How to Finance a New Home

Tips and insider secrets to getting the best financing deal.

A lousy economy, rising unemployment and a dismal long-term outlook translate to ideal financing conditions for new-home buyers. A general malaise bordering on depression is wreaking havoc on consumer confidence, another factor fueling financing opportunities.
 

The tentative real estate market amounts to an ideal window of opportunity for adventurous contrarians. A few favorable financing variables include tax credits, depressed prices and low interest rates. That’s not all. Builders from Vermont to San Diego are offering incredible incentives such as below-market rates of 4.25 percent.

Thinking about financing a new home? Here’s the lowdown from some of the country’s top real estate experts:

Don’t believe everything you read. That’s the word from Neil Garfinkel, a real estate and banking attorney with New York City law firm Abrams Garfinkel Margolis Bergson LLP. While economists and business analysts continue to paint a picture of doom and gloom, Garfinkel says the real estate market has turned around, and he’s been very busy negotiating deals.

“Contrary to what the media is saying, things are happening in the real estate market,” he says. “People are buying new homes. I don’t know why that news isn’t getting out.”

Take the hint. “Don’t try and time the market and hang back and wait for an ideal buying opportunity,” Garfinkel advises. “That could be a big mistake because there may never be an ideal time. No expert knows what the real estate market will be like a week from now, no less six or 12 months ahead. If buyers are ready to buy, and everything is order -- credit scores and finances are in good shape -- they ought to shop around for deals.”

Do it right. A mortgage contingency is a must, Garfinkel insists. In this uncertain real estate market, buyers must have a mortgage contingency built into the contract, he says. “The lending marketplace has changed drastically over the past few years. It was assumed that once buyers got a contract, it was pretty certain that getting a mortgage was a slam dunk.”

Not anymore. Garfinkel’s advice: Don’t assume that getting a mortgage is easy. Securing a mortgage is more important than finding a property.

Know your financing options. Real estate financing expert Michael Sichenzia, president of Deerfield Beach, Florida’s Dynamic Consulting Enterprises LLC, says that there are a few excellent financing options, many of which are a result of a poor economy. Sichenzia, a former mortgage originator who sold mortgages to investors, did a four-year prison stint for mortgage fraud. When released, he turned over a new leaf and dedicated his life to correcting past wrongs and becoming a consumer watchdog, protecting naive homebuyers from predatory lending practices and unscrupulous mortgage brokers.

Sichenzia’s fast buck days are over. He works from dawn to sunset re-negotiating loans on behalf of homeowners and tries to get loan modifications that reduce buyers’ rates, extend terms and lower payments. His most challenging goal is helping homebuyers facing foreclosure find ways to salvage their homes.

Unlike mortage and financial experts who have hefty hourly fees, Sichenzia charges customers a one-time fee of $500 for his service, regardless of the time spent on each client’s case. Often several days are spent working out clients’ finances.

Although the residential housing market is in the proverbial toilet, Sichenzia says there are some excellent financial options for new-home buyers. His two favorites are FHA loans and home builder- and developer-sponsored financing. Here’s the lowdown on each:

FHA Loans

The Federal Housing Administration (part of the Department of Housing and Urban Development) was established to help first-time buyers. The amount they can borrow ranges from $271,050 for single-family homes in low-cost areas to $729,750 in high-cost cities such as Los Angeles or New York.

Here are some of the benefits of an FHA loan.

  • Small down payment. FHA loans require only a 3 percent down payment to obtain financing.
  • Easy to qualify. Since the FHA insures the mortgage, lenders are more likely to give loans to borrowers with less than perfect credit histories. The FHA doesn’t use credit scores to determine eligibility or interest rates.
  • Lower cost. Because FHA loans are backed by the federal government, they’re more likely to be competitive or offer better rates than commercial lenders.
  • More security. In the face of a massive global financial crisis that brought down once-respected and established financial services institutions, the FHA, established in 1934, is not going away. If lenders encounter problems, the FHA offers options to avoid foreclosure.

However, the FHA is not giving away loans to potentially risky borrowers. It has clear, unbendable rules about borrowers with a history of bankruptcy and foreclosure. If borrowers have declared bankruptcy, two years must have passed from declaration, and they also must have re-established an acceptable credit record. And if a home was lost through foreclosure, they must wait three years and have a clean credit history during that period.

Each state has different FHA requirements. To learn more about FHA loans and banks offering them throughout the United States, contact the U.S. Department of Housing and Urban Development, 451 7th Street S.W., Washington, DC 20410; or call the FHA at 800-225-5342 begin_of_the_skype_highlighting 800-225-5342 end_of_the_skype_highlighting.

Home Builder and Developer Sponsored Financing

Home builders and developers are offering incredible buying opportunities -- far beyond free appliances and country club memberships. They include enticing financing incentives, says Sichenzia. In fact, builders are going toe-to-toe with banks and mortgage companies.

“When you consider that half of the 60,000 builders in the U.S. will be out of business by the end of 2009,” adds Sichenzia, “it’s no wonder that they’re aggressively competing with lending institutions.”

Sichenzia advises talking to publicly traded builders because there’s less likelihood of running into snares.

When to Take Advantage of Builder Financing

Shop around and compare builder financing deals with what banks are offering, advises Sichenzia. Many builders are offering terms that are below market rates and less than what local banks are offering. “Many of the loans are in the 5 percent range,” he says. “And they've been that way for the past few months. They’re 30-year fixed rate loans, stable, conservative, and there’s little to no risk.”

This is very different from a few years ago. “Then, builders were offering adjustable rate loans, and eventually buyers were stuck with exotic loans that had to be financed,” Sichenzia explains. Look for builder-financed products with a 5 percent to 5 1/2 percent rate; minimal down payment; and seller concessions in the form of buydowns. “Buyers can get this kind of a deal if they can prove verifiable, long-term employment and a good credit rating,” Sichenzia says.

Look for programs that will save you cold hard cash. The National Association of Home Builders in Washington, D.C., reported that 75 percent of all builders and developers are offering incentives, many of which simplify financing and save buyers money in the bargain. They include:

  • First year of mortgage payments.
  • Limited opportunity to take advantage of up to 95 percent financing.
  • Deferred mortgage payments. However, this can be a mixed blessing because interest continues to accrue on the deferred payments and at the end of the grace period, the deferred amount will be added on to the balance of the mortgage.
  • Payment of closing costs. Buyers could potentially save thousands of dollars, depending on the cost of the house, location and type of mortgage.
  • Cash incentives. Many builders are paying homeowners’ insurance polices or taxes for up to a year.

Guarantee or lock in a mortgage rate. That's the advice of David Reed, president of CD Reed Mortgage Bankers of Austin, Texas, and author of “Financing Your Condo, Co-Op or Townhouse,"  Here’s why: By locking in an interest rate, buyers guarantee that the rate will be reserved for them when they close on the deal. If not locked in, they’re at the whim of market conditions and obligated to take whatever’s available. Reed adds that lenders take locks very seriously. If buyers lock in a rate with lenders, the lender reserves that rate for them.

To get more free information about mortgages and lending institutions, check out the following nonprofit organizations:

  • Neighborhood Assistance Corporation of America: a nonprofit community advocacy and homeownership organization.
  • NeighborWorks America: a national network of more than 240 community development and affordable housing organizations.

According to Tracey Rumsey, a mortgage loan officer in Bountiful, Utah, author of “Saving the Deal -- How to Avoid Financing Fiascos and Other Real Estate Deal Killers” and a staff writer for MortgageCurrentcy.com, look into these often overlooked sources:

  • New construction tax credits. These are state tax credits specifically for existing new-construction homebuyers. States are rolling these tax credit allocations out right now to move existing new construction inventory. California was the first to implement the tax credit and is offering up to $10,000. Many states are pounding out legislation offering similar incentives.
  • VA loans. Offers 100 percent financing. Veterans can score big by using their VA eligibility to buy a new home. With no down payment requirement and no monthly mortgage insurance, it’s hard to beat this option.
  • State housing agency loans. First-time homebuyers should always check out their state’s housing agency loan programs. Most states offer 100 percent to 103 percent financing, allowing buyers to finance their closing costs as well as the full purchase price of the home. Some states even waive the first-time buyer requirement when the home is purchased in a certain area.
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