First we went to the bank and asked them who we needed to speak to in order to get a home loan. Banks have special workers called "loan originators" who deal with helping people find the right loan for them. I guess you could say these people sell money.
Our loan guy met with us and asked to see our W2 forms from last year and our last two paychecks from our current jobs. He also had us fill out our employment information and wanted to know if we owed any money on other loans like those for college or cars, which we do. After we got him all of that info he said he would be checking our credit scores and then sending us a letter with our pre-approval amount.
Last week we got our pre-approval notice in the mail for about $100,000. So that means according to the bank and their system they will consider lending us $100,000 to buy a home. Now, there are two ways the bank can loan us this money.
Disclaimer - I am not a professional loan originator. Please do not take my word for it, go to your bank!
1. The FHA loan
F stands for "First Time" and H stands for "Home." I don't know what A stands for, maybe "Association." Either way, this is one of our options. By going under the FHA plan we have to pay 3.5% of the total loan amount up front. So before we even get the $100,000 we have to pay $3,500. This seems like a lot but is actually the cheapest down payment option for us. Plus there is a tax credit of $8,000 that you get the year after you buy your first home (with which I can only dream of the party possibilities). Of the $8,000 we have to pay $0 back to the government... sweet.
Another perk of going the FHA loan way is that there is something called the 203K. This states that if we find a home for less than the amount we actually borrow we can use the excess money to fix up the house on the inside. We must use at least $5,000 and at the most $35,000. The bank must approve the contractors that are doing the work. The work must be started within 1 week of the approval and must last no longer than 6 months. Even with these restrictions this sounds like an awesome deal.
In this market it seems as though sellers would be very motivated (my own assumption and according to our loan guy a correct one). It is for this reason that under the FHA loan the sellers of any house are allowed to contribute up to 6% of the house to the buyers. In most cases this is used to cover the closing costs or maybe repairs made to the house before the sale. Again, I don't know the full possibilities of using this contribution. That is something you would want to talk with your loan guy about.
One downside to the FHA loan is mortgage insurance. This is insurance that you pay so that in case you default on your loan the mortgage company can still make money... I guess. Anyway, I do know it increases your monthly mortgage payment. And there is also an upfront mortgage insurance payment that increases the costs of closing on your house/loan.
That's a lot of info. I think I'll wait to discuss the Conventional Loan option.
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