Purchasing a property can be a daunting endeavor whether it’s your first purchase or third investment home. In today’s ever-evolving housing market and industry, even the savviest homebuyer can benefit from a brief refresher on the current state of financing affairs. So this month, we’re hitting on the key financing basics as they relate to four specific home purchase scenarios. Are you or someone you know beginning to set out on a house hunt? The insights below can help to level set expectations and minimize surprises along the way.
Scenario 1: Buying for the First Time
This is the first scenario as it’s the most likely to be encountered. And while exciting, it’s not all about the house hunt. In addition to the task of finding the right fit for your first home, getting your credit in order for your mortgage application is essential. Mortgage lenders often will favor a higher credit score by passing through savings in the form of lessened risk through a lower interest rate. On the contrary, those with lower credit may not be approved for certain loan programs, or may have to pay a higher interest rate or what are referred to as “points” in order to obtain a particular interest rate. Points are akin to a fee paid to your lender on top of standard closing costs.
The good news is that your credit score can easily be obtained online, and often at no cost. Be sure to check your score before you embark on the process so there will be no surprises when your future lender pulls your credit report. Once armed with your credit history, you’ll have the confidence to explore different property options.
Scenario 2: Buying a Condo
Not all houses are treated the same in the eyes of a mortgage lender. For instance, condominiums, rather than detached single-family homes, come with a set of unique challenges. A buyer may seek the benefit of a smaller property, or perhaps less yard work, but there can be tradeoffs to a condo. For instance, you’ll be dealing with a condominium association, which oversees and maintains common areas at a specified monthly or annual fee. From a purchasing standpoint, your mortgage lender may require what’s referred to as “walls-in” homeowner’s insurance coverage on top of the entire association policy. This requirement may also depend on how comprehensive the master condominium insurance policy is, and whether it covers individual units in addition to the entire building.
Scenario 3: Buying an Investment Property
Investment properties come with their own opportunities and challenges. Buyers who plan to finance the investment should be prepared for a few stricter conditions on a mortgage than they may have experienced with a primary residence. Since lenders realize that the roof over your head is typically a priority when it comes to monthly bills, they will often require the full 20 percent down payment on a non-owner occupied investment property. Mortgage rates are also typically higher due to the additional risk that’s assumed by the lender on a non-owner occupied home. Additionally, there are operating expenses to consider, such as taxes, insurance, utilities and maintenance, when weighing the pros and cons of managing an investment property. It’s important to keep your expectations in check as not all investment properties are immediately revenue producing.
Scenario 4: Buying a Second Home
Lastly, for homeowners with some flexible funds on hand, a second home may provide a retreat for those who strongly favor a particular vacation spot. Homeowners purchasing a second home have to keep in mind that lenders can offer comparable rates to that of a primary home, so you may need to provide documentation to evidence that you won’t be renting the property out. For instance, if the home is in a popular vacation destination and your name is on bills for optional items such as cable and internet, this can imply to your lender that you are using the property as intended.
Ultimately, these unique situations place case-by-case parameters on the mortgage process, and in order to best prepare for each type of homeownership, you should discuss your options with your lender to clarify what is required.