What Do I Need To Know About Mortgages When Buying A Home?
Buying a home is a fun and exciting time, that’s part of the reason I made it my full-time career. Our goal at Raleigh Realty is to educate, empower and provide value for you, the consumer. We want to make your home buying or selling experience, as smooth and enjoyable as possible. We are in a referral business after all.
So without further ado, here’s what you need to know about mortgages when buying a home:
How Much Do I Need For A Down Payment On A House?
Chances are if you’re reading this post you’re somewhat interested in either buying a house, learning more about the buying process or you know someone who is. In this blog post we are going to debunk a few myths about how much of a down payment you really need to buy a house, as well as teach you about buying power.
For those of you buying or selling a home in NC, this blog post includes tips that will potentially save you thousands of dollars on your transaction and each year thereafter.
Down Payments require 20% of Purchase Price, right?
The days of needing a 20% down payment on a house are gone. You can still pay for a home with 20% down, it’s no longer a requirement for anyone seeking to buy a home to live in. There are several instances where 20% will be a requirement but for those looking at homeownership, you can go as low as 0% on a down payment.
Down Payment options starting at 0% (A must read for NC folks)
A 0% down payment option allows for home buyers to finance the entire purchase price without a single dollar. We’ve heard of some scenarios where people who have bought homes, actually received money back at the closing table. Here are the options (1 for strictly NC, 2 National)
NCFHA, VA, and USDA are three options offering 0% down payment options:
For those of you buying in North Carolina, The North Carolina Housing Finance Agency (NCHFA) offers help with down payments up to 5% of the first mortgage loan amount! The best part?… Repayment is only if you sell, refinance, or transfer the home before year 15 of the loan – the down payment assistance is forgiven at 20% per year after you live in the home for 10 years, and fully forgiven at 15 years. There is a good chance YOU are eligible.
Requirement for eligibility directly from NCHFA:
Am I Eligible?
You may be eligible for an N.C. Home Advantage Mortgage™ if:
- you are buying a new or existing home
- you are a first-time or move-up buyer
- you buy a home in North Carolina and occupy it within 60 days of closing
- your annual income does not exceed $85,000
- you are applying for a FHA, USDA, VA or conventional loan through a Participating Lender and meet the sales price limits of the loan type
- you are a legal resident of the United States, and
- your credit score is 640 or higher.
What Properties Are Eligible?
- New and previously owned single family homes
- Manufactured Homes (only new, never occupied, doublewide or greater manufactured homes on permanent foundations)*
*These property types are only available for FHA, VA and USDA loans, not conventional loans.
2. The U.S. Department of Veterans Affairs (VA Loan)
The U.S. Deparment of Veteran Affairs offers VA Loans that require 0% down financing options. This program is available to military veterans only. This loan has no mortgage insurance and is one of the best loans on the market.
3. The U.S. Department of Agriculture, USDA
The U.S. Department of Agriculture (USDA) offers loans at 0% down payment with a few restrictions. The program only works for homes designated rural by USDA and additional income limitations apply. In one example: Families of four or more, who have a household income in excess of $96,400 are not eligible for USDA Loan.
Down Payment Option - 3.5% Down
The Federal Housing Administration (FHA) allows for a minimum down payment of 3.5% down to buy a home. A common misconception is that FHA loans are for first time home buyers only, and this is not the case.
In North Carolina, and in most states, lenders are able to lend up to $417,000. An FHA loan with a 3.5% down payment has one drawback called mortgage insurance. Most people see mortgage insurance as a bad thing, however, it helps to increase your buying power. Rates for FHA loans are around 3.25-3.3% right now, historically low rates that give buyers a lot of buying power.
The max FHA loan amount in Wake and Johnston county is $280,000, $330,000 in Durham and Chatham.
One major advantage of an FHA loan is that it is Assumable. You can assume the remaining balance if you want someone to take over the loan which is a huge asset. Your listing agent should help ensure the loan servicer has made arrangements that allow for the assumable loan.
Down Payment Option – 5% Down
An overwhelmingly popular choice is a conventional loan with a 5% down payment. These loans are similar to an FHA loan in the fact they will lend up to $417,000. These conventional loans are a great alternative to FHA loans in the fact PMI (Mortgage Insurance) goes away after you accumulate 20% equity and after a minimum of 24 months. Fannie Mae and Freddie Mac make up about 50-60% of all home loans.
How Does My Credit Score Impact My Ability To Obtain A Mortgage?
Your credit score and your credit report both impact what type of loan you qualify for and the lower your score is the higher your interest rate will be. Your credit score is directly affected by your credit report. You have many different credit scores coming from different credit organizations, and there are a lot of ways of collecting these scores online with websites like Credit Karma. Most mortgage lenders use FICO score. The top three credit reporting agencies are Equifax, Experian, and TransUnion.
Helpful tips to keep a good credit score:
- Track it online through websites like Credit Karma (Not always the most accurate but great for showing you missed payments and general tips/information)
- Apply only for the credit that you absolutely need.
- Don’t use all of the credit that you have available and make sure you pay it off ASAP.
- Order a free report and dispute any errors that you find
- Before you do anything credit related, seek the advice of an expert if you’re unsure
What Happens When Interest Rates Go Up?
If rates move up by 1%, buying power is reduced by 10%
4% Interest Rate = Mortgage 300,000 with Principal and Interest @ $1,432.25/month
5% Interest Rate = Mortgage $312,000 with Principal and Interest @ $1,674.88/month
Difference of $242.63/month
How Does Mortgage Insurance Work?
Mortgage insurance is not a bad thing. Without a 20% down payment you will be paying mortgage insurance, which allows more people to afford homes. Mortgage insurance can be paid every month and it can go away once you have the 80-20 loan to value ration. With mortgage insurance you have several options:
- A slightly higher interest rate built in, around 4-4.25%, and it helps maximize tax deductibility.
- Buy mortgage insurance over the live of the loan.
- Split premium and buy the monthly factor down.
- Lender paid mortgage insurance – over 50% of consumers choose this option.
Investors looking to buy investment property are required to have a 20% down payment.
What Is a Mortgage Credit Certificate?
A Mortgage Credit Certificate allows first-time home buyer’s that met certain income and sales price limits, eligibility for a Mortgage Credit Certificate of up to $2,000 a year in tax savings. It’s amazing how many real estate professionals are unaware of this tax savings available for first-time home buyers. This federal tax credit can lower your income tax liability, dollar-for-dollar, leaving you more money to use toward your mortgage.
In N.C., MCCs can be combined with the N.C. Home Advantage Mortgage, as well as with any other qualifying lender mortgage program, increasing the savings on your new home.
If you qualify for the Mortgage Credit Certificate you will be eligible to claim 30% of the interest you pay on your mortgage if you’re purchasing an existing home. For those that qualify, and are buying new construction, you will be eligible to claim 50% of the interest for your new home. Each year up to $2,000 is available in the form of a federal income tax credit.
How Does a Mortgage Certificate work?
The NCHFA website uses the following example to showcase how the MCC works in a real-life example:
Suppose you qualify for an MCC and obtain a 30-year, 4% fixed-rate mortgage of $97,000 for the purchase of an existing home (not new construction). The first year’s interest payment is approximately $3,880. The MCC allows you to take a federal income tax credit of $1,164 ($3,880 x 30%) for that year.
If your federal income tax liability is $1,164 or more after you have taken all other credits and deductions, you receive the entire benefit of the MCC tax credit – $1,164. In figuring your taxes, you also claim a deduction for the remaining 70% of your mortgage interest.
If your federal income tax liability is less than $1,164—for example, $800—your tax is reduced by only $800 that year. However, the remaining credit can be claimed on tax returns for the next three years, if tax liability increases. Note that depending on your individual tax situation, the MCC may not always provide a tax credit benefit to you in a given year depending on your overall tax liability.
You can receive an immediate benefit from your MCC tax credit by filing a revised W-4 (Employee’s Withholding Allowance Certificate) with your employer. In this example, your federal income tax liability would be reduced by $97 a month ($1,164 ÷ 12). The extra $97 increases your take-home pay and helps make your house payments affordable.
Before You Can Start Searching For Homes, First You Need To Speak With A Mortgage Professional… Why?
Many times people may be ready and willing to buy a home, only to discover that they aren’t able to buy that home. For instance, I am ready and willing to buy a Ferrari, but I am not able to.A Mortgage Professional is someone who can offer a wealth of information and advice when it comes to buying a home.
When searching for a Mortgage professional we recommend our friend, Kevin Martini, at www.KevinMartini.com.
We recommend Kevin because he is genuinely interested in helping people receive the best rates possible, and will walk you through every step providing complete transparency the entire time. Kevin has a team of mortgage professionals, who have all been well trained to work with consumers on obtaining the best possible financing for each individual persons needs.
Now that you have a better understanding of how mortgages work when buying a home, ask yourself, are you ready?
If you still find you have more questions about the home buying process, our friend, Andrew Fortune, wrote a great blog post on the 10 Most Common Home Buyer Questions.
Ready, Willing, and Able To Buy… Now What?
If you are ready, willing, and able to buy it’s time to begin searching for your home as well as your team. You’re going to want to develop a list of criteria that you want in a home and prioritize the list with the importance of each feature.
Then it’s time to find the right team to work for you. Our 100% biased opinion is to use Raleigh Realty J. What makes us great and strive to be better, is our consumers and the amount of positive, supportive, feedback we receive.
Remember, your credit score impacts your ability to qualify for a mortgage so don’t open any credit cards, or use any sort of financing that could jeopardize your ability to qualify for a loan.
If you find that you’re ready to start building your own equity and want to consult with a professional agent please feel free to give us a call. We are happy to help answer your questions, even if you don’t choose us as your Agent.
Hi there! I'm Ryan Fitzgerald, a REALTOR in Raleigh-Durham, NC and the owner of Raleigh Realty. Chances are you and I share a similar passion, Real Estate! I also have a passion for technology, sports, and people. Would love to hear from you. Drop me a note in the comments section below and feel free to share this article socially!