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Purchase
Loan Topics
100%
Financing or 0% Down Loans
Avoid
Mortgage Insurance with 80/10/10 Financing
No
Cost Purchases
Purchase
Pre-Approvals
No
Income Documentation Loans
How
Much Home Can You Afford?
Yes, it's true! There is such a thing as
100% financing- with no money down. Borrowers may keep all of the
down payment in reserve (investments) and pledge the assets
instead. The interest costs are higher in this type of loan, but
the interest the down payment money earns in the investment may well
make this a worthwhile situation. As a rule of thumb, fully leveraging
your real estate purchase would make the most sense if your investment
returns were better than 3% over the prevailing 30 year fixed
rate.
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If you purchase your home with less than 20%
down, chances are you will obtain a loan that is insured by ``Mortgage
Insurance'' (MI). Private mortgage insurance or MI is a type of
insurance provided by a private mortgage insurance company to protect a
lender in the event of default on a loan. This type of insurance is
generally required when a borrower has less than 20% equity in a home;
i.e. the loan amount divided by the property value is 80.01% or greater.
As your home appreciates or your loan balance decreases (or a
combination of the two), and your equity in the home exceeds 20%, you
may petition the mortgage holder to drop the MI. This process may be
cumbersome or difficult.
One way to avoid paying MI is to purchase a home with a combination
first and second mortgage. The first mortgage would be limited to 80% of
the home's appraised value. The second mortgage, which would close in
conjunction with the first, would then provide for the difference
between the home's purchase price, less the 80% first mortgage, less the
down payment available . In other words, if you have a 10% down payment
available, your first loan would provide for the 80% mortgage with a
second mortgage of 10%. This is commonly referred to as an 80 -10 -10
transaction.
Another way to avoid incurring MI payments is to find a lender that
offers self-insured programs. This type of loan would have a higher
interest rate in place of the private mortgage insurance premium. While
mortgage insurance premium payments are not tax deductible, the interest
associated with a self-insured mortgage would be fully tax deductible.
The decision of whether to obtain a loan with mortgage insurance versus
the above two options should take into account the combined total
monthly payments of the various options, adjusted for the tax benefits
of interest deductions.
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In a purchase situation a no closing cost
option can work extremely well when the borrower has limited funds
available for closing or when the rate market is declining and the
borrower may want to refinance quickly. No closing cost loans can be
used effectively to free up more cash for the down payment or save for
repairs or other uses. If the seller can not credit for closing costs
(due to low equity or other reasons), a no closing cost loan is the next
best alternative.
In some cases no closing cost loans can give a borrower more cash than
is needed for the direct closing costs. As long as this does not exceed
the lender's guidelines (typically 3% of the purchase price in overall
credits), this cash can be applied to other costs in the transaction.
One important item to remember is that a no closing cost loan will not
have points, and thus no deduction for that
cost. Additionally, the other costs are paid for and no deduction is
available. If you are purchasing a home, points and some costs are
generally entirely deductible in the year you buy. This is true even if
the seller is paying for your points.
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A
purchase preapproval is a lender's analysis of you as a borrower without
specific property information. In other words, your loan information is
submitted to a lender for full underwriting and includes all borrower
details, such as employment information, asset information, and credit
history. The lender then approves you as a borrower, subject to a
maximum loan amount, down payment, and interest rate.
Getting preapproved for a loan is critical in today's real estate
environment. Many Realtors do not want to accept offers from buyers
unless their home loan has already been approved by a lender. By
going through the loan process prior to being in contract on a home, you
can eliminate all of the obstacles to borrowing without jeopardizing an
actual purchase transaction. Once your loan is approved, your real loan
closing will be quick and subject only to a satisfactory appraisal and
title report on the home.
To begin the preapproval process you need to make some assumptions for
your purchase price, loan amount, and loan program. Any of these
assumptions can change once you've found your home, but it helps to do
the following:
1- Complete your application for the
maximum loan amount and purchase price that you're interested in. You
can always reduce these later.
2- Get your loan approved at an interest
rate that is higher than what you expect to take. Again, the loan
program that you decide upon can differ from what you are initially
approved at.
The preapproval of your loan will ensure that your real purchase
will go smoothly once you have located the perfect home.
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Often grouped together despite their subtle
differences, ``light documentation,'' ``no-income verification'' and
``quick qualifier,'' or ``QQ'' loans are a solution for many buyers who
have income from sources that are hard to verify. Usually these loans
are used by self-employed borrowers who have difficulty verifying all of
their income, or by borrowers with very complex income structures. For
example, a borrower who has income primarily from rental properties and
investments may be hesitant to verify all sources of income due to the
volumes of paperwork this would require. With a no income documentation
loan, the borrower can simply state his income on the application, and
the lender will use this stated income to qualify the loan. Why do
lenders do this? Because they recognize that by charging a slightly
higher rate of interest they can rely on this stated income of the
borrower and cover the additional risk. Lenders do in fact rely on
verifying that the borrower has assets that logically match the stated
income, along with excellent credit. Apply
for a No Doc Loan
With a higher cash down payment, typically 25% or higher, along with
good credit, these loans allow borrowers to buy into purchase prices a
lender wouldn't ordinarily qualify them for. Because no-income
documentation loans carry a higher interest rate, they should only be
used when necessary, not simply to avoid the paperwork requirements of a
full documentation loan.
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