|
|
|
You've decided to buy a home and now you have to decide what kind of financing you wish to use to complete the purchase. Maybe you have the ability to pay cash for the home, but this isn't always your best option.
The time to think about your options is before you have the pressure of having a contract on a home. It is ALWAYS better to get pre-approved for your mortgage rather than to wait until you've found your property.
Pre-Approval
A pre-approval is when you make application with a lender, provide them with the 
documentation needed by your loan program and the lender actually processes the credit and employment portions of the loan application. Basically, the only thing that the lender doesn't do is the appraisal and the title work on the property. When you locate the right property and get it under contract, the lender will then process these portions of the loan.
With a pre-approval if there are any problems with your loan application such as a mistake on your credit report or confusion about your employment status,etc., then you have the luxury of having time to fix the problem or to work around the problem without the pressure of having a home on the line.
Another advantage of being pre-approved is that it makes you a lot more like a cash buyer. The seller will know that you are able to complete the transaction as long as the appraisal and title work come in with no surprises. If you were looking at two contracts on a piece of property that you owned and one contract came with a solid pre-approval and the other not, which would you chose? If there were only one contract on your property, but it was for a bit less than you had hoped. Would you give it more consideration if the buyer had already had their credit pulled, employment checked and had a lender give them the thumbs up?
A pre-approval is different than a "pre-qualification". In a pre-qual the lender takes what you tell them at face value or maybe does a cursory glance at your employment documentation and tells you if you will "qualify" for a mortgage. Sometimes, the lender will go as far as pulling a credit report on you as well, which is better than not pulling a credit report, but still not as good as having the credit/employment portions of the application fully processed.
Which Mortgage Program Is Right For You?
There is a dizzying array of mortgage products out there for you to choose from. Far too many to go into each and every loan program available to you here on this section of our site. If you are interested in a more detailed examination of the various mortgage programs available click on "Mortgage Options".
That said, we will go into some of the basics here such as; Should you pay cash for the home or how much should I put down on the home? What's the difference between Conventional Mortgages, FHA Mortgages and a VA Mortgage? What if I've had credit problems before?
Should You Pay Cash For A Home Or How Much Should I Put Down On The Home?
If you've got the ability to pay cash for a home, should you? Maybe you can't afford to pay cash, but you have the ability to put down a sizable amount? How much of my cash should I put into this transaction? These are all questions that you need to think about ahead of time when purchasing a home.
Most people think that the truly conservative thing to do, if they have the ability to, is to pay cash for the home. This is not always the case. It depends upon your financial circumstances, your age and some other considerations.
If you enough money to pay cash for the home and still have a considerable amount left over, then paying cash might not be a bad thing. You won't have to mess around with having a lender and making payments, etc.
There are however, tax advantages of having a mortgage on your home and since
mortgages are one of the least expensive sources of capital, it's not impossible to invest your money in such a way that you end up making more than it costs you to borrow for your home purchase. If this is the case, the "spread" (that is the difference between what you are borrowing at and what you are lending at) is called profit! At this point in your home search you might want to talk to your financial adviser and bounce this off of him or her. Remember that no investment is without risks, but there are several investment options out there where the risk is minimal and the return can be higher than the rate that you will be paying on your mortgage.
The same can be said when you are considering how much money to put down on a home. The more you put down on the home, the less your payment is going to be. However, if you are making more from investing the money than you are saving by putting it down on the property, then you might be better leaving the money invested and borrowing more.
Generally speaking, if you can put 20% down on the purchase you can avoid the requirement of having PMI (Private Mortgage Insurance) which is an insurance policy that protects the lender in the event of your default. There are other ways around PMI which we go into greater detail on in the "Mortgage Options" section of our web page.
Tax and investment considerations aside, one other thing that you need to consider when deciding how much money to put down on the purchase of a home is called "liquidity". Liquidity is basically how much cash cushion do you have in the event that you need it.
If you put all of your cash into the down payment, what would happen to you if you lost your job or needed cash for an emergency situation. Once the money is put down on your home it is transformed out of cash and into what is called "equity". It doesn't disappear, but it does become more difficult to get at.
If you need access to it, you will either have to sell the property or borrow it back out at a time when your ability to borrow might be compromised. Also, even if you are able to borrow the money back out, there might be a delay in the time that it takes to process and close on that loan. This can be circumvented by establishing a "home equity line of credit" against the property, but it is something that you need to consider before paying cash or putting extra money down on the property. This phenomenon is called a "Liquidity Crunch".
Considering Your Financing Options Continued (Next)
Click Here To Go Back Buyer's Information And Tools
Click Here To Go Back To Main Page
Click Here To Go Back To Top Of The Page