A note from the team leader, Erica…
In the ever-evolving landscape of real estate, it’s crucial to stay informed about the various financing options available for homebuyers in 2024. Whether you’re a seasoned homeowner or a first-time buyer, understanding your choices can make a significant difference in your home purchasing journey. In this article, I’ll discuss an array of home financing pathways highlighting their pros and cons. Let’s get started!
Conventional Financing: The 5% Down Dilemma
Conventional financing remains a popular choice among homebuyers, offering the flexibility of a low 5% down payment. However, there’s a catch – Private Mortgage Insurance (PMI). To avoid PMI, consider the benefits of putting down 20% or more. While it may require more upfront cash, this option saves you money in the long run by eliminating PMI on the front-end and lowering your monthly payments.
No PMI with Seller Concessions:
The great news is some lending companies now allow you to pay the PMI cost upfront and even by utilizing funds from a seller concession towards that cost. This means you can negotiate with the seller to cover the cost of the PMI, making your homeownership dreams more obtainable. This loan product can be a win-win situation that’s worth exploring when opting for Conventional financing. But it’s worth noting not every lending company that offers Conventional financing offers the option to close with less than 20% down and not have mortgage insurance on the loan.
FHA Financing: An Alternative for Lower Down Payments
For those who can’t even meet the 5% down payment threshold, FHA financing offers a viable solution. With a down payment as low as 3.5%, it’s a more accessible option for many buyers. However, keep in mind that FHA loans come with built in mortgage insurance for the life of the loan, which in turn takes longer to own your home outright. But this loan product is a great way for buyers who have little to no money saved to purchase a home sooner than later. The loan product’s guidelines allow for “Gift Funds” to be utilized toward the down payment monies needed (coming from a family member or friend) and Seller Concessions are allowed up to a total of 6% of the sales price to cover the buyer’s closing costs for the loan. Closing costs, in addition to your bank and title fees, inspection and appraisal costs, also equate to the prepaid monies required for the escrow holdback for the property taxes, homeowner’s insurance and HOA fees where applicable.
FHA loans are geared towards financing for primary residence purchases and because of this the loan guidelines require you to take possession of the property as your main residence within 60 days of closing. This also means it’s unlikely you can purchase a home with a traditional FHA loan product and use the property as a rental. And it’s a requirement that the home be in habitable condition. Items like cracked windows, stairs without handrails, and chipping or peeling paint will be flagged on the appraisal report as a condition that will need to be corrected prior to closing. Evidence of water leaks, mold or deferred maintenance can be a deal killer. A home has to be livable otherwise the loan will be denied. A clear Pest Inspection Report is another requirement; and the appraisal process for this loan type is the one of the more stringent evaluations that take place as a contract contingency. This is good information to know in case you find yourself in a competing situation utilizing FHA financing.
FHA does offer renovation loan products for the homebuyer who is interested in purchasing a property that needs repairs and/or updating. 203K and 203b are the more common loan programs used for an “as-is” sale type, especially if the property being purchase is bank owned, a REO (real estate owned) or a foreclosure. For these types of “construction” loans there are requirements about all of the work being completed by a professional. The Contractors completing the planned renovations or projects and the work plans themselves all need to be approved by the underwriter, prior to closing, as a loan contingency.
VA Financing: A Perk for Veterans
VA loans are a fantastic option for our nation’s veterans, requiring no down payment at all in most cases. Additionally, they don’t have ongoing PMI costs, making homeownership more affordable for those who have served our country. If you qualify for VA financing, it’s definitely worth exploring this advantageous opportunity. The closing costs do tend to be a bit higher for this loan program, but Seller Concessions can go towards the closing costs for the Buyer. It’s worth noting for this type of loan product, as is the case mentioned above with FHA loans, the appraisal guidelines for the standard of condition of the home are more stringent to make sure the home is livable. And for this type of loan, eligibility guidelines require that the Seller pay for the termite inspection not only for the buyer’s knowledge but to prove to the lender that the home is free and clear of wood destroying pests. In the event a property is found to have evidence of infestation or damage of wood destroying insects or pests the Seller is obligated to complete treatment and provide a 1-year warranty on the work in order for the loan to close.
Down Payment Assistance (DPA) Programs for Arizona:
If you’re buying your first home in the beautiful state of Arizona, you might be eligible for a first-time homebuyer program. These programs can provide much needed down payment assistance for homebuyers that are short on cash for their purchase. However, be aware these programs come with stipulations regarding payback if you sell the home too soon. There are also rules on when you have to take possession by as an owner occupant and how long you need to own as your primary residence in order not to have to pay back the monies utilized from the program. Home in 5 and Home Plus are the two programs to consider if you are purchasing your first home in AZ in 2024 and want to take advantage of the opportunity for some “free money” towards your home purchase. There are also grant programs offered for first responders and teachers in AZ that help with monies towards the downpayment as well.
Buy-Down Loan Programs: Tailored Payment Solutions
2:1 and 3:1 buy-down loan programs have become more common over the past year and a half and offer a unique solution for buyers looking to save on their initial mortgage payments. This is a creative solution for buyers concerned about the higher interest rates, to purchase sooner than later. With these programs, sellers contribute through concessions to the buyer’s interest rate for the first few years with a point (rate) buy down at closing, resulting in lower monthly payments. While this might not affect your overall loan amount, it can provide a more budget-friendly solution in the short term while you wait for the mortgage rates to lower, to get into a new home this year. There are no prepayment penalties with these loans which means you can refinance at any time.
Seller Concessions: Making Your Dream Home Affordable
Seller concessions can be a game-changer in your home buying journey. By negotiating with the seller, you can have them cover some or all of your closing costs, reducing your upfront expenses. This can be particularly helpful when you’re looking for a more affordable way to become a homeowner. And if you are not utilizing a FHA or VA loan for your home purchase there is no limit on the amount you can ask for with closing cost assistance from the Seller. But it’s worth noting for the AZ Residential Resale Purchase contract, that term/item, states “Up to” which is definitely something you want to be aware of before starting negotiations. In the event not all the monies negotiated for Seller Concessions is utilized for the Buyer’s total loan expenses, those unaccounted for monies go back into the seller’s pocket at closing.
Bridge Loans: Bridging the Gap
For those who would prefer to buy their new home before selling their current one, a Bridge loans offers a great solution. These short-term loans “bridge” the financial gap between the sale of your old home and the purchase of a new one. They provide the flexibility to move quickly in competitive markets to avoid missing out on the home of your dreams, but it’s essential to understand the terms, interest rates and costs.
Jumbo loans cater to buyers looking to finance high-value homes that exceed the conforming loan limits. While these loans are available for both Conventional and VA financing, they often come with stricter credit requirements and higher down payment demands. It’s essential to explore your options and work with a lender experienced in jumbo loans when considering financing for higher priced properties.
Hard Money Loans: Fast and Flexible Financing
Hard Money lending offers unique financing options with little or no documentation requirements. These loans come with higher interest rates, starting in the double digits and can be an excellent option for homebuyers needing to compete with “All Cash” Offers in a hot real estate market. This financing option is particularly valuable when time is of the essence, and traditional lending options may not be available. Hard money loans are a valuable tool and short-term solution for real estate investors and buyers in unique situations.