A buydown is a type of financing where the buyer or seller pays extra points (also called discount points) to reduce the interest rate on a loan. Buydowns make it easier to qualify for a loan because they lower a loan's interest rate. They can also allow you to buy more house for your money.
There are generally two types of buydowns: a permanent buydown and a temporary buydown. A permanent buydown lets you pay extra points to get a low interest rate over the life of your loan.
A permanent buydown can be paid by the seller or the builder to incentivize finalizing a sale by creating lower monthly payments. Assisting with a buydown may be beneficial to sellers as well, if they are having difficulty selling their property, or if market conditions are slower. It increases the buyer’s ability to qualify for a loan, therefore, allowing the home to be sold quicker. Plus, a buydown offer is usually less than a price reduction on the home.
In a temporary buydown, you prepay interest in exchange for a lower rate during the early years of a loan. The most common temporary buydown is called 3-2-1, meaning the mortgage payment in years one, two and three is calculated at rates 3 percent, 2 percent and 1 percent, respectively, below the rate on the loan. On a 2-1 buydown, the payment in years one and two is calculated at rates 2 percent and 1 percent below the loan rate. And on a 1-0 buydown, the payment in year one is calculated at 1 percent below the loan rate.
A temporary buydown can be a benefit to a buyer whose current income is low but anticipates that it will increase during the next two years. First-time homebuyers who need to purchase all of the furnishings that go into a new home may also find a temporary buydown appealing.
Down payment funding alternatives
For many buyers, especially first-time buyers, saving up the funds for the down payment can be a seemingly insurmountable hurdle to home ownership. This doesn’t have to be the case. As your loan originator, I can help you find creative ways to come up with your down payment.
Using a gift for your down paymentOne way to fund a down payment is by using a gift. For many loan programs, a gift may be used for a portion or all of the required down payment. Money given as a gift for a down payment can’t come from anyone. Family members are the usual source, but an employer may also be acceptable. If this is an option open to you, please let me know. I can help you determine which loan programs accept gift funds for down payments and who may give the gift. I’ll also supply the gift letter that the person giving the gift is required to sign. The gift letter states that the funds are a gift and will not be paid back.
Down payment assistance charities
If a willing and able family member is not available, buyers now have the option of turning to a non-profit for down payment assistance.
Caution should be taken when searching for a down payment assistance charity (aka down payment assistance program). There are many reputable organizations providing buyer assistance, but there are dubious ones as well. You may want to research the charity with the Home Gift Providers Association (HGPA) (http://www.downpaymentalliance.org/) before making a commitment.
Generally, a down payment assistance charity will give the buyer money for a down payment that does not have to be repaid. The seller will contribute an equal sum to the charity at closing or soon after. The seller will also pay an administration fee to the charity. Sounds good, right?
This can be a good option for buyers who don’t have other means of securing a down payment. However, you should be aware that this means of funding the down payment may inflate the selling price of the house. You’ll want to consult with your real estate professional about how such a program may affect the selling price.
Zero down mortgage loans
Service persons and veterans can qualify for a VA Loan that requires no down payment. VA Loans are guaranteed by the U.S. Department of Veterans Affairs. In addition to no down payment, these loans usually offer a competitive fixed interest rate and limited closing costs. While the VA does not issue the loans, it does issue a certificate of eligibility required to apply for a VA loan.
There are also private sector alternatives that offer 100% financing of the home purchase price. Let me help you find the down payment and mortgage alternative that’s right for you.
Save money during the holidays and buy that dream house in the New Year
The holidays can put a dent in your savings especially if you're planning to buy a home. But there are several ways to cut costs so your finances aren't in the red by New Year's Day. Consider the following money saving tips:
Avoid Holiday Theft
Although we'd like to believe the holidays bring out peace on earth and good will towards men (as the Christmas carol goes), the weeks between Thanksgiving and New Year's Day tend to be a prime season for criminals. However, do not worry, as there are some easy precautions you can take to prevent becoming a victim of theft. To best protect yourself and your belongings, consider the following safety tips:
When holiday shopping:
With everything going on during the holidays, it's easy to become careless and vulnerable to theft and other holiday crime. Protecting yourself and your home from potential crime is the easiest way to ensure a safe and happy holiday season.
VA loans are made by private lenders, and guaranteed by the U.S. Department of Veteran Affairs (VA) to qualifying veterans for the purchase of a home. The guarantee means that the lender is protected against loss if you fail to repay the loan. Most of the time, there is no required down payment on a VA loan, and the borrower often receives a lower interest rate than is available with other loans.
Other benefits of a VA loan include:
Although mortgage insurance isn't a requirement, the VA charges a funding fee to issue a guarantee to a lender against borrower default on a mortgage. The fee may be financed in the loan amount, or paid in cash by the buyer or seller.
A VA loan can be used to buy or build a home, or improve a home with energy-saving features such as solar or heating/cooling systems, water heaters, insulation, weather-stripping/ caulking, storm windows/doors or other energy efficient improvements approved by the lender and VA.
Veterans can apply for a VA loan with any mortgage lender that participates in the VA home loan program. A Certificate of Eligibility from the VA must be presented to the lender to qualify for the loan.
Why might you need an appraisal? How do appraisals work?
In many cases, lenders need a professional, independent appraisal of the property you want to buy or refinance to ensure that it is worth at least as much as they are being asked to lend on it. If you are making a smaller down payment and have a lower credit score, the lender is going to be even more interested in making sure the property that will be collateral for the loan is worth lending the amount requested.
A professional, independent appraiser will usually visit your home and inspect its interior and exterior. The appraiser doesn't want to buy your home, and isn't a visiting head of state. So whatever you do, do not postpone the appraisal until you get a chance to "clean up a little." Cleaning does not make your appraised value higher! And delaying adds time to an already lengthy process.
The appraiser will form an opinion on the probable market value of the property considering sales of similar homes in the area among other factors. He or she will prepare an appraisal report explaining the conclusion. The appraisal belongs to the lender considering lending money with the home as collateral. Often, you can receive a copy of the appraisal either as a courtesy or in keeping with state law. Let us know you're interested and we'll help.
The lender wants to know first of all whether the property is worth at least as much as the loan amount. In the unlikely event the lender would have to foreclose, it wants to know it should be able to recoup at least the loan amount. But if your loan program depends on you borrowing, for example, 95 percent of the property's value and no more, the appraisal can impact your eligibility for the loan that's right for you. In a "close" case like that, the best solution is almost always to increase your down payment, or we can help find another solution such as another loan program that works.
An appraisal can cost from $200 to $500 or more for very complex properties. You as the borrower repay the lender for its cost in paying the appraisal fee upon settlement of the loan.
Are you pre-qualified or pre-approved for a loan?
Before you start shopping for your new home, give me a call so we can figure out how much you will be able to afford. As a buyer, this will put you in a better position. It is during this time that it is crucial to understand the difference between being pre-qualified for a loan, and being pre-approved for a loan. You will need to know the difference between these two terms later when you decide to make an offer on a house.
To get pre-qualified for a loan, I will analyze information regarding your debt, income, and assets. We will look at your credit profile and assess goals for a down payment and look at different loan programs that will work for you. I will then issue you a pre-qualification letter indicating the amount you are pre-qualified to borrow.
It is important to understand that a pre-qualification letter is merely an estimate of what you are eligible to borrow, not a commitment to lend. Getting pre-approved for a loan gives you competitive advantage when the time comes to bid on a home because you have already been approved for a loan for a specified amount.
To get pre-approved, you will complete a mortgage application and provide me with various information verifying your employment, assets and financial status, such as W-2 forms, bank records and credit card statements. We will look over your mortgage options and submit your application to the lender that best meets your needs. Once the application process is complete you will receive a pre-approval letter indicating the amount your lender is willing to lend you for your home.
A pre-approval letter is not binding on the lender; it is subject to an appraisal of the home you wish to purchase and certain other conditions. If your financial situation changes (e.g. you lose your job), interest rates rise or a specified expiration date passes, your lender must review your situation and recalculate your mortgage amount accordingly.
Your credit report is a record of your credit activities. It lists all of your credit card accounts and loans, the balances as well as your payment history. Your credit report will also show any action that has been taken against you for unpaid bills, such as a lawsuit or filing bankruptcy. It is imperative that the information in your report is complete, accurate, and up to date. Businesses use this information to evaluate your applications for employment, insurance, and credit, so it's important that you keep up with your credit report.
The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission (FTC), is designed to promote accuracy and ensure the privacy of the information used in consumer reports. Under the FCRA, both the credit reporting agency (CRA) and the organization that provided the information to the CRA (usually the credit card company) must correct any errors or incomplete information in your report.
If you do encounter a mistake on your credit report, several steps need to be taken to correct the matter:
1. The first thing you need to do is get a copy of your credit report from each of the three major CRAs: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com.
2 In a written letter, tell the CRA what information you believe to be inaccurate. Include copies (not originals) of documents that support your position. Provide your complete name and address, identify each item in your report you dispute, and request deletion or correction. Be sure to make copies of your dispute letter and enclosures.
3. Send your letter by certified mail, return receipt requested, so you can document what the CRA received.
4. The FCRA mandates that all CRAs reinvestigate the items in question — usually within 30 days — unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the credit card company. After the credit card company receives notice of a dispute from the CRA, it must investigate, review all relevant information and report the results to the CRA.
5. If the disputed information is found to be inaccurate, the credit card company must notify all nationwide CRAs so they can correct this information in your file. Disputed information that cannot be verified must be deleted from your file.
6. When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the credit card company verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the credit card company.
7. In addition to the CRA, you should also write to the credit card company about the error. Again, include copies of documents that support your dispute. If you are correct — meaning the information you disputed is found inaccurate — the credit card company cannot use it again. Further, at your request, the CRA must send notices of corrections to anyone who received your report in the past six months.
How can you improve your credit score?
It's basically impossible to change your score in the time between when you choose to purchase a home or refinance your mortgage, and when you apply for a loan. So the short answer is, you really can't "on the spot." But there certainly are strategies you can live with to make sure when you apply for a loan your score is as high as possible.
Make sure that the information that each of the three credit reporting bureaus has on you is consistent and up to date. Order a copy of your credit report about once a year, and dispute any inaccuracies.
Note: In theory, if a series of credit reports is requested on your behalf during a limited amount of time, your score goes down until time passes without any inquiries. However, changes in the law though have made "consumer-originating" credit report requests count less. Also, a series of requests in relation to getting a mortgage or car loan is not treated the same as a number of credit card requests in a limited time. This is because the credit bureaus, and lenders, realize that people request their own credit reports to keep up with what's on them, and smart consumers will shop around for the best mortgage and car loans.
However, unsolicited credit card solicitations in the mail will not count against your credit report, so don't worry.
There are two main components of your credit score: your payment history, and the amounts you owe. Bankruptcy filings and foreclosures, which can stay on your credit report for up to 10 years, can significantly lower your score. It's important to manage your credit so that you do not take on more credit than you can handle.
Late payments work against you, so it's extremely important that you pay your bills on time, even if it's just the monthly payment.
Don't "max out" your credit lines. Since the size of the balance on your open accounts is a factor, lower balances are better.
It's said that by carefully managing your credit, it's possible to add as much as 50 points per year to your score. It isn't easy to do, but it is absolutely worth it!
Before you begin to shop for a new home, you should set up a time to meet with me so we can figure out how much you can afford. This will put you in a better position as a buyer. That’s when it is important to understand the distinction between being pre-qualified for a loan and pre-approved for a loan. The difference between the two terms will be crucial when you decide to make an offer on a house.
To get pre-qualified for a loan, I will collect information about your debt, income, and assets. We’ll look at your credit profile and assess goals for a down payment and get an idea of different loan programs that would work for you. I will issue you a pre-qualification letter indicating the amount you are pre-qualified to borrow.
It is important to understand that a pre-qualification letter is just an estimate of what you are eligible to borrow, not a commitment to lend. Getting pre-approved for a loan gives you competitive advantage when the time comes to bid on a home because you have been approved for a loan for a specified amount.
To get pre-approved, you will complete a mortgage application and provide me with various information verifying your employment, assets and financial status such as W-2 forms, bank records and credit card statements. We’ll review your mortgage options and submit your application to the lender that best meets your needs. Once the application process is complete you will receive a pre-approval letter indicating the amount your lender is willing to lend you for your home.
Looking to get pre-qualified or pre-approved? Contact Don Spears with Executive Lending Group at (405) 615-8543.