Prior to making an offer on a Vermont property, you should have a letter of pre-approval from a qualified lender confirming your ability to purchase a home in the price range you are searching. Once a contract becomes binding, you will have to formally apply for the promised financing.
Depending on the terms of the contract, the purchase of the home may still be contingent upon you obtaining suitable financing. This clause is in the contract to protect you from any unforeseen changes in your life or in the lender's terms. This also allows time for the appraisal of the property and the assurance that it is valued correctly for both you and the bank.
Most homebuyers get loans through savings institutions, mortgage bankers, commercial banks, and credit unions. Below are a few of the local lending institutions we feel provide excellent service.
Types of loans
In general, three broad categories of loans are available:
1. Private vs. government loans. Most mortgage loans are made by savings institutions, banks, and mortgage companies. Generally, a lender will require you to buy mortgage insurance, (PMI) particularly if you make a down payment of less than 20% of the purchase price of the property. This insurance may be paid at closing or added to the loan amount. VA loans require no mortgage insurance, but only qualified veterans may apply for them. Mortgage insurance protects the lender, to a degree, in the event of default.
On government (FHA and VA) loans, the government does not actually loan the money but rather guarantees (or insures) to repay the lender if you default for some reason. Government loans have important advantages -- they generally require a lower down payment than conventional loans and often have a lower interest rate or points. On the downside, government loans limit the amount you can borrow, often take longer to process, and sometimes have higher closing costs. Many government loans also require that the property being purchased be in good condition, thus limiting the purchase or a “fixer upper”.
2. Fixed rate vs. adjustable rate. On a fixed rate mortgage, the interest rate stays the same over the life of the loan, usually 15 or 30 years. That means your payment will not change except for adjustments on escrowed taxes and insurance.
Adjustable rate mortgages (ARMS) have interest rates or monthly payments that can go up or down over time. These mortgages typically start out with a lower interest rate, lower monthly payments, and lower fees and points than fixed rate mortgages and often appeal to first-time homebuyers, younger couples who expect their incomes to grow in the coming years, and people who might not have much cash for down payment and closing costs.
If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the interest-rate cap (the maximum rate you will be charged no matter how high rates go in the market), the index that will be used to calculate future interest rates, and how index charges will affect your mortgage.
3. Assumable vs. new loan. Some loans, particularly FHA and VA loans as well as some adjustable rate mortgages, are assumable. That means a buyer can assume an existing loan usually on the same terms as the previous owner.
Assuming a loan may save some costs and time. As the buyer, you would typically pay the lender a fee at closing for processing the assumption.
The true price of financing
When shopping for a loan, don't judge the loan by the interest rate alone. Compare several items in the entire loan package, including:
- Points on a low-interest-rate loan can be double those for a loan with a higher interest rate, causing you to pay more up front.
- Total fees charged by the lender. Some lenders will absorb the cost of many services, while others do not, so ask in advance.
- Term. In general, the longer the life of the loan and the more fixed the payment, the more you can expect to pay over the life of the loan. For example, a 30-year, fixed rate loan will cost more in interest than a 15-year, fixed rate loan.
- Penalties. Ask what penalties will be charged if you pay off the note early. A prepayment clause could require you to pay a penalty if you pay off the loan early, such as refinancing the loan at a later time.
Loan approval process
From the lender's viewpoint, approving the loan, based on your financial standing, is only part of the risk; the other part is the property itself. The lender may require an appraisal to verify that the home is worth the amount of the loan, as well as a physical survey to discover any encroachments on the property. Repairs may be required. Insurance must be purchased. Verifications of employment, deposits, and other matters must be obtained. Loan documentation and conveyance instruments must be drawn up and approved. In addition, an attorney or title company must research the ownership and title transfers in the past, and arrange for paying off any liens, taxes, and other costs. All these conditions and others must be satisfied before a transaction can close.
As another protection, the lender may require insurance to protect against fire and storms. (Flood insurance could be required if the house is in a flood plain).
Contact Greentree Real Estate for more info on financing a home in Vermont.