Let’s start with how much you need, which will depend on the program you’re doing and the loan amount.  In general, on an FHA loan, you need 3.5% of the sale price for down payment and approximately another 4% of the sale price for closing costs.  This number may seem high, but closing costs make up a lot of different things — lender charges associated with originating your loan, appraisal, credit report, funds to start your escrow account, 1-year upfront homeowner’s insurance, title company charges, county charges and possibly a broker commission fee charged by your Realtor.

Your down payment can come from logical sources like your own money, a gift from a family member or even down payment assistance available to some first time buyers.  Money for closing costs can come from these sources too, plus in most cases, the seller can pay for some or all of your costs, depending on the program.  They cannot cover any of your down payment.

Let’s say you’ll be using your own money — which is very commendable.  Lenders will require the last 60 days of bank statements to prove you have the funds necessary for closing and down payment.  Funds can come from many different account types – savings, checking, money market, roth IRA, stocks, bonds, mutual funds, 401K accounts and possibly more.

The big thing to know is that CASH on hand or deposited is NOT acceptable in a mortgage transaction.  Cash cannot be verified or traced, so it’s unacceptable as an asset.  Any deposits made into your bank accounts on the statements you provide for your loan, and those going forward, will be scrutinized in terms of deposits and overdrafts.  It’s important to only deposit your work income while in the mortgage process.  Check out the other things NOT to do in the process.

Taking a loan against an asset is also acceptable for down payment, though the payment, in most cases, will have to be used as a debt in qualifying.  Loans against another home, car or your retirement are typical places you could finance the costs or down payment.  An unsecured loan or draw against a credit card is NOT acceptable.

Assets are important, but not crucial at the time of pre-approval.  For instance, some of my borrowers save during the process.  Though they may not have the funds at our first meeting, they will within a month or so prior to closing.  As I mentioned, gifts are acceptable sources of assets too as long as they are from a family member.  There is a method to the madness for verifying these assets, so please seek advice from your loan officer PRIOR to getting any funds from family.

The take-away from this is that you will need money for down payment and closing costs; however, the amount you need will vary on the program and if you’re eligible for special assistance and/or if the seller agrees to assist with costs.  The other big take away — DON’T make deposits that aren’t from your employment or they will be questioned.  It’s better to be above-board with your loan officer about your intentions rather than finding out at the last minute you have an issue with your loan due to unverifiable assets.

Your pre-approval puzzle is solved now that you have all four things in place.  The glue that will hold it all together is choosing the right loan officer who will help you make sure the pieces are where they need to be.  Of course, it would be my pleasure to serve as your glue, but with anything, you need to find a person you trust and are comfortable with.  Good luck!!!

*You must be a Veteran to qualify for a VA loan.  Zero-down is par for the program, but there are still closing costs that either need to be paid by the Veteran, a gift from family or the seller.

How about we get the “bad” news out of the way first. Please note the quotes. Any FHA loan requires something called Up Front Mortgage Insurance Premiums (UFMIP). FHA is self-insured which means they don’t use private mortgage insurance companies (PMI) to cover a portion of their risk if the loan defaults. This UFMIP is financed into the loan size which is currently equal to 1.75% of the loan amount. The change?? Starting April 5th, they will be increasing that to 2.25%. Why the increase? FHA has had to take a lot of losses due to the high foreclosure rates. They are supposed to keep 2% in their funds for this insurance — they are down to 1/2% — ouch. Hence the increase. So what does this mean to you? Not a lot. It’s about a $5/mo difference in your payment, depending on your loan amount. Calculate that out. $5/mo over year is $60/year and let’s say you live there 5 years — so $300. Doesn’t that seem so piddly? Imagine though that most loans that have been originated in the past 2 years have been FHA. That adds up fast!

This next change is so lame because it will neither help or hurt anyone. Why they have it is beyond me. Currently, FHA doesn’t have a minimum required credit score. The new rule requires buyers with a 580 score or less to put 10% down. OMG, 10% down. Bet you’re questioning what I said regarding a 3.5% down payment from my earlier comment. Reality — it’s a mute point. No investor buying an FHA loan will take a buyer with a score under 620 and some investors are moving toward 640. So, can you say lame with me???

Here’s the doozie that WILL affect you — we just don’t know when. They are predicting Spring/Summer. As of right now, FHA allows the seller to pay up to 6% of the sale price toward your closing costs and pre-paid expenses. Hitting us like a brick in the head, they will be reducing this to 3%! This is huge. Typically, asking the seller to pay 4-4.5% of the sale price gets you what you need. Though the lower the sale price, the higher the seller paids percentage needs to be due to the fixed closing costs that aren’t tied to the loan size. In real terms, instead of just needing 3.5% down payment, you will need to up your investment to about 4.5-5%. Yup, this is really going to hurt in the pocketbooks and savings of the buyers. It’s putting FHA on par with conventional financing which has always limited seller paid costs to 3% (with less than 10% down). FHA does allow gifts for down payment and closing costs.

And, not all changes are bad! Here is the good news — phew!  Of course only 25% of the changes are positive.  Well, that is a bummer.  We just have to deal.  For instance, this change has been effective since Feb. 1.  FHA has temporarily suspended the anti-flipping rule. The term “flipping” has quite a bad rap.  It’s really due to people buying a house at less than market value and turning it to sell for more when the buyer did NOTHING to it to warrant the additional increase in price.  This term gets tossed around like a salad — “I want to buy foreclosed homes and ‘flip’ them” — Whether it’s from friends, the media or even those programs on TLC, almost everyone gets the concept.   The rule, which is suspended for ONE year, said that a purchase agreement on a home HAD to be 90 days away from the date the title transferred to the seller. Whoopie, right? Why is this even important to you?   It’s opened the door to many more homes that you, as an FHA buyer, can actually put in the running. 

That’s about it in a lengthy nutshell! To recap, the two major changes you need to be excited/concerned about is the removal of the anti-flipping rule which is in effect now and the change in seller paid costs with an effective date in Spring.  Just stay tuned for more updates as they come.  And let’s get off our horses and actually enjoy what has changed for the better and sweat about the projected changes when they come.

So seriously, why start a post with this?  As a home buyer, especially those of you looking to buy for your first time, you “learn” a lot about the process, like what lender to use, what to ask when comparing loans and other wonderful tips, mostly from friends, family and co-workers.  I am here to tell you that though they may seem to know the ropes, it doesn’t mean their situation matches yours.  There are plenty of things you can teach them. 

For instance, you may be advised to ask what rates are when narrowing down what lender you want to use.  Knowing the rates is a very smart thing to do.  But, realizing why this question isn’t valid is smarter.  On any given day, rates can change.  One lender can be higher or lower than another and change positions within the same day.  There are many loan officers out there that will quote you an interest rate that “teases” you into wanting to work with them.  Truth of the matter is rates don’t matter one iota unless you have a purchase agreement accepted on a home and you can lock that minute.  Until that time, lenders can tell you whatever they want.  Notice I am being general here.  I am of the mindset that starting honest is a good thing — not only that, there is always a little fear I have, that indeed, you will call back (good thing) and I have to abide by my rate commitment (not so good if I under-quoted).  And so you know, many first time buyer programs have their own rates tied to them.  So regardless of what lender you use, the rate is the rate.  No variance.  This means even though you’re doing an FHA loan, you won’t be quoted an FHA rate, but that of the first time buyer loan program.  And, this also assumes the lender you called can and is willing to do these loans.  Many don’t and will give you bad information to steer you from something that may be the BEST deal for you overall.

Okay, if the rate is the same because you’re going with the first time program, then what else should you compare?  You may be advised to compare closing  costs by getting a good faith estimate.  Again, smart idea to check costs between lenders, but this isn’t the end all for making a decision.  Here’s a question … what is it worth to you to get your loan closed on time or at all for that matter?  Tough to answer since you might not be at that point yet.  I will say that it’s worth it’s weight in gold.  Trust me on this.  In the 16 years I have originated, I have had many people jump ship after I’ve spent hours educating and being there to answer their questions, just to save 1/8% in rate or $500 in closing costs.  And you know what?  I can honestly say that a good number of them call back complaining about one thing or another with the other lender stating they “wish they had stayed with me”.  Nice compliment, but they don’t pay the bills.  Compare your costs; go ahead.  Just remember it’s tough to put a dollar figure on reaching your dream of home ownership.

What else are you hearing?  Had anyone suggested working with a broker because they can “shop” to find you the best rate?  Or maybe they’re suggesting you go with a bank, a lender that does everything in-house.  All good advice.  Keep in mind; you are getting this advice due to that person’s experience with THEIR process.  Gosh, I can’t tell you how many people say to me during a meeting “my friend got this rate” or “my friend only needed to put xxx% down”.  Yes, their friend probably had that experience.  Back to it being THEIR process.  On conventional financing, for example, depending on the amount down and your credit score, you could pay a higher rate than someone whose score is higher.  It’s reality.  Or maybe they “financed” their closing costs so you should too.  Want the education here so you are smarter than the 5th grader — ie your friend, family or co-worker?  Closing costs cannot be financed in the way you may think.  The only way to “finance” costs is to have the seller pay them.  So why would that make them financed if the seller pays them?  As a good student, that is a brilliant question.  Let’s say the house you want is $100,000.  When you make your offer, you ask the seller to pay $3000 toward your costs; the seller agrees.  What did they just agree to?  Making $100.000 on their home or making $97,000?  You got it, the lesser figure.  Essentially, then, you could have paid $97,000 for the home, asking for nothing, and they would have agreed.  Indeed, you are “financing” the costs in this respect.

Okay, off subject on the last one.  It doesn’t necessarily matter what type of lender you choose.  You want someone reputable, honest, knowledgeable about the first time buyer programs, as well as forthcoming with information on them; and most importantly, you want your deal to go smoothly.  All lenders have their down sides.  A bank just offers one product.  A broker gives you options.  Sometimes, this really means the broker has more opportunities to make more money on your loan (which you won’t know and really don’t care if you’re getting what you want for terms and customer service).  Could you get all these things under one roof?  Of course you can!!  We, among a few other lenders, offer both– the security of having in-house processing and underwriting, so control of the process, along with options.  And when searching your options, don’t forget to ask about the first time programs.  If you really want to test their knowledge, let them know you’re a first time buyer and see if they offer programs that would suit your situation. If not, then I submit to you to take a pass on that lender.  They won’t be working in your best interest.

I know there’s more to being smarter than a 5th grader and plenty more scenarios I can throw at you.  Bottom line … make sure your questions are handled, options are proposed and the company has enough support to handle your loan through the process.  Oh, and tell your friends, family and co-workers “thank you” for their advice and let them  know you’ve got your situation handled.  There are other ways to put this, but if you still want to keep them as friends … you may want to tread lightly!  Oh, and one last thought. By no means am I saying to stop listening.  Some advice will be good; it’s just choosing what advice to listen to.  Good luck!