Burgher Vision, Inc

Buyer Basics

Financing Overview
Conventional, FHA, VA, Cash

If you have enough cash to buy a property outright, then obviously, there is no need for financing. This is the best way to buy a property if you can. As they say, "Cash is King." But for most of us, we need to apply for mortgage financing from a lender. The pros and cons of each type of financing is discussed below, but first, please read this important introductory material:

All non-cash real estate contracts have a clause which allows the buyer to cancel the contract if they fail to get the necessary financing. This, along with the reality that financing has become very hard to acquire during the recession, means that sellers always prefer cash buyers over buyers who need to get financing. A seller will often accept a lower cash offer over a higher offer that requires financing, because it will be more likely to close, and will probably close sooner.

Lenders require an appraisal on all properties for which they will provide financing. If you, as a non-cash buyer, make an offer which a seller accepts, an appraisal will then be performed. If the appraisal comes in less than the offer amount, the lender will reduce the amount they are willing to lend you proportionately. The seller MIGHT agree to reduce the price to the appraised amount, but they do not have to. If they don't, then you as the buyer must make up with the difference, or withdraw your offer. But if you're a cash buyer, then you don't even need an appraisal, and no one will stop you from paying as much as you want for the property.

CASH

CONVENTIONAL

  This is the best way to buy if you can. Note, however, that your word that you have enough cash is not good enough: you'll have to supply proof of funds with each offer you make. For many high-end homes, you may have to provide proof of funds before they even let you tour the home.
  A seller is more likely to accept your cash offer than an offer which requires financing even if your offer is somewhat lower, because it will be more likely to close and will probably close sooner. But there are a lot of cash buyers out there these days all competing against each other. The lower the property price, the more bidders competing, so if you're serious about buying, be prepared to offer more than the asking price.

  When a bank or mortgage company offers to lend money that is not guaranteed, insured, or subsidized by any government agency, it is called conventional financing. The terms they offer will depend upon your credit score, credit history, income, debt to income ratio, and other factors.
  They'll require you to make a substantial down payment, usually 10% to 20%, sometimes even more. The higher your credit score, the lower the interest rate they'll charge you. If you have less than perfect credit or income conditions, they may require you to purchase a Private Mortgage Insurance policy to protect them if you default on the loan.

FHA

VA

  The Federal Housing Administration (FHA) has been helping lower income people buy homes since the 1930's. They do this by insuring lending institutions against default by the borrower.
  The FHA does not make loans, so you still need to arrange for financing with a conventional lender. If you quality under the current FHA guidelines for your area, the lender will offer you a lower interest rate than you could get on your own, and will require less of a down payment, as little as 3%, much less than normally requried. In return, you must purchase an FHA insurance policy which you pay partly up front as part of your closing costs, and the remaining Mortgate Insurance Premium (MIP) is paid as part of your monthly mortgage payment.
  Before approving the insurance, the FHA will require an appraisal to determine ithat you're paying a fair amount for the house. They'll also require one or more inspections to ensure that the propety is safe to occupy and is free from significant defects, or pests such as termites.
  The FHA sets limits on the mortgage loan amounts by county and type of home. These limits are adjusted from time to time to reflect changse in inflation and cost of living. Limits vary according to the type of home (1, 2, 3, or 4 family dwelling), and they differ for each county according to the average cost of housing in that area.

  The Veterans Administration makes it easier for veterans or the spouses of veterans to purchase a home with more favorable terms than they could get on their own, and with little or no down payment. This is achieved by providing a guarantee to the lending institution.
  The VA does not make loans, so you still need to arrange for financing with a conventional lender. The lender will offer an interest rate dictated by the VA, and you may elect to make a down payment as little as one dollar. Unlike FHA, no mortgage insurance is required, thereby allowing more of the monthly payment to go towards paying down the loan balance. However, there is a VA funding fee of up to 3.3% which is charged, but it can be added to the amount being financed.
  The VA will require an appraisal to determine ithat you're paying a fair amount for the house. They'll also require one or more inspections to ensure that the propety is safe to occupy and is free from significant defects.
  The VA sets limits on the mortgage loan amounts by county. These limits are adjusted from time to time to reflect changse in inflation and cost of living. Limits vary for each county according to the average cost of housing in that area.
  The VA will only guarantee one loan for you at a time. However, once a guaranteed loan is fully repaid and you prove your eligibility, you can use it again. Note, however, it you let someone assume your VA guaranteed loan, you cannot get another VA guaranteed loan until they finish paying the loan.

• Tax Breaks for Military Families by Kimberly Lankford, Kiplinger (April 2010)