%   of the amount of the loan. This is commonly known as the “Origination Fee.”

  Points. Points are percentage points of the amount of the loan. One point = 1%. Points are charged to raise the   lender’s yield. For example, a lender may be willing to offer an interest rate that is lower than the general market   rate and in return require the borrower to pay “points”. The points are payable at closing.

  Adjustable Rate Mortgages. Adjustable rate mortgages are generally originated at one rate of interest, with the   rate fluctuating up or down during the loan term base upon economic conditions. Generally, interest rate   adjustments are limited to one each year, and there are a maximum number of increases that may be made over   the life of the loan.

 

TYPES OF LOANS

  Real estate loans today are categorized into three general types: 

Veterans Administration. (VA) direct loan and loan guaranty program; Federal Housing Administration (FHA)   insured loan; and the conventional loan which is any loan not guaranteed or insured by a federal or state agency.

  Veterans Administration Loan. The main purpose of the VA loan is to assist veterans in financing the purchase of   reasonably priced homes, including condominium units and mobile homes, with small or no downpayments. The   financing is limited to owner-occupied residential (1 to 4 family) dwellings.

  Federal Housing Administration Loan. Purchasers wishing to use an FHA-insured mortgage must meet certain   criteria. A charge will be made to the borrower as the premium for the FHA insurance. This protects the lender from   loss. The property must be appraised by an FHA appraiser before the loan is made.

  Conventional Loan. This type of loan is not insured by the government or guaranteed. The risk is therefore higher   for the lender, which is reflected by higher interest rates and a larger downpayment requirement. Lenders
establish specific terms of the loan, and can vary according to market conditions, consumer needs, and state   regulations.