It’s no surprise that purchasing a home is a massive financial decision. While the investment is incredibly rewarding, saving up enough to become a homeowner can be challenging. However, certain options you can consider throughout the process of buying a home that can remove the burden of these costs. In this blog post, we’re explaining discount points, lender credits, and seller concessions and how you may be able to benefit.

What Are Discount Points on a Mortgage?

Discount points or mortgage points give you the ability to lower the interest rate on your mortgage. You may view discount points on a mortgage as a trade-off, where you pay more money at the closing and the lender lowers the interest rate.

Data collated by the Consumer Financial Protection Bureau indicates that discount points were rather popular with homebuyers in 2023’s first three quarters. During this period, 58.7% of buyers with home purchase loans used discount points. This number stood at 56.2% for buyers with non-cash-out refinance loans and a staggering 88.5% for borrowers who opted for cash-out refinances.

How Discount Points Work

Each discount point costs around 1% of the mortgage amount and brings the interest rate down byan average of 25 basis points (0.25%), although it may vary from 0.125% to 0.375%. Keep in mind that the interest rate reduction can vary from one mortgage provider to the next. When you get discount points, your lender charges a one-time fee that you need to pay at the time of closing.

If you’re thinking about refinancing your existing mortgage, you might not have to pay for discount points at the closing because some lenders roll these costs and other closing costs into the new loan. In this case, while you need to pay less at the closing table, it affects the equity you have in the home.

Are Discount Points Worth It?

The answer to “Is it worth it to pay points for a lower interest rate?” is that they make sense if you plan to stay in the home you purchase for a few years. Referred to as the break-even period, this is the time it takes for the gains from the lower monthly payments to equal the initial cost of purchasing the points.

If you intend to keep living in the home beyond the break-even period, paying for discount points might work well for you. This is because once you cross this stage the lower interest rate will lead to savings for the remainder of the loan term.

Discount points might not be worth it if you sell or refinance your home before crossing the break-even period. If you foresee this happening, you might be better off putting the money toward your down payment and increasing your equity in the home.

How Many Discount Points Can I Buy?

The Lender determines the maximum number of discount points you may buy. Most lenders let borrowers buy up to four discount points. This, on average, can bring your interest rate down by 1%. Data released by Freddie Mac indicates that a typical 30-year fixed-rate mortgage comes with 0.5 to 0.7 discount points, and the number is lower with adjustable-rate mortgages (ARMs) because these borrowers tend to refinance or sell sooner.

What Is a Lender Credit on a Mortgage?

While discount points help lower the interest rate on a mortgage and require you to pay an upfront cost, lender credits can work well for borrowers who wish to reduce the burden of closing costs. So, what are lender credits and how do they work?

Lender credits give you the means to bring down your closing costs in exchange for a higher interest rate. This allows you to lower your upfront expenses and spread them over a prolonged period. However, you can use lender credits only to cover closing costs and for no other purpose.

Are Lender Credits Worth It?

Getting lender credits might work well for you if your main aim is to get some financial assistance or flexibility at the closing table and don’t mind paying a slightly higher interest rate. Given that closing costs can go up to 6% of a home’s selling price and that you also need to account for the down payment, lender credits can help bring down your initial expenses.

Oftentimes, assistance with closing costs helps borrowers come up with the down payment they need to buy a home, allowing them to get on the path to homeownership sooner. In addition, if you plan to refinance or sell in the near future, the shorter timeframe can help override the effect of the higher interest rate.

One potential drawback of getting lender credits is that the higher fixed interest rate will stay in place for the entire loan term, and you might end up paying significantly more than the original amount. This can be a problem if you’re already stretching your budget, because a higher interest rate translates into higher monthly payments. In addition, the higher interest rate might put you at a disadvantage if you plan to refinance at a later stage.

How Much Lender Credit Can I Get?

How much lender credit you can get depends on the type of mortgage you select, the amount you wish to borrow, and your lender. (Lender credits are not always available. Please check with your lender for details). Factors that can work in your favor include a good credit score, a large down payment (20% or more), and a low debt-to-income ratio.

What Are Seller Concessions?

As the name implies, seller concessions refer to concessions the seller of a home offers to a potential buyer. In this case, a seller might offer to cover one or more costs associated with buying a home to reduce a buyer’s upfront expenses.

If you look at seller concession examples, you’ll notice they come in different forms. One of the most common types of seller concessions is a seller agreeing to cover all or part of the closing costs. If, during an inspection, you find a problem that needs fixing, you may ask for a concession to cover the cost of repairs. In some instances, sellers agree to cover appraisal fees, loan origination fees, and attorney fees.

Keep in mind that while you may request seller concessions, whether or not sellers agree is their prerogative. In addition, remember that these concessions don’t come in the form of hard cash and typically find their way into bringing down your closing costs.

Who Benefits?

When offered, seller concessions tend to benefit buyers and sellers alike. While the buyer enjoys a discount, the seller manages to make the sale. However, where and when you wish to purchase a house might have an effect on whether you might get a seller concession.

Asking for seller concessions makes sense in a buyer’s market where the supply of homes for sale exceeds the demand. In this scenario, given the low demand, a seller might be more inclined to offer a concession and offload a property faster. However, the situation tends to reverse in a seller’s market, where a seller might have no inclination to offer concessions because of the high demand.

Pros and Cons

The biggest advantage of a seller concession is that it brings down the closing costs and makes the home you purchase more affordable. While this can help you make a larger down payment than you initially planned, it can also leave you with more savings in your bank account.

One potential drawback of asking for a seller concession is that it might make your offer seem less appealing, especially in a seller’s market. Besides, when it comes to homes that receive multiple bids, sellers may choose to disregard offers that come with requests for concessions. In this case, you might be better off making a lower offer and covering the closing costs on your own.

Seller Concession Limits

Regulatory bodies like the U.S. Department of Housing and Urban Development (HUD) and Fannie Mae have set seller concession limits to prevent housing market inflation and ensure stability in prices. These limits vary based on different types of loans.

Conventional Loans

Seller concession limits for conventional loans depend on the down payment amount for primary residences and second homes. Investment properties are 2% max on all combined loan-to-value (CLTV) ratios.

• Less than 10% down payment – Seller concession of up to 3%
• Down payment of 10% to 25% – Seller concession of up to 6%
• Down payment of over 25% – Seller concession of up to 9%

Remember, if you’re getting a conventional loan to purchase an investment property, the seller concession cannot exceed 2%.

USDA Loans

If you plan to get a U.S. Department of Agriculture (USDA) loan, the seller may contribute up to 6% of the loan amount. The home’s selling price or the down payment you make does not have an effect on the seller concession limit in this case.

VA Loans

Getting a Department of Veterans Affairs (VA) loan qualifies you to get a seller concession of up to 4% of the home’s selling price. Other than for closing costs, you may use these concessions for paying VA funding fees as well as to pay existing debts and judgments.

FHA Loans

The seller concession limit for Federal Housing Administration (FHA) loans stands at 6% of a home’s selling price. While you may use these concessions to cover closing costs, you can also use them to pay for appraisal fees and other home purchase-related expenses.

Seller Concession vs. Price Reduction

While a seller concession is usually specific to a buyer’s request, a price reduction typically applies to all potential buyers. Both are fairly common in buyer’s markets, where sellers either want to attract attention to their properties or speed up the sale.

Although a seller concession and a price reduction might seem the same from the cost perspective, know that they work differently, especially if you’re getting a mortgage. Consider an example where a buyer plans to purchase a house for $100,000 and make a 10% down payment of $10,000. Closing costs stand at 6% or $6,000.

With a 6% seller concession, the closing costs are covered. However, in case of a 6% price reduction, the overall cost of the house reduces to $94,000. To cover the closing costs, the buyer still needs to pay $5,640. In this scenario, if you wish to bring down your upfront costs, a seller concession works better.

Which Should You Get?

If you think you may need some assistance to cover the closing costs of your mortgage, find out if you can get a seller concession to pay for the same. Alternatively, you may also request a seller concession if you find a problem during a home’s inspection and will need to spend money to fix it after the purchase.

If you’re unable to get a seller concession to cover the closing costs for any reason, you may consider requesting a lender credit. The former is a better option because it works more like a discount, whereas you have to pay for the latter. Besides, while seller concessions bring down the cost of homeownership, lender credits might have the opposite effect.

Prospective homebuyers who wish to lower their interest rates might benefit by buying discount points. While you’ll need to pay extra at the closing table, you stand to gain in the long run, provided you live in the house for a prolonged period.

Conclusion

When it comes to dealing with discount points, lender credits, or seller concessions, making an informed decision requires paying attention to different aspects. These include your existing financial situation, upfront costs, how long you plan to live in the home you purchase, and the potential for long-term savings. Discussing your requirements with your financial advisor and a reputable mortgage provider is ideal.

Home buying requirements often tend to vary, and finding a home that meets your needs to a tee can be quite challenging. However, most real estate experts and New York City homebuyers’ guides suggest that paying attention to the neighborhood is more important than narrowing down on a suitable home. After all, it’s possible to remodel and fix a home you purchase.

So, if you’re wondering, “What’s the best place to buy a house in New York?” these neighborhoods deserve your attention.

The Best Neighborhoods for Buying a Home in New York

New York, with its diversity, gives homebuyers several great neighborhoods from which to choose. Here are some that are well set or up and coming.

Manhattan

If you like the hustle and bustle typically associated with New York, you’ll feel right at home in Manhattan. Often referred to as The City, Manhattan is described as the financial, cultural, media, and entertainment capital of the world.

The average median home value in Manhattan is around $1,140,576, with there being a 3.5% year-on-year decline in home values.

Manhattan has over 350 primary and secondary schools. Public schools in the area fall under NYC Geog District # 2 – Manhattan or NYC Geog District # 3 – Manhattan. Residents may also choose from schools that are part of NYC Geog District # 4 – Manhattan and NYC Geog District # 5 – Manhattan.

As one of the best places to buy a house in New York City, Manhattan is home to several big hospitals, some of which include Bellevue Hospital, Lenox Hill Hospital, Lower Manhattan Hospital, and Metropolitan Hospital Center.

Chelsea

Predominantly residential, Chelsea offers a mix of townhouses, row houses, apartment blocks, city housing projects, and tenements. In addition, the area’s social and ethnic diversity is plain to see through its many retail businesses. Eighth Avenue boasts of a carnival-like atmosphere all through the year, which is great if you’re buying a house in New York for its vibrant culture.

The average median home value in Chelsea is $1,482,972. There has been a 6.9% decline in home values from August 2023 to August 2024.

With 19 primary and secondary schools, Chelsea gives its residents numerous education alternatives from which to choose. Public schools in Chelsea are part of NYC Geog District # 2 – Manhattan, although residents also get to choose from schools that are in the Hoboken Public School District and the Weehawken Board Of Education School District.

The nearest major hospitals include Bellevue Hospital Center and NYU Langone Medical Center in Kips Bay as well as the Beth Israel Medical Center in Stuyvesant Town.

Hell’s Kitchen

Hell’s Kitchen’s gritty reputation is long gone. It is now home to numerous entertainment and dining alternatives. It merges with the Theatre District, where Broadway and Off-Broadway shows are all too common. Long favored by many new actors, it has also started attracting young Wall Street financiers who are interested in buying a home in NYC.

The average median home value in hell’s Kitchen is around $934,000. There has been a 3.9% year-on-year decline in home values.

The New York City Department of Education operates three public elementary schools in Hell’s Kitchen as well as 10 high schools. The rate of student absenteeism in Hell’s Kitchen and Chelsea is lower than in other parts of NYC. In addition, more than 80% of the neighborhoods’ high school students graduate on time, which is over 5% more than the citywide average.

Major hospitals that are easy to access from Hell’s Kitchen include the Bellevue Hospital Center and NYU Langone Medical Center in Kips Bay along with the New York Presbyterian Hospital in Upper East Side.

West Village

In 2017, West Village earned the distinction of having the most expensive residential property sale prices in the U.S., with prices typically exceeding $2,100 per square foot. It is regarded as an important historical landmark linked to the American bohemian culture of the early and mid-20th century. The now-famous Stonewall Inn is located just off Seventh Avenue and Christopher Street.

The average median home value in West Village is around $1,541,874. There has been a 7.6% decline in home values from August 2023 to August 2024.

West Village is home to four schools. While the NYC Geog District # 2 – Manhattan operates public schools in West Village, residents also get to choose from options that are part of the nearby Hoboken Public School District and the Elysian Charter School.

Major hospitals that residents may turn to include Lenox Health Greenwich Village as well as the Bellevue Hospital Center and NYU Langone Medical Center in Kips Bay.

East Village

East Village has been home to free-thinkers and artists for a while. While corporate interests have made inroads into some parts of this neighborhood, just about every good NYC homebuyer guide highlights the fact that the area around the St. Mark’s Church on Second Avenue continues to support local art and artists.

The average median home value in East Village is around $1,141,152. There has been a 2.3% decline in home values from August 2023 to August 2024.

There are 23 primary and secondary schools in East Village. The public schools in East Village are part of NYC Geog District # 1 – Manhattan. The Northside Charter High School and NYC Geog District #14 – Brooklyn are in close proximity.

Major hospitals that are easily accessible include Beth Israel Medical Center in Stuyvesant Town, the New York Presbyterian Lower Manhattan Hospital in the Civic Center area, as well as NYU Langone Medical Center and the Bellevue Hospital Center in Kips Bay.

Williamsburg

Williamsburg, in Queens, on the other side of the water from the East Village, wins the popularity contest with visitors heading to this part of New York. This neighborhood boasts of great nightlife as well as numerous restaurants, vintage designer shops, and indie fashion alternatives.

The average median home value in Williamsburg is around $1,057,440. Of all the best neighborhoods to buy a house in New York, this is among the few where prices of homes have climbed in the last year, with a 2.3% August 2023 to August 2024.

Williamsburg’s public schools are part of NYC Geog District #14 – Brooklyn. The neighborhood has a total of 55 primary and secondary schools. Other alternatives include the Believe Northside Charter High School and the Bedford Stuyvesant New Beginnings Charter School.

Woodhull Medical Center is the nearest major hospital. In addition, the neighborhood has several medical clinics.

Park Slope

There’s good reason why many homebuyers feel Park Slope is the best place to buy a house in New York City and it definitely warrants your attention if you’re thinking about buying a home in Brooklyn. In 2010, the New York Magazine ranked it as the most desirable neighborhood in New York. The American Planning Association called it one of the “Greatest Neighborhoods in America” in 2007.

Fifth Avenue and Seventh Avenue are home to the area’s commercial interests such as shops, bars, and restaurants. The east-west side streets house lines of apartment buildings.

The average median home value in Park Slope is around $1,374,494. There has been a 2.8% decline in home values from August 2023 to August 2024.

Park Slope has as many as 22 primary and secondary schools. Public schools in the neighborhood belong either to NYC Geog District #15 – Brooklyn or NYC Geog District #13 – Brooklyn. The Bedford Stuyvesant New Beginnings Charter School and NYC Geog District #17 – Brooklyn are in close proximity.

The New York Presbyterian Brooklyn Methodist Hospital is a major hospital that is located in Park Slope.

Jackson Heights

Jackson Heights has found favor with middle-class homebuyers interested in buying a house in NYC since the early 2000s, primarily because of its cultural diversity and the unique architecture of buildings in the area. Street food from the world over is easy to find along Roosevelt Avenue from 74th to 108th Street. A stretch of Roosevelt Avenue that is home to several bars and clubs often makes for comparison with Christopher Street in the West Village.

The average median home value in Jackson Heights is around $456,807. There has been a 6.0% decline in home values from August 2023 to August 2024.

There are a total of eight schools in Jackson Heights. Public schools in this neighborhood belong to NYC Geog District #30 – Queens. Other school districts in the vicinity include NYC Geog District #32 – Brooklyn and NYC Geog District #25 – Queens.

The Elmhurst Hospital Center in Elmhurst is the nearest large hospital.

Other Popular Neighborhoods in NYC

Depending on which NYC homebuyers guide you go through, you’ll find different suggestions. Some of the other neighborhoods you may look at if you’re buying a house in New York include Gramercy Park, Harlem, Hudson Valley, the Hamptons, Windsor Terrace, East Williamsburg, Bushwick, Bedford–Stuyvesant, Melrose, Mott Haven, Fordham, Long Island City, and St. George.

Alternatively, if wish to move beyond the city and are looking for the best places to buy a house near NYC, you may check what the top neighborhoods in Long Island have to offer.

What You Need to Know About Buying a Home

Before you think about buying a home in New York or anywhere else, determine if you’re better off as a renter or a homeowner. Take your individual needs into account before narrowing down on any neighborhood. For instance, do not fail to account for the time you will need to spend commuting to and from your workplace. Other aspects that need your attention include:

• Affordability – after taking into account income and expenses
• The down payment and closing costs
• Selecting a mortgage lender
• Getting preapproved for a loan
• Comparing multiple listings and carrying out home visits
• Making an offer

Selecting a Mortgage Lender

The best place to buy a house in New York and the neighborhood you select notwithstanding, it is important that you work with a reliable mortgage provider. Finding a mortgage lender who might work well for you requires that you pay attention to different aspects.

The interest rate you get has a significant effect on the overall cost of your loan, and even a small difference in percentage can make a noticeable dollar-value difference. Take a close look at all the fees you might need to pay, which may come in the form of application fees, loan origination fees, document preparation fees, credit report fees, assumption fees, closing fees, and prepayment penalties.

When getting a loan to purchase a home, flexibility in terms and conditions might make the entire process more borrower-friendly. For example, several borrowers benefit by being able to choose from making weekly, biweekly, and monthly repayments. Some lenders provide home loans that come with fixed interest rates for the initial period of the loan, while moving to a variable rate at a later stage. Some borrowers also look for features such as redraw facilities and repayment pauses.

Since getting a mortgage involves a long-term association with a lender, do not forget to pay attention to customer service levels. An easy way to do this is to look for testimonials or reviews written by previous or existing borrowers.

Choosing the Right Type of Mortgage

When it comes to applying for a home loan, you get two basic alternatives from which to choose. In both cases, eligibility might involve meeting different criteria, including having good creditworthiness. Your credit score may also play a role in the interest that applies to your loan.

Government-Backed Loans

You may qualify for a government-backed home loan whether you’re a first-time homebuyer in NYC or not. The U.S. Department of Agriculture (USDA) provides USDA loans through private mortgage lenders. The Department of Veterans Affairs (VA) guarantees VA loans. Similarly, the Federal Housing Administration (FHA) insures FHA loans, but note that FHA-insured loans come with the additional cost of mortgage insurance regardless of the down payment amount.

The key benefit of most government-backed loans is that they require you to pay little to no down payment.

Conventional Home Loans

Conventional home loans are ones that you may get through banks, credit unions, mortgage lenders, and private lenders. With a typical conventional home loan, you may be able to pay as little as 3% of the home’s selling value as a down payment, but the average down payment can range anywhere from 5% to 20% of the home’s selling value based on your comfortability and various circumstances discussed with your loan officer.

Conclusion

It is only normal for people to want to buy homes in which they can lead safe and comfortable lives. Fortunately, there are a number of neighborhoods in NYC where people from different walks of life can feel right at home, and buying a house in New York can be simpler than you imagine. Once you narrow down on a suitable locality, think about approaching a reputable lender to get pre-approved. This way, you can limit your search to homes that fit your budget.

Homebuyers in the United States typically need to pay around 10% to 20% of a home’s selling price as down payment. This requirement serves as a safeguard for lenders, while also indicating to them that you are financially responsible. However, the down payment is often looked upon as a big obstacle to the path toward homeownership. Even in modestly priced neighborhoods, the down payment can amount to thousands of dollars, which then begs the question, “Can you buy a home without a down payment?”

Fortunately, there are different types of mortgage programs that require little to no down payment. Zero and low down payment home loans are made available to individuals who meet specific eligibility criteria, which include having good creditworthiness. So, what options might you have if you wish to buy a home with no down payment?

USDA Loans

Potential homebuyers with the question, “Can I buy a house without a down payment?” often end up turning to these loans. The United States Department of Agriculture (USDA) is responsible for issuing USDA loans through its Rural Development Guaranteed Housing Loan Program. You may think about applying for this zero down payment loan if you are an eligible rural or suburban home buyer. USDA loans come in three forms:

• Loan guarantees. In this scenario, USDA guarantees mortgages issued by participating local lenders. However, if you choose to pay little or nothing toward the down payment, you will need to get mortgage insurance.
• Direct loans. If you’re wondering how to buy a house with low income and no down payment, you may consider looking at how direct loans work. The USDA issues these loans for individuals who fall under the low and very low income brackets. Where you live might have a bearing on income thresholds. With the right types of subsidies in place, you may look forward to an interest rate as low as 1%.
• Home improvement loans/grants. While not quite a solution for homebuyers, these loans and grants work well for existing homeowners. These loans or monetary grants give homeowners the ability to upgrade or repair their homes. By combining a grant and a loan, you may get assistance of up to $27,500.

One of the benefits of getting a USDA home loan without down payment is the lower insurance premium when compared to other types of loans. In addition, if you take a look at the USDA loan eligibility maps based on the type of property you wish to purchase, you will notice that most areas outside of the country’s major cities also qualify as rural areas.

If you’re wondering what credit score is needed to buy a house with no money down through a USDA loan, know that these loans come without any minimum credit score requirement. However, you become ineligible if you have an existing delinquency of a nontax federal debt. Applicants without adequate credit history may consider applying, because other factors are then taken into account. If your credit score is lower than 640, your application goes through a more stringent underwriting process.

How much you may borrow through a USDA loan depends on the location of your desired home, and limits vary from one county to the next. Limits in most countries range between $120,000 and $250,000, although they can go up to around $570,000.

VA Loans

The answer to, “Can you buy a house with no down payment as a person who is on active duty is in the military?” is yes. This is thanks to the U.S. Department of Veteran Affairs which is responsible for providing VA loans.

People who may qualify include existing service members, veterans, as well as eligible surviving spouses. These home loans without down payment also take away the worry of making monthly mortgage insurance payments. However, you need to pay a funding fee that may vary depending on your military category and the type of loan you get. The offerings include:

• Purchase Loans and Cash-Out Refinance. You may apply for a purchase loan to buy a house. If you wish to borrow against the equity you have built in your existing home, you may go the cash-out refinancing way.
• Native American Direct Loan (NADL) Program. Meant specifically for eligible Native American Veterans, this program lets applicants purchase, construct, or improve their existing homes on Federal Trust Land. Applicants may even make use of this program to further reduce interest rates on VA loans.
• Interest Rate Reduction Refinance Loan (IRRRL). The IRRRL is also referred to as the Streamline Refinance Loan. It gives existing VA loan holders the ability to get lower interest rates.
• Adapted Housing Grants. These grants are meant for veterans who suffer from permanent and total service-connected disability. Applicants may use the funds to build or buy adapted homes, or to modify existing homes to make them more suitable for living.

While the VA loan program does not have a minimum credit score requirement, it is not unusual for lenders who accept minimum down payment for home loans to have their own requirements. Most lenders look for credit scores between 620 and 640, although there are some that accept lower scores. You will also need a valid Certificate of Eligibility (COE).

There is no maximum limit surrounding how much you may borrow through a VA loan. However, there is a limit on the amount that the VA guarantees. For a single-unit property, this limit currently stands at $484,350 in most states across the country. If you are looking at buying a home in a high-cost market, the limit extends up to $726,525. 

FHA Loans

If minimum down payment for home loans is your main criterion in looking for a mortgage, you might benefit by taking a look at what the Federal Housing Administration (FHA) has to offer. FHA was founded in 1934, with the aim of reducing requirements to get a home loan and encouraging homeownership. FHA loans are issued by FHA-approved lenders, and they are insured by FHA.

While you cannot get a home loan without down payment through FHA, you might qualify to make a 3.5% or 10% down payment. What makes FHA loans particularly popular is that they offer increased flexibility through the eligibility criteria.

Since FHA works as a guarantor on your loan, you need to make mortgage insurance premium payments. This is because if you end up defaulting on the loan, FHA is responsible for repaying the lender the amount you owe toward the mortgage. How long you need to keep paying mortgage insurance premium depends on the loan-to-value ratio as well as the loan term.

Conventional 97 Loans

Fannie Mae provides these loans for first-time homebuyers who wish to purchase primary residences. According to Conventional 97 loan requirements, you need to pay at least 3% as down payment. Private mortgage insurance remains in place until you acquire at least 20% equity in your home. Most lenders who provide these loans require credit scores of 680 and above.

HomeReady Loans

Fannie Mae provides these loans for low and moderate income earners who wish to purchase primary residences as well as for those who want to refinance existing primary residence mortgages. These loans require 5% down payment. Until you get 20% equity in your house, you keep making payments toward private mortgage insurance. A credit score of 680 or above is typically required.

Home Possible Advantage Loans

Freddie Mac provides these purchase and refinance loans to applicants who do not own any other property, although it makes a few exceptions. You need to pay at least 5% as down payment, and private mortgage insurance is part of the parcel. Your credit score needs to be 660 or above.

Should You Buy a Home Without Down Payment?

You might benefit by getting a home loan with a low or no down payment if you want to buy a house quickly but do not have money to put toward the down payment. Given the existing market scenario and mortgage interest rates, this might be as good a time as any to consider going the homeownership way. Some people also get home loans with a low or no down payment so they may continue to have more cash on hand to take care of other expenses or to make investments.

Possible Drawbacks of Buying a Home Without Down Payment

The idea of paying zero or minimum down payment for home loans comes with its share of potential drawbacks. Even if you get a competitive interest rate, you will, in all likelihood, end up making a higher monthly repayment. Other drawbacks might include:

• Higher mortgage insurance. If you buy a home with no down payment, you typically need to make ongoing payments toward mortgage insurance. Besides, the less you pay as down payment, the more you pay toward mortgage insurance.
• Fees. Some home loans without down payment attract funding fees, which can be a tidy sum. Even if the fee is incorporated into the loan, the buyer is still responsible for paying it at some point.
• Financial risk. One of the drawbacks of buying a home without down payment is that you start by having absolutely no equity in the house you purchase. In such a scenario, if the market experiences a downturn, your exposure to financial risk might be significant. This is especially the case if you need to sell the house and end up getting less than what you paid. Even if you do not sell the house, you still end up owing more toward your mortgage than the actual worth of the house.

Conclusion

Can you get a home loan without a down payment? Well, when it comes to how much down payment you need, the fact remains that several homebuyers are eligible to pay zero or minimum down payment. Depending on factors such as your income, creditworthiness, and what you do for a living, you might qualify for a home loan without down payment or one that requires you to pay 3% to 10% as down payment.

However, the type of loan you get notwithstanding, it is important to determine if you can afford to make mortgage payments and keep up with other home ownership costs. Once you get that out of the way, all you need to do is contact a reliable lender.

So, you’re ready to buy a home! Congratulations, we’re here to help you every step of the way. One of the first steps is submitting your application for a mortgage. If you’re a first-time homebuyer or perhaps it’s been a while since you applied for a mortgage, you’ll need to know the documentation required to apply. In this blog post, we’re sharing a complete guide for the application process and what to expect along the way!

Check Your Credit Reports

When you apply for a mortgage, you may expect the lender to look at your credit score to determine the level of risk you pose as a borrower, wherein the higher your score, the lower the perceived risk. As a result, it’s ideal for you to know what lenders will see when they pull up your credit reports. If you feel your credit score is lower than you would like, you should consider improving it before applying for a mortgage.

There are instances when mistakes or erroneous entries make their way to people’s credit reports, causing their credit scores to drop. Going through your credit reports from the three major reporting bureaus -Equifax, Experian, and TransUnion – enables you to spot any inconsistencies, after which you may contact the bureaus in question and get them rectified.

Keep in mind that your credit score might play a role in the type of mortgage you apply for, especially if it falls below a particular limit. More often than not, you need a credit score of 620 or higher to qualify for a mortgage, but there are exceptions. Your credit score also may affect the interest rate that applies to your mortgage.

Getting a free copy of your credit report from the three major credit bureaus once a year is easy, and you may do so by visiting their websites.

• Equifax
• Experian
• TransUnion

Review Your Debt-to-Income (DTI) Ratio

While a lender looks at your credit score when reviewing your mortgage application, they also pay attention to other aspects of your financial profile. For example, you may expect a lender to check your debt-to-income (DTI) ratio to determine how much of your monthly income goes toward servicing your existing debt.

Calculating your DTI ratio requires adding up all your monthly debt payments and dividing the total by your gross monthly income. For example, if your gross monthly income is $10,000, out of which you use $3,500 to make debt payments, your DTI ratio is 35%. Keep in mind that your DTI ratio also includes your mortgage principle, interest, taxes, and insurance. Ideally, your DTI ratio should be 36% or below, although some lenders are okay with this number going as high as 43% if there are other offsetting factors.

Determine How Much You Can Afford

Fannie Mae’s mortgage affordability calculator lets you get some indication of how much you can afford to borrow based on various factors like your income and existing debt. However, much like calculating your DTI, it does not account for expenses that fall outside of the debt category. These may include phone bills, insurance payments, and day-to-day expenses that can vary significantly from one person to the next.

To determine how much you can afford to borrow through a mortgage, make sure you account for your lifestyle as well as ongoing maintenance costs. When it comes to the latter, expect to spend 1% to 4% of a home’s value on its upkeep every year.

When addressing this important aspect of the mortgage application process, you should ideally avoid determining the most you can borrow. Instead, you should focus on how much you can afford to repay comfortably each month.

Think About the Down Payment

Just about every mortgage loan process flow chart you look at will devote a section to down payment because of the crucial role it plays. For starters, while many people feel they need to make at least a 20% down payment to get a conventional mortgage, this is not the case.

Depending on the program you qualify for, you might be able to pay as little as 3% to 5% toward down payment on a conventional mortgage, although you will need to pay extra for private mortgage insurance (PMI). Getting a no down payment mortgage might also be an option, provided you meet the required eligibility criteria.

While you might qualify for a mortgage that requires a small down payment, know that there are potential shortcomings. For example, a larger down payment will bring down your monthly payments and reduce how much interest you pay during the term of the loan. In addition, making less than 20% as down payment for a conventional loan will require that you get PMI.

Keeping adequate funds aside to cover the closing costs is ideal, as these can vary from 2% to 6% of the amount you borrow.

Look at Different Types of Mortgages

Given the different types of mortgages, it’s important to compare them and determine which programs best fit your needs. For example, if you know you will live in the house you purchase for just a few years, you may consider getting an adjustable-rate mortgage (ARM) with a low introductory rate.

Conventional Loans

Conventional or conforming loans are the most common type, and qualifying for these non-government-backed loans requires that you have a credit score of 620 or higher. Some lenders might be willing to accept down payments as low as 3%.

VA Loans

Backed by the U.S. Department of Veterans Affairs, qualifying for a VA loan requires that you have a credit score of 620 or higher. You may qualify with a lower score if you have a valid Certificate of Eligibility (COE). In addition, you may get a VA loan without making a down payment.

USDA Loans

The U.S. Department of Agriculture guarantees all USDA loans. You may apply for one as a low- or moderate-income borrower with a credit score of 640 or higher. Typically made available for eligible rural homebuyers, you may also apply for one as a resident of a suburban area of a large city or a town where the population does not exceed 25,000. Like VA loans, USDA loans come with no down payment requirement.

FHA Loans

The Federal Housing Administration guarantees these loans. You may qualify for an FHA loan with a credit score of 500 or higher, in which case you’ll need to make at least a 10% down payment. If your credit score is 580 or higher, the minimum down payment requirement drops to 3.5%.

Jumbo Loans

If you need to borrow an amount that exceeds conforming loan limits set by the Federal Housing Finance Agency (FHFA), you may consider applying for a jumbo loan. In this case, you’ll need a credit score of 700 or higher. The down payment amount may vary from 10% to 20%.

Fixed Rate vs. Adjustable Rate

The mortgage you get can come with a fixed or adjustable interest rate. With a fixed-rate mortgage, the interest rate remains the same throughout the term of the loan. This ensures that your payments won’t fluctuate with time.

If you get an adjustable-rate mortgage (ARM), the interest rate is subject to change after an initial period when it remains fixed. For example, with a 3/6 ARM, the interest rate will remain the same for the first three years, and it can then change every six months. If interest rates fall in the future, you stand to gain, but the reverse holds true as well.

Loan Term                  

Another important aspect of the mortgage application process, when you’re comparing different types of loans, is to determine what loan term suits you the most. A 30-year mortgage term is the most common, although you get other options from which to choose. For example, many lenders offer 15-year and 20-year mortgages.

Bear in mind that the loan term affects the overall cost of a mortgage. This is because the more time you take to repay the money you borrow, the more you end up paying as interest. However, while a shorter loan term can lead to savings in the long run, you will need to make higher monthly payments.

Get Pre-Approved

Even though you’ve done a fair amount of groundwork before you get to this stage, the mortgage loan process timeline typically begins when you apply for pre-approval. This process usually takes one to three days. Getting a pre-approval is ideal because it gives you a clear indication of whether you qualify for the type of mortgage you select and how much a lender is willing to lend.

During this stage, you may expect a lender to go through your credit reports, verify your employment and income, and look at your existing assets and debt. Getting pre-approved before you begin looking for a home is ideal as you can limit your search to the given budget. It also helps demonstrate that you are a serious buyer, which is perfect when you’re negotiating.

Find a Home

With a pre-approval in place, you may begin looking for a home. Depending on your requirements, the neighborhood you want to purchase a home in, and other factors, this may take a week to a month or more.

Make an Offer

Once you find a home you like, it’s time to make an offer. Real estate agents come in handy during this stage too because they know how to structure these documents and know which contingency clauses to include. For example, your agent might include a mortgage contingency clause that gives you a predetermined time period to get a mortgage. In this case, if you terminate the contract before the contingency date, you stand to get your earnest money back.

The earnest money is what you need to pay as the cash deposit that secures your offer. Depending on how hot any given market is, this could be as little as $5,000 or up to 5% of a home’s selling price. If you’re buying a house in a competitive market, make sure you’re ready to write a check or carry out a wire transfer when you make your offer.

Submit Your Mortgage Application

You may complete this crucial section of the mortgage application process timeline in an hour or two if you have all the required paperwork and information at hand. While some lenders might require additional information, this is what you need to provide when dealing with a typical mortgage application.

• Photo ID and Social Security number
• Employment and income information
• Pay stubs and W-2s (self-employed applicants can provide tax returns)
• Proof of additional income
• Income tax returns
• Bank statements
• Retirement and investment account statements
• Details of existing debt
• Details of alimony/child support payments (if applicable)
• Signed purchase and sale agreement

What Happens Next

Moving down the mortgage loan process flow chart, once you submit your application, the appraisal can take one to seven days, as is the case with the home inspection. The title search can take one to two weeks, and you may expect the underwriting process to take 10 to 15 days. Once you receive the loan estimate, review it carefully. Then, compare it with the closing disclosure you receive at the time of closing to ensure that the terms and conditions remain the same.

Conclusion

With knowledge of what the steps in the mortgage application process are, make sure you follow the right approach to becoming a homeowner. If you find yourself stuck at any stage or if you need more information about the process, consider seeking professional assistance. This can be from a real estate agent when it comes to looking for a home or from a mortgage provider if you need any mortgage-related information.

Buying a home is probably the biggest investment you will make. As a result, you must know what you’re getting into at the very onset. You don’t want to overlook any important aspect that you may regret later. Fortunately, you can avoid commonly made home buyer mistakes if you follow some basic guidelines before and during the process.

So, what are the most common home buying mistakes to avoid?

1. Not Contacting a Lender Early Enough

It is important that you contact a lender as soon as you decide to go the homeownership route. This gives you insight into the types of loans on offer, the down payment you need to pay, interest rates, loan terms, and whether or not you might require private mortgage insurance (PMI). Consider getting pre-approved as this gives you an indication of how much you can afford. It also serves as an indicator that you are serious about making a purchase.

2. Buying While Still in Debt

If you go through first-time home buyer tips, you will notice that thinking about buying a home when you have considerable debt is not the way to go. Think about it this way – would you want to run a marathon with ankle weights slowing you down? Debt has a way of eating into your monthly budget, and it might even cause problems when it comes to keeping up with regular monthly repayments toward your mortgage.

Getting a mortgage if you already have considerable debt is one of the biggest mistakes when buying a home, and one that you best avoid. If you’re in debt, reduce it, build your savings, and then think about buying a home.

3. Using Credit Carelessly

It is common for lenders to check borrowers’ credit reports at the time of pre-approval, and then again at the time of closing. A mortgage provider does this to ensure that there is no change in an applicant’s financial position during this period.

Not surprisingly, one of the top mistakes to avoid when buying a house is applying for other forms of credit after the pre-approval and before the closing. Refrain from making big-ticket purchases on credit as well. This is because any significant change in your debt-to-income ratio can get an underwriter to reject your application or provide revised terms that are less than favorable.

What you should try to do is get your existing outstanding balances to below 30% of your available credit limit, while paying all your bills in full and on time every month.

4. Thinking You Need a Down Payment of At Least 20%

Several first-time home buyers think they need to pay at least 20% of a home’s selling cost as a down payment, making it among the more common mistakes when buying a home. However, if you pay 20% or more as down payment, you do not have to worry about getting PMI. The flip side is that it might take you several years to save the required 20%, and you might also limit your cash flow during the period.

Depending on the type of loan you get, you can pay as little as 3% down payment for a conventional loan. With some government-insured loans, you can pay even less.

5. Not Considering Government-Insured Loans

Some real estate experts feel that the answer to, “What is the biggest mistake when buying a house?” is ignoring government-backed loans. The ones that require your attention include the United States Department of Agriculture (USDA) loans, Federal Housing Administration (FHA) loans, and U.S. Department of Veterans Affairs (VA) loans.

• USDA loans are available for rural homebuyers, suburban homebuyers, as well as buyers looking for homes in towns where populations are below 25,000. These loans are designed for low-to-moderate income earners.
• FHA loans are ideal for borrowers with less-than-perfect creditworthiness. However, they come with mandatory mortgage insurance.
• VA loans are designed for veteran and active-duty military service personnel and their spouses. Veterans have the option of not paying any down payment.

6. Rushing the Process

Getting a mortgage to buy a home can be a complicated process. One of the top mistakes first-time homebuyers should avoid is to rush through the process of getting a loan. If you rush through things, you get little time to save money for the down payment, and you will probably miss fixing errors on your credit report. Bear in mind that it may take months or even years to repair poor credit. As a result, map out a suitable home buying timeline well in advance.

7. Not Considering Other Costs

Not factoring in costs other than the home’s selling price makes it to the list of the top first-time home buyer mistakes to avoid with good reason. This is because there is no dearth of prospective buyers who focus on making the down payment and forget to account for closing costs. Typically, closing costs hover between 2% to 4% of a home’s selling price.

You need to take the cost of homeownership into account as well. In addition to making repayments toward your mortgage, you will also need to pay property taxes and any applicable home insurance premiums. Ongoing repair and maintenance costs require your attention too, failing which you might find yourself overshooting your monthly budget. You should ideally aim to set aside around 1% to 3% of the home’s buying price each year for repairs and maintenance.

8. Buying a House Outside Your Budget

It is not uncommon for people to fall in love with homes and buy them even if it requires them to stretch their pockets. This is among the most common first home buying mistakes to avoid, even if you qualify for a mortgage. This is because the mortgage payments, homeowners insurance, and property taxes might add a severe burden on your finances. While the added cost might not seem like much initially, it might turn out to be problematic in the long run.

9. Not Saving Enough

Not saving enough money before you buy a house makes it to the list of the top home buyer mistakes to avoid for different reasons. For starters, while saving money for the down payment is important, you also need to consider ongoing repair and maintenance costs. In addition, spending all or a major portion of your savings on the down payment is not a good move.

While paying 20% or more toward down payment does away with the need for PMI and helps reduce monthly costs, you should have some savings in place to account for unexpected expenses. Ideally, you should have an emergency fund with at least six months of living expenses.

10. Not Giving the Neighborhood Enough Attention

Another home buying mistake you should avoid is to give more priority to a house than its neighborhood. Consider this – you find a house that suits all your requirements perfectly, but once you move in you learn that you don’t quite like the neighborhood. Narrowing down on the right suburb or town can make a significant difference when it comes to the lifestyle you lead as well as family development.

Ideally, the neighborhood you select should not be a mismatch with the culture and values you follow. Once you find the right neighborhood, you can always consider buying a house that you can tailor to your needs. Aspects that typically need your attention include school ratings and crime rate as well as access to public transportation and healthcare.

11. Not Carrying Out an Inspection

It is crucial that you have a good idea about what shape a house is in before the closing of a sale. This is because you don’t want to end up with a house that requires unexpected repairs, especially when they burn a hole in your pocket. While inspecting a home on your own gives you a basic indication of its condition, you might be better off opting for a professional home inspection.

When it comes to some of the worst home buying mistakes that lead to monetary losses, you can find not using the services of professional home inspectors on almost every list. This is because they know just what to look for and where, and can end up saving you heartache and money in the long run.

12. Paying Too Much Attention to Aesthetics

It is only natural to want to buy a house that appeals to you visually. However, some cosmetic changes, such as replacing old wallpaper, may well be worth the cost. Not buying a house just because you don’t like its paint job, landscaping, or carpeting is a rookie home buying mistake you should avoid. If you look for a home with the approach of not minding making a few cosmetic changes, the possibility of landing a good deal increases.

Physical appearances can take a backseat if you are getting a house that fits your budget and meets your other requirements such as size and location. Remember that owning a home is usually a long-term proposition, and you can always think about making changes further down the road. Some of the other aspects you need to focus on include the home’s floor plan, roofing, and foundation, as well as its plumbing and electrical systems.

Remember that fixing a house on your own or hiring a contractor to do the job is typically more cost-effective than buying a house that has recently been fixed by its existing owner. Besides, you can then do up the house according to your liking.

13. Not Getting a Homebuyer Rebate

One of the most common first-time homebuyer tips that pass the attention of people is to get homebuyer rebates or commission rebates. The rebate can be up to one percent of a home’s selling price. It is deducted from the buyer’s agent’s commission. First-time home buyers can benefit by getting this rebate in most states in the U.S.

If you plan to buy a house in a state that allows homebuyer rebates, find out if your agent will offer the rebate before closing. The states that prohibit homebuyer rebates include:

• Alaska
• Alabama
• Iowa
• Kansas
• Louisiana
• Mississippi
• Missouri
• Oklahoma
• Oregon
• Tennessee

14. Buying Without a Real Estate Agent

Given the widespread use of the internet and easy access to real estate listings, some prospective buyers feel that can get through the process of purchasing a house on their own. However, this is one of the mistakes first-time homebuyers should avoid. According to data collated by the National Association of Realtors, 89% of buyers bought their homes through real estate agents or brokers in 2023.

Typically, the seller pays the buyer’s agent’s commission, so this is an aspect you don’t have to worry about. In addition, a real estate agent can:

• Help you determine what types of homes you can expect to find within your budget.
• Give you access to a wide range of homes in your desired neighborhood based on your requirements.
• Give you an edge over other prospective buyers who are without buyers’ agents.
• Provide valuable assistance at the negotiating table.

15. Not Getting All the Details on Paper

Not getting all the details surrounding a purchase in writing is among the most common home buying mistakes that can turn ugly in the future. There have been instances of homebuyers assuming that the kitchen appliances they see during their inspections are part of the deal, only to find the kitchen bereft of any equipment after the deal is done.

Expect a home’s previous owner to take all that can be detached away once you buy the house. This can include hot tubs, bath fixtures, light fixtures, washers, dryers, ceiling fans, and other home appliances. Make sure you go through the contract in great detail before the closing. If any of the items you think come with the house are missing, get them added before signing on the dotted line.

Conclusion

Buying a home might seem like a daunting task, although carrying out a little groundwork ensures that you minimize the possibility of getting a bad deal. The best place to start is to contact a lender and establish how much you can afford to borrow. Then, make a list of what you require from the new home and the locality, and look for homes accordingly.

Do not hesitate to seek professional assistance because doing so makes the process considerably simpler and you get to avoid all the common home buying mistakes easily.

If you plan to buy a home, chances are you have heard about the concept of attending open houses, where you get to view properties that are up for sale. In such scenarios, you must remember that the home belongs to someone else and you’re a guest, and it’s crucial to treat the process professionally. In this blog post, we’ll share best practices for attending open houses and answers to commonly asked questions.

What is an Open House?

An open house is when sellers invite the general public to view a home that is up for sale. More often than not, real estate professionals take the responsibility of hosting open houses on their clients’ behalf, although some sellers may choose to host them on their own. An open house typically lasts for a few hours, and most people hold them on weekends to attract more foot traffic. You may also find some that take place on weekday evenings.

When homeowners decide to sell their homes, their real estate agents tend to recommend that they host open houses to attract more potential buyers. However, a seller may decline the proposal and request to show the house only by appointment.

A typical open house is informal, and you might even find small refreshments that help make the atmosphere more welcoming. It’s common for open houses to have sign-up sheets, which you may fill with your details. Some real estate agents and realtors create informational flyers, giving potential buyers further insight into the property. These can come in the form of its key details, price, photos, and information about the neighborhood.

Can You Go to an Open House Without a Realtor?

The main goal of an open house is to give potential buyers the opportunity to see any given home in person. Whether you choose to go alone or with a friend, family member, or real estate professional is entirely up to you. However, as per an October 2023 court verdict, buyers will need written agreements with their realtors if they wish to take them along to open houses.

The answer to, “Do realtors go to open houses with you?” depends on the stage of the home buying process you’ve reached. For example, it makes sense to take your realtor along if you’ve already signed an agreement, or at least keep them in the loop. This is because they can provide valuable insight into aspects like pricing, a home’s features, and its neighborhood.

Can You Go to an Open House Without an Appointment?

Given the nature of an open house where a property is open for public viewing during a predetermined timeframe, you don’t need to make an appointment to visit an open house.

Finding Open Houses

If your main goal of visiting open houses is to determine what the market has to offer and you’re not particularly serious about buying a home yet, you may begin the search online. This is because several real estate websites update region-specific open house listings regularly, and you may also find them on social media platforms.

Some agents post open house ads in local newspapers, and going through the real estate section might work well for you. Placing signs of open houses outside of the property is common too, so you may consider driving around the neighborhoods you’re interested in at a relaxed pace when you have time.

Prospective buyers who are serious about the process may benefit by enlisting the services of real estate professionals who have good knowledge of the desired neighborhoods. This is because they tend to have access to resources that the general public does not.

Keep in mind that open house listings often make their way to multiple listing services (MLS) and agents’ websites, giving other real estate professionals the ability to view all properties and notify their clients when they find suitable options.

The Importance of Open Houses for Buyers

The open house concept is an important element in the home buying journey, allowing you to get a close look at the property in question, beyond photos and videos. An open house typically gives you more time to explore a home than a one-on-one showing, so you can get a better feel of how you may use the space. You can also walk around the neighborhood to explore what it has to offer.

If you’re wondering what to do at an open house as a buyer, know that you can examine different aspects of the home such as the size of the rooms, floor plan, quality of fixtures, and overall upkeep. You may use this opportunity to determine if the house receives adequate natural light and establish general noise levels. Finding out what’s motivating the existing homeowner to sell might help at the negotiation table.

Once you attend a few open houses, you get a better understanding of what you need in a home and the elements you can do without. When at an open house, it’s also important to get additional information such as proximity to schools, public transportation, healthcare facilities, and open spaces. You should also keep an eye out for elements that might need extensive repairs.

If you like what you see at an open house, you can always ask your agent to arrange for a professional home inspection later.

Open House Tips for Buyers

Buying a home is typically the biggest financial decision that many people make, so it’s best to approach the process with caution. No matter which open house checklist for buyers you go through, you will find that you need to pay attention to multiple aspects, even ones that extend beyond the actual property. So, what should you do at an open house as a buyer?

Get a Pre-Approval

Getting a pre-approval for a mortgage before you start looking at homes comes with numerous benefits. For instance, a pre-approval gives you an indication of how much a mortgage provider is willing to lend to you, and this can help you carry out a more focused search. A pre-approval can work in your favor when you’re negotiating with sellers because they tend to take you more seriously than other prospective buyers. Besides, it can also lead to a faster closing.

Research Online First

When a home that’s up for sale has an open house, there is a very good chance that you can find the listing online. Use this to get as much information as you can, which may include the home’s square footage, price, monthly payments, number of rooms, and age. Online listings also tend to come with photos and videos. Going through a home’s online listing gives you an indication of if it’s worth visiting at all.

Take Notes and Photos

Given that you will end up looking at a few or more homes before you buy one, keeping track of details can be challenging. As a result, it’s ideal that you take property-specific notes each time you visit an open house. These may include features that draw your attention as well as concerns and questions you might have.

Taking photos can also help you compare different properties at a later stage, but make sure you do this only after seeking permission from the sellers or their agents.

Make a Good Impression

It is common for real estate agents and Realtors to represent homeowners who wish to sell their homes, and it’s normal for them to help sellers determine which offers are the best. As a result, making a good impression with the seller’s agent can help give that extra push your offer requires in a competitive market.

Make sure you arrive at the open house dressed well and follow all house rules that might apply. Agreeing to any request that a seller’s agent may have, like completing a sign-up form, is the ideal way to go.

Look at Neighboring Homes

Visiting an open house gives you an opportunity to look at other homes in the vicinity. However, it’s important to be discreet and look at them from a distance. Remember that neighbors can be long-term, especially if they’re homeowners, so it makes sense to look for signs that might indicate potential problems. For example, are the homes of the immediate neighbors neglected or well-kept?

Inspect Closely

Given that you get considerable time to go through a property during an open house, use it to your advantage. Besides, make sure you don’t let the staging distract you, and inspect the home with a critical eye. For example, sagging roofs, cranky HVAC systems, and cracks in the walls can be signs of neglect.

Mold can lead to significant problems and can occur in homes that have suffered any type of water damage, either because of flooding or leaking pipes. While mold appears in plain view at times, it usually thrives in damp and dark places. This requires that you check for mold in the basement, under the deck, in the bathroom, and under the sinks.

With homes that are fully furnished, you should do your best to detect hidden problems by trying to look past furniture and check for damage to the floorboard, drywalls, tiles, and bricks. Remember that there are several elements in a typical DIY home inspection, and it’s best that you understand the process in advance.

Check Storage Space

The square footage of a home might not serve as a clear indication of the storage space it offers, so considering this aspect during an open house is important. Ask the seller’s agent if it’s okay to climb up the attic, open closet doors, check drawers, and inspect bathroom storage, and make sure you treat the existing owner’s belongings with care. If a home comes with an unfinished basement that can provide adequate storage space, determine if it is worth the expense.

Pay Attention to Other Prospective Buyers

At an open house, you need to view other prospective buyers as your competition, but it’s important to be respectful to them. Knowing how many people attend an open house can be useful because while many visitors might lead to stiff competition, only a handful might mean that the seller will receive few bids, and that yours might stand a better chance.

Follow Up with the Seller’s Agent

If you have questions about the property, don’t hesitate to contact the seller’s agent. You may also consider sending a quick email to express your interest in the home by highlighting the aspects you like. If you wish to give a home a relook, you may  request a one-on-one viewing.

Can You Go to an Open House Without a Pre-Approval?

The short answer to this is, yes, you may go to an open house without pre-approval from a mortgage provider, but having one in place comes with numerous benefits. For starters, it shows the seller that you are serious about buying a home and adds credibility to your offer. Besides, if you’re purchasing a home in a competitive market, a pre-approval letter can swing the pendulum in your favor, especially if a competing bidder does not have one.

If you decide to move forward with the purchase, a pre-approval can speed up the process because you’ve already taken care of the initial paperwork. Besides, a pre-approval gives you an indication of how much you can borrow, and you can then attend open houses based on this number. Bear in mind that lenders consider several factors before granting preapproval, which include your credit score, income, and debt-to-income ratio.

Conclusion

Now that you know what to do at an open house as a buyer, make sure you put your best foot forward when you attend the next one. If you feel you might not remember all the aspects that need your attention, jot down a few pointers from the open house tips for buyers you find on this page and refer to them as and when needed.

If you’re serious about becoming a homeowner, consider getting a pre-approval from a reputable lender ahead of time because this demonstrates intent to a seller or a seller’s agent. What follows is making an offer, negotiating, and closing the deal.

It is common for people who have started families or have reached a certain age to feel the pressure of buying a home. While expectations can come from different quarters, basing a decision as big as buying a home is not something you would want to rush into. After all, living on rent does come with its share of pros. So, is it smarter to buy a house or rent?

Is It Better Financially to Rent or Buy a House?

One of the biggest arguments in favor of home buying is that the property serves as an investment. However, it is not uncommon for people to miscalculate or overestimate their return on investment (ROI). Besides, homes don’t necessarily work as appreciating assets all of the time.

According to Robert Shiller, a Nobel Prize winner and a Yale economist, real inflation-corrected prices of homes from 1890 to 1990 remained “virtually unchanged”. Analysis of Shiller’s data revealed that home prices had grown at a compound annual rate of as little as 0.3%, adjusted for inflation, during a 100-year period.

When you decide to buy a home, you mustn’t put all your financial eggs in one basket. This requires that you hang on to some of your investable assets. It is also crucial that you look at your purchase as a right to housing instead of a long-term investment that will yield great dividends.

According to most experts, housing may work well as an investment, but not as a great investment. As a result, if your main aim of buying a home is an investment, you might be better off putting your money in a well-balanced and diversified portfolio of stocks and bonds, and continue living on rent.

The Cons of Buying a Home

Buying a home comes with its shares of pitfall and limitations, which you should know about at the very onset. This way, you may find it easy to determine if you are better off as a renter or a homeowner and prepare yourself to avoid or overcome any nasty surprises down the road.

Moving Out Is Not as Easy

What is an advantage of renting your residence instead of owning it? For starters, when you live on rent, you may choose to move out when the contract expires or by providing the required notice period. This gives you the freedom to move from one neighborhood to another, and even relocate to another city.

When you buy a house, moving out becomes harder because you may not find a suitable buyer when you want. Alternatively, you might end up selling your home for less than it is worth simply because you are in a hurry.

If you think you might have to relocate because of work or because of family obligations, it might be in your best interest to continue living on rent. Ideally, you should consider buying a home if you plan to live in it for at least five years.

You Need to Make a Down Payment

Depending on the type of home loan you seek, your credit score, and the mortgage provider you select, you typically need to make a down payment of 5% to 20% of the home’s selling price. In addition, the standard procedure is that you need to pay this amount in one go, before the lender disburses the loan amount.

Making a down payment that is as large as financially viable for you is ideally the best way forward. This is because a larger down payment reduces the amount you end up paying as interest in the long run. However, this also requires that you come up with a significant amount of cash at one time. As a renter, you have a lot less financial responsibility.

The Lure of a Mortgage

If you, like many others, are wondering, ‘Is it worth paying rent or mortgage?” consider this aspect carefully. You do not have to buy a house just because you qualify for a mortgage, and this is a mistake some people end up making. Before you buy a home, take time to look at your spending habits and existing debt carefully.

If you have significant debt, you might want to reduce your financial burden before you think about getting a home loan. This is because not paying your mortgage in a timely manner will have an adverse effect on your creditworthiness. However, if you have a low debt-to-income (DTI) ratio, you might consider going the homeownership way.

The Risk of Depreciation

One question that many prospective homebuyers have is, “What is a financial risk of being a homeowner?” While it is common for people to expect their homes to appreciate in value over time, this is not always the case, especially if you do not prepare yourself for the long haul.

If you wish to sell a house when its value is down, there is a good chance that you will have to settle for less than its original price. This can also be a problem if you wish to refinance your mortgage through a different lender because you might not qualify for the amount you expect. As a result, think hard about buying a house if you don’t plan to live in it for at least five years.

The Risk of Foreclosure

Another financial risk of being a homeowner is that if you don’t plan your finances right, or if you experience a monetary setback, you might not be able to keep up with your mortgage payments. In such a scenario, you risk losing your house to foreclosure. While a foreclosure might leave you financially drained, it also has a significant negative impact on your creditworthiness.

Ongoing Costs

When preparing to buy a home, think about the long-term costs that come in the form of home repairs and renovations. If you are stretching your budget to buy a home, keeping up with the ongoing home maintenance costs might seem challenging. In addition, if you do not spend much time in the house you purchase, you might need to spend even more to hire a caretaker.

Benefits of Buying a Home

If you feel you are emotionally and financially ready and have determined that owning is actually better than renting, you may get the process underway and look forward to the benefits that home ownership has to offer.

Spending Less

While buying a home might seem expensive, it can turn out to be more affordable than renting in the long run. Depending on where you live, you might even end up spending less each month if you buy an affordable home and get a USDA loan or a VA loan. What also helps with these loans is that you do not have to worry about making a big down payment.

However, if you’re wondering whether it is more cost-effective to buy or rent, bear in mind that where you buy a home and the property in question has a bearing on this factor. This is because, according to the February 2024 Rental Report by Realtor, it is more affordable to rent a starter (0-to-2-bedroom) home than to buy one in the country’s top 50 metros.

Building Equity

When you buy a home with the long term in mind, you work in building equity. When you pay rent, it is money you will never get back. Making monthly mortgage payments, on the other hand, helps you build equity. As the amount you owe toward your loan reduces, the equity you hold in your home increases.

If you wish to sell your home at a later stage, home improvements can increase its value and the equity you hold, and you still may be able to recoup some of the money spent when you sell or refinance.

Getting a Tax Break

During the initial years of repaying your mortgage, most of your payments go toward paying off the interest. The government allows you to deduct a percentage of the amount you pay as interest when you file your tax returns. While this might not seem like much, it does add up to a tidy sum over the years.

Increased Stability

One of the top answers to, “What is a benefit of owning a home instead of renting one?” comes in the form of stability. After all, a big pro of owning a house and living in it is that you do not have to worry about looking for a new place because your existing landlord wants you to move out. When you live in a house that you call your own, you can look forward to a set neighborhood and don’t have to worry about changing schools or hospitals.

Increased Flexibility

Living in a rented house does not provide the same flexibility that owning one does. For instance, if you want to modify your home’s kitchen or bathroom, you can do so as and when you want without seeking your landlord’s permission. Remodeling the interior of your home, carrying out a landscaping project, or using wallpapers of your liking is easy to do when you own your home. 

Should I Rent or Buy a House?

Finding out if you are ready to buy a home is not difficult, and all you need to do is answer some basic questions. So, what details will you consider as you decide to rent or buy a home?

• Do you have money for the down payment? You should ideally be able to pay around 20% of the home’s value as down payment. However, there are some types of loans that require lower down payments.
• Can you keep up with the mortgage payments? Repayments toward fixed-rate mortgages do not change over the entire loan term, which gives you an easy way to predict if you will be able to keep up with payments in the future. With an adjustable-rate mortgage, you need to factor in that your monthly repayments may increase at almost any time.
• Are you secure in your job? If you have job security and feel that you will stick to your existing job or will find a new one easily, you may consider buying a home. A steady source of income will ensure that you keep making your mortgage repayments on time while continuing to build equity in your house. If you have switched jobs recently or plan to do so soon, you might want to hold on to your home-buying plan for some time.
• How good is your credit score? Your creditworthiness plays an important role in your ability to secure a loan and get a favorable interest rate. For instance, while an excellent credit score typically results in a competitive interest rate, a low credit score could result in you paying a noticeably higher interest tare. Typically, a credit score of over 720 will get you the best rates.
• Are you willing to fix your credit score? If you have poor creditworthiness, you might want to improve your credit score before applying for a mortgage. You may do this by making all your repayments on time, reducing your debt, getting inaccuracies in your credit report fixed, and avoiding getting new forms of credit.
• How favorable is the credit and real estate market? Take a look at existing interest rates and consider expert opinion surrounding whether real estate prices might rise or fall in the future. For context, consider these numbers released by Freddie Mac. Average interest rates for 30-year fixed mortgages dropped from around 7.5% in October 2023 to 6.77% as of the week ending July 17, 2024.
• Are you committed to staying put? Given all the costs associated with buying a home, you must commit to staying in it for a few years. In your plan to move out in the first couple of years and wish to sell the house, you might end up losing a tidy sum. Bear in mind that selling the house also comes with its fair share of costs. So, is owning actually better than renting? Typically, only if you plan to stay put for five or more years.

Conclusion

The short answer to, “Are you better off as a renter or a homeowner?” depends on your individual circumstances. If you are unsure about your financial situation or plan to relocate in the near future, you might be better off living on rent. On the other hand, if you have your finances in order and plan to live in the same place for a few years, buying a home might work well for you. If you do plan to buy a home, looking for a suitable mortgage lender and getting pre-qualified before you begin your search is the ideal way forward.

There are various reasons seniors choose to get mortgages, from upsizing or downsizing to tapping into the equity they’ve built in their homes. While getting a mortgage after a particular age might seem challenging, as long as you meet the required eligibility criteria, there is no reason why you cannot qualify. Besides, given the different types of mortgages for seniors, qualifying for one might be simpler than you think.

Senior Homeownership and Mortgages in Numbers

Data released by the Federal Reserve Bank of St. Louis shows that there is a slight increase in homeownership rates from the 55-year to 64-year-old bracket to those aged 65 years or more. For example, 75% of 55-year to 64-year-olds in the country owned homes in 2020, when compared with 80% for those aged 65 years or older. In 2022, the numbers stood at 76% and 77% respectively.

Data compiled by Nation Swell highlights that the percentage of people aged 65 years or more who have mortgages has increased by 28.5% from 2000 to 2022. In addition, while mortgage debt is not common in this age bracket, 34% of people aged 65 years or more had mortgages in 2022.

A more recent post in the New York Times suggests that 40% of homeowners who are 64 years or older had mortgages in 2022.

Why Seniors Get Mortgages

While some people choose to get mortgages a few years before retiring, there are others who opt to take this path after retirement. In both cases, the reasons are varied.

• Moving to a new home. Oftentimes, seniors wish to move out of their existing homes. Some do it to downsize, either because of financial reasons or because their homes, without their children, are too large for their needs. Instances of seniors buying new homes to be closer to their kids and grandkids are also common.
• Reinvesting equity. Some older homeowners who have paid off their mortgages or have substantial equity in their homes might want to reinvest it to generate more income. However, in such a scenario, there is no guarantee that your investment will keep pace with your home’s growing value, so it’s best to consult a financial advisor in advance.
• Getting a lower rate. Refinancing can be a viable option for seniors who have not paid off their mortgages yet if they benefit from a lower interest rate. Lower rates that translate into lower monthly payments can be beneficial if you need extra money or are having trouble keeping up with your payments. However, you need to account for all the fees involved in the process to determine if you will come out on top.
• Dealing with financial problems. Given that many older people live on fixed incomes, keeping pace with inflation can seem daunting. It is not uncommon for seniors who find it hard to maintain their existing lifestyles to tap into the equity they’ve built in their homes so they may get access to the required funds. In this case, a reverse mortgage might be the order of the day.

The Equal Credit Opportunity Act Makes Age a Non-Factor

From the legal perspective, the Equal Credit Opportunity Act makes it illegal for a creditor to discriminate against an applicant based on age as well as national origin, religion, race, color, sex, or marital status. While you might need to provide some of these details as part of your application, the only purpose they serve is that of demographic data.

Whether you are close to retiring or have already retired, you may expect your application to go through the same underwriting guidelines. What’s important is that you should demonstrate your capacity to repay the money you wish to borrow, either in the form of income or assets. So, the answer to, “Can I get a 30-year mortgage at age 65?” is in the affirmative, provided you check all the boxes.

While the law stipulates that mortgage providers cannot use age as a qualifying factor when they access applications for credit, the fact remains that you still need to meet all the eligibility criteria of the type of mortgage you wish to get.

Is It Hard for Seniors to Get a Mortgage?

If you’re wondering “What is the oldest age you can get a mortgage?” know that you may apply for one even if you are in your 90s, as long as if you meet the requirements. However, while the law prohibits lending discrimination based on age, different findings indicate that some seniors might face challenges in qualifying for mortgages.

A study carried out by the Center for Retirement Research at Boston College points out that there is a direct correlation between rejection and age, one that does not work in favor of older applicants. However, it mentions this does not imply that lenders are in violation of the fair lending legislation.

Results of the study highlight that the law makes way for lenders to consider applicants’ ages in some circumstances. In addition, it takes into account the economic implications that lenders face because of mortality risk owing to which there might be a need for additional collateral.

A working paper by the Federal Reserve Bank of Philadelphia has also found a link between the age of borrowers and application rejection rates. It points out that the probability of rejection increases gradually with age, but accelerates during old age. One contributing factor can be the lack of ability to maintain properties.

Other factors that can play important roles in the outcome of your application include your existing debt and assets. For example, if you already have significant debt, a lender might feel that you may not be able to handle more debt, especially if you’re on a fixed income. 

Which Type of Mortgage Is Typically Offered to Seniors?

There is no single type of mortgage that lenders provide to seniors, and the options you get are largely the same as the ones that younger borrowers get. If anything, a few alternatives enter the picture only as you grow older. The most common types of mortgages for seniors include conventional loans, VA loans, and reverse mortgages.

Conventional Loan

A conventional or conforming loan is one that meets the guidelines set by Fannie Mae and Freddie Mac. Depending on the lender you select, you might be able to make a down payment as low as 3%. You typically need a credit score of 620 or higher to qualify.

VA Loan

The U.S. Department of Veterans Affairs (VA) backs these no-down payment mortgages for eligible existing and retired military personnel. If you qualify, you may use to proceeds to buy a new home or refinance an existing mortgage. While there is no minimum credit score requirement, the possibility of approval increases with a score of 620 or higher.

Reverse Mortgage

If you have built adequate equity in your home and are at least 62 years old, you may qualify for a reverse mortgage. The biggest advantage of this type of mortgage for seniors is that you don’t have to make any monthly payments. Instead, you receive money from the lender. In addition, there is no income-based eligibility criterion.

USDA Loan

The U.S. Department of Agriculture (USDA) guarantees USDA loans, and you may qualify for one as a low- to moderate-income borrower. The property you wish to purchase does not have to be rural. It can be in an eligible suburban area of a large city or a town with a population of up to 25,000. A credit score of at least 640 will hold your application in good stead.

FHA Loans

Backed by the Federal Housing Administration (FHA), FHA loans might work well for seniors with less-than-perfect credit scores. If your credit score is 580 or higher, you may make a 3.5% down payment. With a credit score of 500 to 579, the minimum down payment increases to 10%.

Non-Conventional Types of Mortgages for Seniors

Given that there is no particular type of mortgage that qualifies as the best mortgage for seniors, it makes sense to explore all possible options. Then, you may make a decision based on your specific situation. Moving beyond the traditional types of mortgages for seniors, here are the ones that not all lenders provide.

Bank Statement Loan

You may consider looking at what a bank statement loan has to offer if your income comes from non-traditional sources like Social Security, a retirement account, or rent. In this case, you may expect lenders to take your cash flow, savings, and assets into account, and you won’t need to present paystubs or W-2s. However, higher interest rates are typically part of the parcel. The minimum down payment may vary from 10% to 20%.

Asset Depletion Loan

An asset depletion loan lets high-net-worth individuals borrow money using the value of their existing assets like stocks and bonds as collateral. This loan allows you to keep ownership of the asset while accessing part of its cash value. In this case, you may apply for a mortgage and ask the lender to convert your assets into qualifying monthly income.

Cash-Out Refinance

The difference between a cash-out refinance and conventional refinancing is that the former replaces your existing mortgage with a larger loan, and you get the difference in cash. While you need significant equity in your home to qualify, Social Security income can also count as income if you’re applying for cash-out refinance.

Income-Based Documents You Need to Apply

Practically every type of mortgage for seniors requires that you provide documents to verify your income. The documents you need to submit depend on the type of income you earn.

• Social Security. You’ll need a recent receipt of income and a copy of your Social Security award letter. If you receive Social Security survivor benefits, you’ll need to show that you will continue receiving the income for three years or more.
• Supplemental Social Security Income (SSI). You need to provide a recent receipt of income and a copy of your Social Security award letter.
• Income from government, retirement, or pension. You need to provide an IRS W-2 or 1099 form, federal tax returns, bank statements showing the deposited income, a copy of the benefit statement/retirement award letter, and a statement from the income provider.
• Income from IRA, 401(k), or Keogh plans. In addition to the documents required for income from the government, retirement, or pension, you need to confirm that you will keep receiving the income for at least three more years. In addition, all the accounts in question should come with unrestricted penalty-free access.
• Income from interest and dividends. You need to submit copies of account statements along with copies of tax returns for the preceding two years.
• Income from VA benefits. You’ll need to verify that the income will stay in place for at least three more years and submit a letter from VA that confirms the income. This does not apply to VA’s retirement and long-term disability income.
• Income from long-term disability. You need to submit the income’s proof of eligibility and documents that outline the amount and payment frequency. You also need to verify that the income does not have a predetermined end date.

Conclusion

You can get a mortgage as someone who is retiring in a few years or has already retired if you meet the required eligibility criteria. More often than not, this requires having an acceptable credit score and enough income/assets.

Mortgages for seniors offer competitive interest rates and flexibility in terms. For example, you may get a conventional mortgage that allows you to make bi-weekly repayments or one that does not charge a prepayment penalty.

If you’re having trouble choosing from the different types of mortgages for seniors, consider discussing your situation with a reputable mortgage provider. Once you have all the information you need, you may make a suitable decision.

Becoming a homeowner is an incredible milestone that should be celebrated! Once you have decided that you are ready for this next step, it is important to prepare for the critical decisions you will need to make that determine your financing. You will be faced with the question of what type of mortgage is best for you: fixed- or adjustable rate? In this blog, we’re breaking down the key difference between these options to allow you to decide with confidence!

 

What Is a Fixed-Rate Mortgage?

For a fixed-rate mortgage, the interest rate remains the same throughout the entire term of the loan. This ensures that there is no change in your monthly principal and interest portion of the payments. Real Estate taxes and Insurance premiums typically increase over time. Fixed-rate mortgages provide a sense of security and allow for simplified long-term budgeting.

One of the key benefits of a fixed-rate mortgage is that it safeguards borrowers from interest rate hikes that can cause monthly payments to increase. Besides, understanding how fixed-rate mortgages function is easier when compared to adjustable-rate mortgages (ARMs).

One possible drawback of fixed-rate mortgages kicks in when interest rates are high. In addition, since the interest rate on the mortgage remains the same, you will not benefit from any cuts. You always have the option to refinance down the road if interest rates drop, but keep in mind that you will face closing costs. After refinancing, you have a new loan.

The total interest you end up paying throughout the course of the loan depends on its term. The most common loan terms include 10, 20, and 30 years. If you’re looking to pay off your mortgage aggressively, a 10-year term is best for you. However, the monthly payments will be much higher than if you choose a 30-year term. The longer the term, the more you will pay in interest. You can make additional principal payments during the term of the loan to shorten the total term and interest paid.

 

What Is an Adjustable-Rate Mortgage?

As the name implies, the interest rate on an adjustable-rate mortgage is subject to change based on the market. Lenders rely on two basic numbers to determine which way they need to adjust their interest rates. These include the index rate and the margin.

• Index rate. The index rate is a benchmark that has a direct bearing on your ARM’s interest rate. Some of the factors that affect the index rate include treasury yields, the Cost of Funds Index (COFI), the Secured Overnight Financing Rate (SOFR), and the prime rate.
• Margin. The margin is the mark-up that a lender adds to the index rate and it accounts for the risk the lender is willing to take to grant you a loan.

Why Index Rates Change

Index rates can change based on different economic factors including but not limited to:

• Inflation. If inflation increases, the Federal Reserve may hike interest rates to cool down the economy. This can cause index rates to rise, and consequently, your ARM rate to go up.
• Demand. When there’s a high demand for mortgages, lenders may raise index rates to manage risk.
• Global market conditions. Global economic events can have a negative impact on index rates.

 

How ARMs Work

The interest rate attached to an ARM is typically lower than that of a comparable fixed-rate mortgage during the initial period which may vary from one to ten years. Once this predetermined period ends, the interest rate can go up or down depending on market conditions. In the long run, the interest rate of an ARM can surpass that of a comparable fixed-rate mortgage.

Once the initial period ends, your ARM’s rate begins adjusting at regular intervals. Here are the most common types of ARMs based on the frequency of adjustments.

• 1/1 ARM. Not commonly found, the interest rate of this ARM remains the same for the first year and changes every year thereafter.
• 3/1 ARM. There is no change in the interest rate during the first year, after which is it is subject to change every year.
• 3/6 ARM. Interest rate adjustments take place every six months after the three-year fixed rate period.
• 5/1 ARM. The interest rate remains fixed for the first five years and adjusts annually thereafter.
• 5/6 ARM. Adjustments happen every six months after the initial five-year fixed period.
• 7/1 ARM.A fixed rate applies for the first seven years, followed by yearly adjustments.
• 7/6 ARM. You get a fixed rate for the first seven years, followed by adjustments that occur every six months.
• 10/1 ARM. A 10/1 ARM comes with a 10-year fixed-rate period before annual adjustments begin.
• 10/6 ARM. Adjustments take place every six months after the initial 10-year period.

Caps on ARMs

You may think of caps on ARMs like safety nets, limiting how much the interest rate and your monthly payments can fluctuate throughout the loan’s term.

• Initial adjustment cap. This limits the increase in interest rate during the first adjustment period. For example, if your ARM has a 5% initial adjustment cap, your interest rate can’t jump more than 5% from the initial fixed rate at the first adjustment.
• Periodic adjustment cap. This restricts any increase or decrease during each adjustment period after the initial fixed rate ends. Typically denoted as a percentage, it applies to each adjustment period throughout the loan.
• Lifetime cap. The lifetime cap determines the maximum and minimum interest rate you’ll pay over the entire life of the loan, ensuring your rate won’t skyrocket even if market rates climb significantly.

ARMs with lower initial and periodic adjustment caps tend to come with higher initial interest rates because lenders take on less risk by limiting how much they can adjust the rate. On the other hand, ARMs with higher caps offer more flexibility for the interest rate to adjust with the market. However, this can lead to potentially higher monthly payments down the line.

If you’re thinking about getting an ARM, it’s crucial to understand the specific caps that apply to your mortgage, and you may benefit by asking your lender these questions.

• What are the initial, periodic, and lifetime adjustment caps?
• How do the caps affect the initial interest rate?
• How would the caps limit rate adjustments over time?

 

Fixed-Rate vs. Adjustable-Rate Mortgages: The Similarities

A close look at the ARM vs. fixed-rate mortgage comparison shows you that both come with some similarities.

• Loan term. Whether you opt for an adjustable- or a fixed-rate mortgage, you get to choose from different loan terms, typically ranging from 15 to 30 years. A shorter term means a higher monthly payment and faster payoff, while a longer term offers lower payments and extends the interest-paying period.
• Eligibility. Getting approved for either loan usually requires a good credit score and a sound financial situation. Bear in mind that lenders assess your income, debt-to-income ratio, and overall financial stability to determine your eligibility and interest rate.
• Ability to refinance. The option to refinance your mortgage exists no matter which of the two you select. This can be particularly beneficial if you wish to refinance an ARM before its interest rate resets.

Adjustable- vs. Fixed-Rate Mortgages: The Differences

The key difference that stands out in the adjustable- vs. fixed-rate mortgage comparison is what happens to the interest rate through the course of the loan’s term. While it remains the same for as long as you have a fixed-rate mortgage, it becomes subject to periodic adjustments with an ARM after the initial fixed-rate period ends. Looking at the pros and cons of each type sheds more light on their differences.

 

Adjustable-Rate Mortgage: Pros and Cons

It is common for potential borrowers to ask “What is the main advantage of an adjustable-rate mortgage?” Here are the benefits on offer.

• Lower interest rate during the initial period when compared to a fixed-rate mortgage.
• Favorable market conditions may lead to lower interest rates down the line.
• Lower initial payments can make qualifying for a loan easier.

What is the big disadvantage of an adjustable-rate mortgage? One potential drawback is that your interest rate and monthly payments might go up significantly over time owing to rate adjustments. Besides, since your regular principal and interest payments may change frequently, it might be challenging to create a budget for the long term.

 

Fixed-Rate Mortgage: Pros and Cons

Factors that work in the favor of fixed-rate mortgages include:

• The interest rate will not increase with time.
• Planning and budgeting are easier because your monthly payments remain the same.
• You might be able to make a smaller down payment when compared to an adjustable-rate mortgage.

The benefits notwithstanding, understanding the potential shortcomings of fixed-rate mortgages is also important. For instance, you’ll need to refinance your mortgage to take advantage of falling interest rates. In addition, you might end up paying a tidy sum as interest if you get a fixed-rate mortgage when interest rates are high.

Which Should You Get?

While looking at the adjustable- vs. fixed-mortgage comparison is important, you need to understand that this aspect comes into play based on the type of mortgage you wish to get and the lender you select. For example, with mortgages offered under the U.S. Department of Agriculture’s Single Family Housing Guaranteed Loan Program (SFHGLP), you don’t get the option of ARMs. However, the option exists with conforming loans, as well as VA loans.

 

Why Fixed-Rate Mortgages Are Better?

While not always the case, getting a fixed-rate mortgage can work better than an ARM in different scenarios.

• Buying for the long-term. If you plan to live in the home you purchase over the long term, a fixed-rate mortgage can bring with it a sense of budgetary stability. You can still make additional payments to repay your loan ahead of time.
• On a tight budget. If you’re on a tight budget, any increase in interest rates can affect your ability to make higher monthly payments, making a fixed-rate mortgage a safer bet.
• Favorable market conditions. When prevailing home loan interest rates are low, you may look forward to long-term savings by locking in a low rate. This can be the case even if the rate you pay is higher than the rate of a comparable ARM at that point because the latter can increase with time.

 

When Can Adjustable-Rate Mortgages Be Better?

Given that an ARM starts out with a lower interest rate than a fixed-rate mortgage, you get some leeway in making additional payments to bring down the principal amount early on. You may benefit by getting an ARM in a few other scenarios too.

• Not buying a long-term home. If you plan to move out of the home you purchase before the introductory fixed-rate period ends, an ARM can save you money. This is because you can enjoy a lower rate while you’re there, and if you move before it adjusts, you haven’t locked yourself into a potentially unfavorable rate for a prolonged period.
• Fall in interest rates. If interest rates are currently high and expected to fall, an ARM can be a gamble that pays off. As rates drop, so will your ARM’s interest rate, potentially saving you thousands over the life of the loan. However, remember, that ARMs are akin to double-edged swords; if interest rates rise, so will your payments.
• Flipping. If you’re buying a house with the intention of fixing and flipping it soon, the money you save from an ARM’s lower initial rate can leave with you extra funds to carry out the required repairs and renovations.
• Increase in income. If you foresee your income to increase noticeably in the times to come, you might be able to withstand the risk that comes with an ARM. This is because you will be able to make higher monthly payments, should the need arise.

 

Conclusion

Now that you know how to determine if a fixed- or adjustable-rate mortgage is better for you, take time to look at the types of mortgages for which you might qualify. For example, if you or your spouse is serving or has served in the U.S. military, you might be eligible to get a VA loan without making any down payment. If you’re still unsure about which way to proceed, discussing your specific situation and requirements with a reputed mortgage provider can help you make your decision.

FHA and conventional loans are among the two most common alternatives homebuyers turn to when they seek funding to move forward with their purchases. While you may use either one to purchase a new home, you may also use them to refinance an existing mortgage. Looking at the conventional vs. FHA loan comparison closely before determining which one might work better for you is important because each loan comes with notable differences.

What Is an FHA Loan?

Backed by the Federal Housing Administration (FHA), FHA-approved private lenders across the U.S. provide FHA loans. The FHA insures mortgages to safeguard the interest of lenders in case borrowers default on their loans. FHA insures mortgages on single-family homes and multifamily properties alike. However, the home you purchase will need to serve as your primary residence.

People with less-than-perfect creditworthiness who feel they might not qualify for conventional mortgages might benefit by looking at what FHA loans have to offer because they come with less stringent credit score requirements.

What is a Conventional Loan?

Most conventional loans meet the requirements prescribed by Freddie Mac or Fannie Mae, and you may also refer to the ones that do as conforming loans. However, they do not come with any type of government-backed guarantee. Unlike FHA loans that you may use to buy only primary residences, you may use the proceeds from a conventional loan to purchase a second home or an investment property.

Conventional loans that do not meet Freddie Mac and Fannie Mae guidelines surrounding aspects such as maximum loan amounts, applicants’ incomes, down payment requirements, and credit standards fall under the non-conforming loans bracket. Jumbo loans classify as non-conforming loans. Non-conforming loans tend to have a smaller market and come with higher-than-usual interest rates.

Eligibility Requirements

Whether you qualify for an FHA loan, a conventional loan, or both depends on multiple factors such as your credit score and the down payment amount. However, FHA loans have more relaxed eligibility criteria surrounding acceptable credit scores and debt-to-income ratios, which is why they come first in this section of the FHA vs. conventional mortgage comparison.

FHA Loan Requirements

• You need a minimum credit score of 500.
• Down payment can be as low as 3% based on your credit score.
• The home must pass a professional home inspection.
• An FHA-approved appraiser needs to appraise the home.

Conventional Loan Requirements

• You need a minimum credit score of 620, although you get better terms with a higher score.
• Down payment for first-time homebuyers can be as low as 3%.
• Down payment for a second home needs to be at least 10%.

Limits on Loan Amounts

FHA and conventional loans have maximum limits surrounding how much money you might be able to borrow, and these limits vary by county. In addition, these limits are subject to change each year.

According to the Federal Housing Finance Agency (FHFA), the conforming loan limits (CLLs) across most parts of the U.S. for one-unit properties in 2024 is $766,550, and it is $981,500 for two-unit properties.

Similarly, FHA’s countrywide floor and ceiling forward mortgage limits for one-unit properties in 2024 stand at $ 498,257 and $ 1,149,825, respectively.

Debt-to-Income Ratio Requirements

Your debt-to-income (DTI) ratio gives lenders an indication of how much money you need to use from your monthly income to make repayments toward your existing debt. Calculating your DTI ratio requires that you divide your total monthly debt payments by your monthly income and multiply it by 100. For example, if your monthly debt payments amount to $1,500 and your monthly income is $4,000, your DTI ratio is 37.5% (1500/4000*100).

The conventional loan vs. FHA loan comparison tilts in favor of the latter when it comes to acceptable DTI ratios. For FHA loans, your DTI ratio should be 50% or lower. When it comes to conventional loans, most lenders look at DTI ratios of 36% or lower with favor.

It’s important to note that the maximum allowed DTI ratio does not apply to each applicant. Lenders might view borrowers with the higher end of acceptable DTI ratios with favor if they appear to be strong borrowers through compensating factors such as excellent creditworthiness or access to adequate cash reserves.

Down Payment Requirements

Just how much down payment you need to make when buying a home varies based not just on the type of loan you choose, but other factors as well. While common perception suggests that you need at least a 20% down payment to get a conventional loan, this is far from the fact.

For instance, the Conventional 97 Loan is a 3% down payment loan alternative for first-time homebuyers, as well as for homeowners who wish to refinance their Fannie Mae loans, and you don’t have to fall in the low-income bracket to qualify.

The minimum down payment you need to provide to get an FHA loan depends on your credit score. You need to provide at a least 10% down payment if your credit score is between 570 and 579. If it’s 580 or higher, you may pay as little as 3.5%.

From the down payment requirement, the Conventional 97 vs. FHA loan comparison tilts slightly in favor of the former because you can make a lower down payment.

You may consider making a large down payment, even more than 20%, if you feel to can afford to because it comes with multiple benefits. With conventional loans, it takes away the need to pay extra for private mortgage insurance (PMI). In both cases, you may look forward to paying lower monthly payments and interest charges throughout the course of the loan term. You’ll also get to build equity in your home faster.

Mortgage Insurance Requirements

Mortgage insurance helps safeguard a lender in case you default on your loan. If you plan to get a conventional mortgage and pay less than 20% of a home’s selling price as down payment, you will need to get PMI. Once you build 22% equity in the home, you no longer need to make PMI payments.

With FHA loans, while FHA insures your mortgage, you still need to pay mortgage insurance premium (MIP). You need to keep making these payments until you pay off your loan in full.

Since you need to make mortgage insurance payments toward an FHA loan for the life of the loan, PMI might be more cost-effective in the long run, especially if you have good or excellent creditworthiness. This is because your credit score plays a role in the PMI rate you get.

Property Standard Requirements

The condition of the home you wish to buy plays an important role in the FHA vs. conventional loans comparison. This is because FHA appraisals follow more stringent guidelines than conventional appraisals. While assessing the value of a home is part of an FHA appraisal, you may also expect an FHA appraiser to pay due attention to aspects such as adherence to local codes, quality of construction, and overall safety of the property.

FHA does not require the fixing of problems that do not affect the soundness or safety of a home. If you feel the home you wish to purchase might not pass an FHA appraisal, you may get the seller to make the required repairs beforehand. Alternatively, you may think about applying for a conventional loan that has more relaxed norms surrounding property standards.

Bear in mind that from the point of view of an FHA appraisal vs. a conventional appraisal, while the former focuses more on a property’s safety and security, the latter’s focus rests more on a property’s condition and value.

Is a Conventional Loan Better Than an FHA Loan?

If you’re wondering whether a conventional loan is better than an FHA loan, know that both come with their share of advantages and disadvantages. For example, while you may qualify for an FHA loan with less-than-perfect creditworthiness, you’ll need to keep making MIP payments until you pay off the loan completely.

The Pros and Cons of FHA Loans

The main advantages of getting an FHA loan include:

• Down payments can be as low as 3.5%
• Low closing costs
• Lower minimum credit scores required when compared to conventional loans
• Higher DTI ratios accepted when compared to conventional loans

The possible drawbacks of getting an FHA loan come in the form of:

• Need to pay mortgage insurance premium through the course of the loan’s term
• More stringent property standard requirements than conventional loans
• Need to use the home you buy as your primary residence
• Interest rates might be higher than conventional loans owing to less stringent eligibility requirements

The Pros and Cons of Conventional Loans

You might benefit by getting a conventional loan in different ways.

• Flexibility in terms
• Nonconforming loans come with no maximum limits
• No need to get PMI if your down payment is 20% or more of the home’s selling price
• Can use the proceeds of the loan to buy a second or an investment home

Like FHA loans, conventional loans also have some shortcomings.

• Typically stricter eligibility requirements than FHA loans
• Need a higher credit score to qualify when compared to FHA loans
• Need a lower DTI ratio to qualify
• Need to pay extra for PMI if your down payment is below the 20% mark

Tips to Reduce Your FHA or Conventional Loan Expenses

One common factor in the FHA loan vs. conventional loan comparison is that you get the ability to lower your loan expenses in both cases.

Compare Loans Estimates

It is important that you compare loan estimates provided by different lenders. Doing this requires paying attention to interest rates, monthly principal and interest payments, monthly mortgage insurance payments, total monthly costs, upfront loan costs, lender credits, as well as the amount of money you need to cover closing costs.

Select a Suitable Loan Term

Selecting a loan term has a bearing on the immediate and long-term cost of your mortgage. For instance, a longer loan term would result in lower monthly payments, and the converse holds true as well.  However, the longer the loan term, the more you would end up paying as interest.

Make a Large Down Payment

Making a down payment of 20% or more can help you avoid the added cost of private mortgage insurance if you get a conventional loan. In addition, a large down payment – toward an FHA or conventional loan – would result in lower upfront fees, overall interest, and monthly payments. You might even benefit by getting a better interest rate.

Reduce Closing Costs

Closing costs refer to the expenses that buyers and sellers incur when transferring a property’s ownership. These may include loan origination fees, appraisal fees, title insurance charges, property taxes, escrow deposits, mortgage tax, and underwriting fees.

These costs tend to vary from one county to the next, and typically range from 3% to 6% of the loan amount. What helps is you may take measures to lower your closing costs by paying attention to all the fees you need to pay.

The first thing you may do to bring down your closing costs is to get the seller to contribute partially. The possibility of this happening is more likely if you’re buying in a market that’s not favorable for sellers. Another option is to negotiate with your lender, especially if you’ve compared multiple loan estimates and have found lower costs through other lenders.

You may also benefit through lower rates and fees if you’ve been a longstanding customer of the financial institution through which you’re seeking a mortgage.

If you’re unable to fund closing costs on your own, you might ask your mortgage provider to include the same in the loan amount. If your lender agrees, these costs get added to the principal amount, which you repay over time.

Conclusion

Which is better, an FHA or a conventional loan? You may consider applying for the former if you have less-than-perfect creditworthiness or if you don’t have enough money to make a large down payment. This is also the case if you’re looking at buying a primary residence or if you have a high debt-to-income ratio.

While conventional loans tend to come with stricter eligibility requirements, they may lead to savings in the form of low or no mortgage insurance payments. A conventional loan might also work well for you if you wish to buy a home that will not pass an FHA appraisal, if you’re buying a second home, or if you’re in it for the long haul.

If you’re still unsure about where the FHA vs. conventional loan comparison stands based on your situation, you may consider speaking with a reputed mortgage provider who can take the specifics of your case into account and then guide you in making a more well-informed decision.