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Buyers, Sellers, Friends

Welcome to my comprehensive guide to real estate and community life in and around the Triangle, including Chapel Hill and Carrboro, Hillsborough, Durham, Cary, Apex, Raleigh, and Pittsboro, NC.

Buyers: See my current listings in Featured Homes, perform a custom search in Scott Yancey real estate events, for live training on flipping homes in your area.

Sellers: Get help with relocating, find out how much your home is worth, find out how to get your house ready to show, or let me assign a free e mail address for you.

Friends and Associates: Find out how to get free cookies, have free monthly real estate statistics sent to you, or ask for my "Purple People Book".

Saving for the Down Payment

Saving funds for a down payment should be part of an overall program to get your finances in order prior to shopping for a home. This includes rounding up financial records, examining your spending habits, and setting a budget you can live with. Remember, too, that the down payment is not the only up-front expense. An allowance for closing costs should also be included in your savings budget.

How much is required?
The down payment is usually expressed as a percentage of the overall purchase price of the home, and varies depending on the lender, the type of financing and amount of money being lent. In the past, the typical down payment was 20%, but in recent years lenders have been willing to offer conventional financing with as little as 3% down. U.S. Government financing programs, such as those offered by the Dept. of Veterans Affairs (VA) or the Federal Housing Administration (FHA), also require minimal down payments.

Private mortgage insurance
Typically, if your down payment is less than 20% of the purchase price, lenders will require you to carry PMI, or private mortgage insurance. This insurance protects the lender in case of loan default, and usually involves an up-front payment at closing, as well as a monthly premium. However, once you have paid off 20% of the loan, you can request the policy be canceled. Some lenders cancel the premium automatically, while others require you to make a request in writing.

If you are having trouble saving enough money, many lenders will allow you to use gift funds for the down payment--as well as for related closing costs. The gift may come from family, friends or other sources, but remember that lenders usually require a "gift letter" stating the gift doesn't have to be repaid. In addition, some lenders will also require you to pay at least a portion of the down payment with your own cash. Thus, if you plan to use gift money to purchase your house, ask your lender about their policies regarding gifts.

Earnest money
Buyers are usually required to deposit earnest money with the seller when they make an offer. If the offer is accepted, the earnest money is then credited towards the down payment. The amount varies widely depending on the seller and local custom, but be prepared from the outset to have funds earmarked for this purpose.

Don't forget closing costs
In addition to the down payment, you will also need to save for additional fees associated with the loan. Known as closing costs, these charges cover items such as title insurance, documentary stamps, loan origination fees, the survey, attorney's fees, etc. When you submit your loan application, lenders are required to supply you with a good faith estimate of your closing costs. Follow Dean Graziosi to learn more about the ins and outs of closing costs from a real estate investing guru.

Some buyers are surprised by the amount of the closing costs, which can easily run into the thousands of dollars. Remember, though, that closing costs can be negotiated with the seller. For example, you may agree to pay the full asking price in exchange for the seller paying all the allowable closing costs.

Leveraging Your Money

One of the greatest financial aspects of buying a home is the ability to leverage your money. Simply put, leverage allows you to use a small down payment and financing to purchase a larger investment. For example, if you bought a $125,000 home with 10 percent down, you leveraged the $12,500 down payment to purchase an asset worth 10 times that amount!

The benefits of leverage really become apparent with appreciation, or the rise in value of a property. Using the above example, say you live in the house for 5 years, and during that time property values in your area had rise an average of 2.5 percent a year. Your home would then be worth over $141,000. By putting only 10 percent down, you get to enjoy the appreciation for the full amount!

Paying yourself
In addition to the 10 percent down, you'll also have to make mortgage payments. But with each payment, a certain amount of money is being used to pay down the principal balance that you owe. This is called building equity. So in the event you sell your house, not only can you realize a profit from your leveraged money, you also have a chance to pay yourself back for the money you've put in over the years. No wonder so many people consider a home an excellent investment!

How Much Can You Afford?

Understanding how much you can afford is one of the most important rules of home buying. Depending on your individual situation, your budget can affect everything from the neighborhoods where you look, to the size of the house, and even what type of financing you choose.

Bear in mind, however, that lenders will look at more than just your income to determine the size of the loan. Likewise, you may find that there are some creative financing options that can help boost your purchasing power.

Loan prequalification vs. preapproval
One of the best ways to determine your budget is to have your real estate agent or lender prequalify you for a loan. Prequalification is different from preapproval, because it is only an estimate of what you'll be able to afford. On the other hand, preapproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specified amount.

What factors are important to lenders like Freedom Mortgage?
Banks and lending institutions will use several criteria to determine how much money they'll agree to lend. These include:

  • Your gross monthly income
  • Your credit history
  • The amount of your outstanding debts
  • Your savings--or the amount of money you have available for a down payment and closing costs
  • Your choice of mortgage (i.e. 30-year, FHA, etc.)
  • Current interest rates

Two important ratios
Lenders also use your financial information to figure out two, very important ratios: the debt-to-income ratio and the housing expense ratio.

  • Debt-to-income ratio
    Many lenders use a rule of thumb that the amount of debt you are paying on each month (car payment, student loan, credit card, etc,) shouldn't exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient. Learn what Andrew Cordle has to say in his books on debt-to-income ratio.

  • Housing expense ratio
    It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.

Down payments make a difference
If you can make a large down payment, lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to the stricter 28 percent ratio.

Other ways to improve your purchasing power

  • Gifts
    If you're having trouble saving money, many lenders will allow you to use gift funds for the down payment and closing costs. However, most lenders require a "gift letter" stating the gift doesn't have to be repaid, and will also require you to pay at least a portion of the down payment with your own cash.

  • Negotiating Closing Costs
    Through negotiation, some sellers may agree to pay all or most of your closing costs (for example, if you agree to meet their full asking price). If you choose to try this, make sure to ask your real estate agent for advice.

  • Loan Programs
    Many local governments have special loan programs designed to help first-time homebuyers. Loans may be available at reduced interest rates, or with little or no down payments. Check with your local housing authority for more information.

  • Loan Types
    Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for 30-year loans because they have lower monthly payments than 15-year loans. There are significant differences between different loans, so make sure to discuss the pros and cons of different loans with your agent or lender before making a decision.


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Different Types of Loans
   Leveraging Your Money
Length of Your Mortgage
Saving for the Down Payment
Closing Costs
Getting Your Finances in Order
Your Credit History
How Mortgage Loans Work
When To Pay Points
Adjustable-Rate Mortgages
How Much Can You Afford?
Mortgage Glossary
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Cheryl Symons CRS, GRI
(919) 960-8934
(919) 968-0569
(919) 618-9896
(800) 752-5006

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Tri Pointe Properties/York Simpson Underwood
404 Meadowmont Village Circle
Chapel Hill, NC 27517
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