Financing a Home Purchase...

Whether you are buying an investment property or your American Dream in Huntington Beach, unless you are planning to pay cash, you will need to finance your purchase usually through a mortgage, that is, borrow money from a lender (mutual savings company, bank, mortgage company, institution, etc.) at some designated interest rate and pay it back over a period of years. Interest is the charge a lender imposes for borrowing money.

For several years now, interest rates have been at historical lows, which have allowed many people to buy a home who otherwise would not have been able to afford one. At the same time, the low interest rates and high demand have driven housing prices to historical highs as well. The houseing market is gradually normalizing as prices are stabilizing, inventory (houses on the market) is growing slightly, and the Fed has started to inch-up interest rates.  Still, competition for your business among lenders appears to be a significant factor in keeping mortgage rates down.

HOW MUCH HOUSE CAN YOU AFFORD?

Today there are many programs available to assist prospective buyers in finding and financing their American Dream. In addition to the conventional 15- and 30-year fixed rates, there are attractive Adjustable Rate Mortgages (ARMs) that offer 3-5 year "fixed" rates that can lower monthly payments substantially. There are also "interest only" payment schedules that can decrease your monthly housing outlay even farther.

Still, no one can predict how social, economic, and political events will affect future mortgage interest rates. Some buyers who are fully leveraged, that is, who have borrowed as much as possible to buy their homes -- sometimes as much as 100 percent with none of their own money as a down payment -- may find themselves in a financial crunch as interest rates increase and housing prices decline. So, in determining how much house you can afford, you should carefully evaluate your income and budget. As a general rule of thumb, count on spending about 33 percent of your gross monthly income on your mortgage payment, including the loan with interest, property taxes, homeowner's insurance, homeowner association fees if applicable, etc. Can you make a down payment? It used to be that 20 percent was the traditional amount on a conventional loan. (VA loans do not require a down payment, and the amount required on an FHA loan is usually between 3-5 percent.) Of course, the larger the down payment is, the smaller the loan and the greater the equity (an owner's value over and above the loan amount) in your property. If you do put less than 20 percent down, the lender will probably require you to carry private mortgage insurance (PMI) on the difference.

At closing there will be other fees such as loan origination fees, escrow charges, and points. (1 point = 1% of the borrowed sum. The number of points you may have to pay is negotiable with your lender, but in general the fewer the points paid, the higher the interest rate.) You can use a mortgage calculator for a preliminary assessment of the amount of house you can afford given a specific interest rate and term of the loan.

THE LOAN APPLICATION PROCESS

Before making an offer on a home, it is a good idea to get "pre-approved' by a lender as it will put you in a stronger negotiating position with the seller. Pre-approval means that a lender will conduct an analysis of your income and assets, current housing and non-housing expenses and other liabilities (debt), and then arrive at a judgement as to the size of the loan the lender is willing to make. At Prudential California Realty, we work with numerous lenders who can assist in this process and get you pre-approved quickly.

In addition, the following information is typically needed in applying for a mortgage:

• Purchase contract and property information
• Personal information including past addresses and contract information
• Employment history and income including pay stubs, W2s, and tax returns
• Assets: bank statements, stocks, other real estate, pension, life insurance, etc.
• Liabilities and debts with history and explanation of any credit problems
• Fees for credit report plus appraisal (usually under $500)

Jim Alvino will work closely with you in filling out the loan application, reviewing your financing options, finding you the right home in Huntington Beach and surrounding areas to your specifications, preparing your offer, reaching an agreement with the seller, and completing the settlement process.