Sign Our Guestbook | Contact Ann | Home Unless you are a cash buyer, you'll need financing to purchase your home. There is no "ideal" loan for everyone. Perhaps that's why there are so many options. Much depends on your financial history, your situation today and your future. Shop around for a lender. Lenders include: banks, savings & loans, credit unions, mortgage companies and public agencies (including cities). It's a good idea to talk to several. Compare interest rates and lender fees to make sure you get the best deal you can. Minnesota has hundreds of lenders to choose from and your real estate agent can refer you to several. If you have a solid credit history, a good steady income, and the prospect for reliable income in the future, you should have no trouble qualifying for a loan. The amount of the loan will depend on the size of your down payment and income minus fixed expenses. Chances are you'll choose from one of these types of loans: a conventional loan, a Federal Housing Administration (FHA) loan or a Veterans Administration (VA) loan (if you are a U.S. veteran). Any of these loans can be either a fixed rate loan or an adjustable rate mortgage (ARM) loan and can range in term from 10 to 30 years. If you don't have a large nest egg for a down payment, or you haven't always paid your bills on time, don't panic. There are some options for people who have so-so credit records and there are mortgage programs especially for people with low incomes and first-time buyers. Talk to a lender about your financial situation and see if you might qualify for one of these special programs. Here's a look at some of the various types of loans and the advantages and disadvantages of each. This should help you to determine the loan that is best-suited for you. Fixed Rate vs. Adjustable Rate Mortgages (ARM) Just as their names imply, a fixed rate mortgage is a mortgage that locks your into one rate for the entire duration of the loan. Adjustable rate mortgages, or ARMs, will adjust according to an index of the U.S. Treasury. Please keep in mind that you always have the option of refinancing your home. In doing so, you can change the status of your rate. Advantages of Fixed Rate Loans Certainty. You will always know what your rate is. There will be no wondering if your rate will rise. If the current interest rates are low, locking in at a fixed rate will ensure that when the rates begin to rise, you will continue to pay the low rate. Disadvantages of Fixed Rate Loans Be careful if the current interest rates are high. If this is the case, taking out a fixed rate loan will mean that you will pay the high rate, even if the current rates begin to fall. (Keep in mind that you can refinance your loan to a lower interest rate if market rates go down, but you may have to pay for an appraisal and closing costs again.) Advantages of ARMs Typically, ARMs have a starting rate of 1 to 3 points lower than fixed rate mortgages. Disadvantages of ARMs Your ARM could rise quickly. If this is the case, you could end up paying much more than the current fixed mortgage rate within a short period of time. Most ARMs are not convertible, meaning you won't have the option to switch to a fixed rate mortgage to protect yourself from rising interest rates. Your only option to escape paying a rising interest rate would be to refinance. To refinance, you'll have to requalify and pay closing costs. If your home's value has declined and you owe more than its current value, you may not be able to refinance. ARMs include "exotic" mortgages such as "interest-only" or "negatively amortized" loans where the borrower does not pay down the principal of the loan for a certain period of time or where the amount owed actually grows! Once the borrower is responsible to pay off the principal they may be unable to afford their payment. Federal Housing Administration (FHA) Loans The U.S. Department of Housing and Urban Development (HUD) guarantees loans for low- to moderate-income homebuyers. These loans are backed by the Federal Housing Administration (FHA). FHA loans are very popular for first-time homebuyers in Minnesota. If you qualify for an FHA loan, you will need to pay for an FHA appraiser to determine the value of the property. You will also need to pay for mortgage insurance. Advantages of FHA Loans You can make a lower down payment; the minimum required is 3½%. It is possible to qualify even if you have substantial long-term debt. The FHA will allow you to pay 43 percent of your income toward long-term debt. This includes your mortgage payment. (You may not be comfortable with such a large debt load, however.) If you take out an ARM FHA loan, the rate will only move 1 point per year. Disadvantages of FHA Loans You must pay an upfront mortgage insurance premium (MIP), which is equal to 1% of the loan amount on a 30-year term. You can pay this fee as part of your monthly loan payment. In addition, you must pay a monthly mortgage insurance premium (MIP) on a 30-year term, which is equal to .90% on homes with a loan-to-value (LTV) above 95% and .85% on homes with a LTV of 95% and below. Veterans Administration (VA) Loans These are available to people who have served in the military for a certain length of time. To see if you qualify, call 651-296-2562 or 1-800-827-1000. Surviving spouses are also eligible for VA loans. Advantages of VA Loans You can borrow the entire purchase price of the home. No down payment is required. Disadvantages of VA Loans You must pay a funding fee, which is 2% for veterans or those on active duty and 2¾% for those serving in the National Guard or reservists. You can pay this fee as part of your monthly loan payment. Assumable Mortgages FHA, VA and a few conventional loans are assumable. This means a buyer can take over the seller's loan and make the payments that were negotiated by the seller several years ago. You might not have to go through the qualification process to assume some conventional loans. But the FHA and VA loans may make you meet their qualification standards. Aside from the possibility of easy qualification, the advantages of assuming a loan have all but dried up in a time of low interest rates. Assumable mortgages may carry higher interest rates than those currently available, but they will generally have lower closing costs. Purchase-Rehab Loans A purchase-rehab loan allows you to borrow additional money to repair and improve the home you are buying. If you are buying a home in need of repairs or improvements, and many of the foreclosed homes on the market today fall into this category, this may be the best option for you unless you have deep pockets (cash reserves). The most common purchase-rehab loan is FHA's 203 (k) mortgage but some lenders offer conventional purchase-rehab mortgages. Most purchase-rehab loans are limited to owner-occupant borrowers and can be used for one-to-four unit dwellings. Here are some of the benefits and limitations of purchase-rehab loans. This is a general overview and much of the information will vary by lender and loan product. Purchase Agreement Before you submit a purchase agreement, it's important to have an idea of what work needs to be done and how much it will cost. Most lenders allow your rehab cost of $5,000 - $35,000. Be sure you can cancel the purchase agreement if the rehab costs end up being higher then you expect. Also make sure you request enough time to complete inspections and get estimates from contractors. Lender Walk-Through Most lenders conduct a walk-through. The purpose of the walk-through is to identify what rehab work needs to be done to make the property livable and safe. Any rehab work identified by the lender must be completed. Structural repairs, major remodeling/renovation and luxury improvements are generally not allowed with rehab loans. Contractor Bids (estimates) Once you and your lender decide what rehab work will be done, you are responsible for getting at least two estimates from licensed contractors. The lender reviews and approves the contractor and estimate. Rehab work must be done by a licensed contractor. Property Appraisal Once the lender approves the contractor and the estimate, they will have the property appraised. This is done to determine the "after-rehab value" of the home, taking into account the cost of the work. Rehabilitation Timeline Generally rehab work has to begin 30 days after closing and be completed within six months. You are responsible for paying your mortgage while the rehab work is being done. Also, consider your living arrangements and if you are going to be able to live in the home while the rehab work is being done. Completed rehab work is generally inspected by the lender before the contractor is paid. Both you and the lender are required to approve payments to the contractor. Only approve payments if you are satisfied with the work. Beware of Abusive and Predatory Lending Predatory lenders take advantage of people in difficult financial situations. They will exploit those who have a lack of financial knowledge, which is why it is easy for first-time buyers to fall victim to them. Be cautious and wary of offers with the following: High Interest Rates and Fees Some loans will contain hidden fees. Most fees are negotiable. Be knowledge of what your lender charges. Ask them up front for a list of their fees. Small Monthly Payments with a Large Balloon Payment at the End of the Loan Period Sometimes lenders will stretch out the payments so that your initial loan payments are small enough to afford. However, stretching out the payments on your loan may result in large unaffordable payments later on which can force you into obtaining another high interest loan to make final payment or selling your home. It is important to know what your payments will be over the life of the loan. Inflated Appraisals Remember that appraisals are only estimates of the property's worth. For instance, suppose you get a $200,000 loan based on an inflated appraisal. You will be held responsible to pay the $200,000 back in full even if your home only sells for $160,000. Whether you are a first-time homebuyer or looking to refinance, be careful of appraisals that overstate the value of your property. High Loan-To-Value Be extremely cautious of lenders or brokers who encourage you to borrow more than 80 percent of your home's value. A high loan-to-value ratio puts both your home and your financial record at great risk. Adjustable Rate Mortgages (ARMs) As opposed to a fixed rate loan, the interest rate on ARMs fluctuates according to the market. Watch out for ARMs with tempting low introductory rates. Just because you can afford mortgage payments at the present interest rate doesn't mean that you will be able to do so if the interest rate rises. Prepayment Penalties These are fees designed to penalize consumers from paying off some or their entire loan early. Facing prepayment penalties, consumers may stay locked into high interest rate loans because it would be too expensive to pay the penalty. Minnesota law requires lenders to disclose these types of penalties at the time of application. The penalty can only be up to two percent of the unpaid principal or 60 days interest on the unpaid principal, whichever is less. A penalty cannot be imposed beyond 42 months of the loan, or upon the payoff of the loan as a result of the sale of the property. Mortgage Insurance Depending on your loan type and the amount of your down payment, you may be required to purchase mortgage insurance. If you made less than a 20% down payment on a conventional loan, you will need to purchase Private Mortgage Insurance (PMI), which is paid monthly. Once you gain 20% of your equity, then you may be released from this insurance. If you have an FHA loan, you will need to pay an upfront and a monthly mortgage insurance premium (MIP). You cannot cancel your MIP under Minnesota law. Property Appraisal To approve your loan, your lender will require a property appraisal to ensure that the amount of the loan is appropriate for the condition of the property. An appraisal is an estimate of the property's fair market value. Homeowner's Insurance Another requirement of the lender will be that you have the property insured. This also insures their investment in the property. Be sure to shop around to avoid overpaying. Keep in mind that an insurance company will not only look at the current condition of the home, but they will also look at any past claims on the property, along with any past claims that you have made on any other properties. Depending on the location of the property (meaning county, city, and zip code), you may pay a higher premium. The insurer will also look at your age, if you have children and if you have any pets. A cost-saving tip is to use the same insurance company that the previous homeowner used or the same insurance company that insures your automobile. Title Insurance The title insurance policy you will be required to pay for at closing protects the lender in case the legal title of the property isn't clear. It doesn't protect you; therefore, you may want to buy an owner's title insurance policy, too. Some events that could result in an unclear title would be if a spouse wasn't living in the property at the time of sale, then later decides they want to claim it, or if the property was left to another party in a will. Escrow Your lender may require you to escrow monthly payments for things such as insurance and real estate taxes. The amount of these expenses will be included in your monthly mortgage payments. _________________________________________________________________________ Mavrik Realty is not engaged in the practice of law nor gives legal advice. It is strongly recommended that you seek appropriate professional counsel regarding your rights and responsibilities as a homebuyer and homeowner. Click here for the entire 6-page printable PDF file for "Buying A Home"

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2105 Southview Blvd.
South St. Paul, MN 55075

Ann Leviton, Broker/Owner
CDPE, CRS, ABR, GRI
Cell Phone 612-270-5722
Office 651-457-3369
Fax 651-457-9533