Pick Your Loan Program First to Accurately find your price range

I certainly don’t want to insult anyone’s intelligence, and finances are a senstive subject, especially since many of you have never met me.  If we’re speaking on the phone about buying a home, or about selling a home, I pretty much assume you’re capable of getting financing, or you wouldn’t be wasting your time.  So, unless you tell me you need some special help, I assume you know you’re qualified.  What many people don’t realize is that how much you can qualify for has a lot to do with the loan program you pick.  Not only what you can qualify for, but the price range that translates from your monthly housing budget.  Just because you can qualify for a $300,000 house doesn’t necessarily mean that you can afford your lifestyle, if you pick out a home at the max for which you can qualify.  Cara and I like to have fun, and when we have fun, we usually like to eat.  And when we eat out, we spend more money.  And at $2.69/gallon for gas, my Toyota 4 Runner is probably going to drink a few bucks worth of gas each time we go out to have fun.  We also have a Senior in College that is coming home for the summer.  So our outgo is going to go up there as well.  So basically what I’m saying, is that just because your mortgage loan officer tells you that you can qualify for a $300,000 house, doesn’t mean that it is a good decision for your family to buy a home that expensive.  It depends on your family’s decisions about other things that cost money.  Lenders aren’t always as generous as you might expect with all this information, so you might have to do some digging.  They don’t like to be shopped around, so don’t be afraid to ask questions until you understand the whole equation.  Ask your lender for a written “Good Faith Estimate” and a Payment breakdown for the programs they’re recommending.  We suggest getting three, and then picking the lender with the best reputation and competitive rates and fees. 

 Why is the program so important?  Well, because there are a few things that directly affect the calculations from monthly payment to purchase price.  Here are all the pieces so you know:

Down Payment is going to reduce your loan amount relative to the purchase price, so therefore, your payment. 

Principle  The principle component of your payment goes toward paying off the loan.  The principal portion of an interest only loan is zero.  The principle portion of a 15 year term loan is going to be higher than that of a 30 year fixed term loan.

Interest The amount of interest you pay is the remaining loan amount times the interest rate, divided by twelve.  Different loan programs have different rates.  Adjustable rate loans have lower interest rates.  15 year loans have lower interest rates than 30.  But the principle component is much higher.  If you are going to do two mortgages, or a mortgage and an equity line, then they will both have different rates.  The rates on seconds can be three points higher, so you need to know the total interest cost of both loans. 

Taxes Most lenders are going to pay your taxes and insurance out of an escrow account.  So your payment is going to have a tax and an insurance component.  Taxes on a Charleston home are going to be about 1.1%, or they would be if the assessed value equaled the purchase price…which it won’t.  Because of the rate at which properties have been appreciating here, the assessed values on the tax record are usually much lower.   Even though it takes about two minutes to look up, most listings on the MLS don’t post the taxes the current owner is paying because most agents are either incapable or just lazy.  If you’re buying a home in the next ninety days and want to know what the taxes are on a particular house, just email me the MLS number at jimadams@kwcharleston.com and I’ll look it up for you.  As a primary residence, your home will qualify for a 4% assessment ratio versus a 6% ratio for investors.  (then the mil rate is used)  So if the property in question is an investment property, and it’s going to be your primary residence, your taxes should be about 2/3.

Hazard Insurance Your lender is going to require you to insure the property, and the best way to find out a rate is to call your insurance agent, or that of the current seller.  All properties are in a flood zone of some sort, but only some flood zone designations require special insurance.  The designation you’re lookingn for that doesn’t require flood insurance is “X”.  http://www.floodsmart.gov/floodsmart/pages/riskassesment/findpropertyform.jsp is a resource you can use as well. 

Private Mortgage Insurance Lenders figure they can liquidate a home for 80% if the borrower defaults.  So, if you don’t put down 20%, they may expect you to carry Private Mortgage Insurance.  That’s why people do 80/20’s…to avoid PMI.  But you need to have it calculated both ways so you know which is going to offer you the best deal.  If the rate on the second is too high, you might be better off with PMI. 

Closing costs Lenders can add “junk fees”, especially when they hear their prospective customer shopping rate.  There are fees that are standard, and some that are not.  They will be disclosed in a “good faith estimate”, so ask for one in writing so you can see what they are.   If you’re considering VA, you need to look at other options as well.  VA lending was created at a time when you had to have a 10% down payment to buy a home.  That’s no longer the case.  I’m not saying not to use your VA benefit, only to look at other programs and pick the best one. 

I hope you’ve found this helpful.  It depends on the range what will lead you to a reasonable search.  As an example, if you’re looking around $200,000, you need to have your range down to about $20,000 or there are just go to be too many homes in your search results.  People always want to know what is the sales price to list price ratio.  It was around 98% but is dropping.  Just ask me what the range is in the specific area in which we’re looking.  Also, just because it’s 98%, doesn’t mean we can’t work a little harder and smarter and find a motivated seller.  It’s possible to save a few thousand from the start, but honestly, requires a little good old fashioned luck to get your first pick, and negotiate with a motivated seller.  Sometimes, it’s worth paying a little more to get your first pick, but we’re gotton lucky several times…you know what they say…the harder you work, the luckier you get. 

Picking a Lender I’ve interviewed dozens of lenders, and I recommend Josh Feldman with Countrywide www.joshuafeldman.net to everyone I speak to.  He hasn’t let me down yet.  I have others that I send people to to get competitive quotes and most people end up picking Josh.  I don’t get any back end money; we just want you to get the best deal with the best service.  (I think he sent me a Christmas Card, but he missed my birthday)  Whenever my clients have problems, it’s always because the buyer has picked joe bag-o-donuts mortgage company and there’s some reason or excuse why we’re delayed, or the costs went up, or they can’t do the deal at all. 

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