Basic Methods of Financing

Sellers “Dream” as there is no question about ability to obtain a loan and earlier closing of escrow.  A cash offer usually gives the buyer the best price with least amount of costs. 

Obtaining a loan from a financial institution or seller financing.  Example #1
Sales Price                            $400,000
Downpayment                    $  80,000
First Mortgage                    $320,000
The lender will usually lend you 80% of the appraised value or sales price.  This is called a “loan to value” (LTV).  
Usually lenders require 20% down payment of the loan to value ratio.

If you finance more than 80% of the loan to value or put less than 20% down payment, the lender will require you to get private mortgage insurance (PMI) for conventional financing.

Buyers pay ‘points” at closing as a part of the loan fee for the privilege of borrowing money.  Usually in conventional financing, 1 point = 1% of the loan amount, or in this example $3200.

Assuming prevailing interest rate is 3.50%, monthly payment is as follows (amortized over 30 years):
$320,000     @        3.50%                        $1436.94     Principle & Interest
$320,000     @        3.75%                        $1481.97     Principle & Interest
$320,000     @        4.0%                          $1527.73     Principle & Interest
$320,000     @        4.25%                        $1574.21     Principle & Interest
$320,000     @        4.50%                        $1621.39     Principle & Interest

Lower rates allow you to either have a lower monthly payment or borrow more money for the same monthly payment.
As a General Rule – Lenders will use 33% of your gross income for housing less any long-term expenses.  This percentage is et by lenders and could change at their discretion.  Lenders are sometimes flexible, depending upon your down payment amount and long-term debts.

Another form of conventional financing and probably the most flexible type of financing available.  Adjustable Rate Mortgages (ARM) start with a lower interest rate and adjusts depending upon the type of program you go with.  There are 1 year ARMS, 3 year up to 7 year ARMS.  They usually have interest rate caps which regulate how much the interest will increase.  There is also a maximum cap over the life of the loan.  Most ARMS have conversion features to be able to convert to a fixed rate interest rate loan.

FHA financing was developed by the government to assist home buyers to purchase homes with relatively low down payments (as low as 3.5%) while at competitive interest rates and with easier qualifying ratios).  At this writing, lenders will allow up to 41% of your gross income on housing and other liabilities).  The maximum amount for an FHA loan may adjust annually and depends upon geographic location.  FHA makes this determination.  Buyers pay origination fee and may finance part of the closing costs.
Mortgage insurance is added to add FHA loans for the life of the loan.  Mortgage insurance amount may vary according to type of purchase (single family home or attached).

FHA interest rates are subject to prevailing rates.

Veterans, active service military, and families of veterans may purchase with no money down up to the VA maximum of their remaining amount of eligibility.
Mortgage insurance is NOT required.  Interest rates depend upon market conditions and unlike FHA, points may move up or down and paid by the seller. 
Buyers pay origination and funding fee depending upon loan to value.

This information is deemed reliable but not guaranteed as lending guidelines subject to change at lenders discretion.