The Question of Finance
With today’s lending rates at a historical low, many buyers are looking to finance their home purchase using a financial institutions’s money, rather than their own cash. Buyers who intend to take a loan to purchase property should take note of the following points.
Where you borrow the money from is something you need to think about, particularly if you are an overseas buyer. The banking industry has dramatically changed from the free-wheeling days of pre-2008. The subsequent fall out from the financial sector meltdown has led to all US mortgage companies toughening up their required qualifying criteria for borrowers. What this means to today’s potential buyers is a home loan from a US lender is not quite as straightforward as it previously was.
Pre-approval vs Pre-qualified Status
If you are a US citizen, you will be borrowing funds from a US lender. In order to ensure that you, as a buyer, are in the strongest position in terms of negotiation with a seller, it is advised the buyer start a dialogue with their preferred lender and get pre-approved for a loan prior to making any offers. The buyer should also secure paperwork from the lender confirming their approval to borrow funds so it can be included with any submitted offers for the seller’s review.
This detail is very important when submitting an offer to a seller as it can adversely affect how the seller views the deal on the table. To explain; the purchase contract includes detailed clauses regarding finance the buyer is proposing to use for the purchase. A buyer’s offer with proof of a firm commitment of a loan is a much stronger proposition to the seller than an offer with no loan in place.
Buyers should not get confused with pre-qualified status from a lender; this is not the same thing. Pre-qualified status is merely an informal offer of a loan by the lender. There is no commitment from the lender to honor this offer until the buyers have completed the full loan application paperwork and submitted themselves to credit checks. The borrower may also have to pay a set up fee to gain pre-approval status. It is not advisable for buyers to attempt to make an offer at pre-qualified status as it is not confirmed that finance will be forthcoming from the lender.
Overseas Buyers and Finance
Overseas buyers should note that at the current time interest rates in the US for loans to non-US citizens are more than likely higher than rates in their country of residence. Therefore it makes financial sense for overseas buyers to compare lending rates in both the US and their country of residence to see who is offering the best deal. Furthermore, overseas buyers should note that US loans to foreign buyers are fairly specialized with only a small amount of lenders offering such loans. These loans usually come with the criteria of a heavy down payment, sometimes in the region of a required 30% deposit of total sales price.
Lender Closing Costs
Buyers should note that using finance to purchase will affect their closing costs. The lender will charge for their services when organizing the loan in addition to levying an interest rate on the money borrowed. These finance charges should be furnished to the borrower via the RESPA required Truth in Lending Disclosure prior to the borrower signing any contract with the lender. These fees will be due at closing for the buyer to pay as part of their closing costs.
In summary, when thinking about the question of finance, buyers seeking a loan should do their homework. Shop around for the best rates, compare and make your final decision on whom to use before entering into any negotiations. Then secure pre-approved status paperwork with your selected lender in order to present a strong offer to the seller and to bargain the very best deal to purchase your dream home.