Rates are low, prices are stabilizing, now may seem like a good time to buy a house. But these factors alone don’t justify a home purchase.
Buying in a favorable market makes good financial sense, as this often results in paying less for a home or snagging an amazing interest rate, which offers long-term savings. And if you have the income and credit to qualify for a mortgage loan, mortgage lenders may vie for your business. It’s a win-win.
But just because the atmosphere is conducive to buying doesn’t mean you’re ready to move forward with a home purchase. Understandably, this is probably the last thing you want to hear, especially if buying has been your dream. However, major shifts in the way lenders approve mortgage applications has made it difficult for some otherwise qualified applicants to get their foot in the door.
Go back five or 10 years and you didn’t need a lot out-of-pocket to buy a house. Pay the fee for your application, credit report, appraisal and home inspection, and lenders practically gave you the keys to a house. The scenario is by far different today, as most lenders require a down payment on FHA and conventional loans – a major hurdle for homebuyers.
“Conventional loans – which made up the lion’s share of mortgages during the housing boom – typically require 5 to 20 percent down, said Tom Lira, senior loan officer and branch manager at Dominion Residential Mortgage.
However, a down payment is only one piece of the financial puzzle when buying a house. You also need to prepare for closing costs, expenses that many borrowers overlook and then quickly discover that they don’t have enough saved to complete a purchase.
Closing costs vary by location, but are typically 2% to 5% of the purchase price, according to Zillow. These costs include the loan origination fee, attorney fees, title search fees, discount points, survey fees, escrow deposits and other miscellaneous mortgage fees, and closing costs are often paid at closing with the down payment.
Between down payment and closing costs buyers can expect to pay – at the very least – 8% to 10% out-of-pocket. And to be frankly honest, it’s simply impossible for many would-be buyers, which can delay home buying dreams.
But all hope isn’t lost for those who can’t afford both expenses.
There is the option of asking a seller to pay closing costs. It’s a big maybe, but very possible if the seller is motivated and has the extra change. And if purchasing a new construction property, there’s a chance that the builder may pay closing costs as an incentive.
And yet another option – a no closing cost mortgage.
A no closing cost mortgage can save you thousands and put dreams of ownership back on the table. But is it really doable?
Well, it all depends on who you talk with.
A mortgage lender may advertise this alternative as a way to drum up business. And from a cash-strapped buyer’s standpoint, it’s the ultimate deal.
However, “fees on a loan don’t just go to the mortgage servicer,” says Casey Bond, managing editor at GoBankingRates.com. “Everyone involved in funding a mortgage needs to be paid for their services, and the truth is that the borrower is ultimately the one to pay these closing costs in one way or another.”
Lenders have different ways of making a “no closing cost” mortgage work. They might wrap the closing costs into the mortgage balance, alleviating upfront costs, but increasing the total mortgage loan. Or they may up the interest rate to compensate for no closing costs, such as charging a borrower 4.5% for a home loan instead of 4.1%. This higher rate may only slightly increase a mortgage payment, but at the end of a 30-year term, a borrower could pay thousands more for his home.
When it’s all said and done, there are no free rides in the mortgage world. A no closing cost mortgage may keep cash in your bank account and alleviate immediate financial stress when buying a house – but there’s a price for convenience.
“It’s up to consumers to decide if the trade-off makes sense,” says Frank Nothaft, the chief economist at Freddie Mac.
This article was first published on http://moneyprime.com.