Lenders want to know that the home they are loaning you money to buy is a good investment. So, after determining that you are an acceptable risk they have to find out if the same can be said of your house.
- What is my home worth?
- What if my home isn’t worth what I decided to pay for it?
- Does the home I want to buy have to be in good shape
- Can I buy an unusual home, a manufactured home, or a fixer upper?
We are six weeks into a series about how to buy a home. We have previously discussed: how to know when you are ready financially, what the actual process is, how much money you have to pay for a down payment, how much money you have to pay for closing costs, and how you know your credit is ready, making it logical today to talk about answering the question, “will the house I want to buy qualify for a loan?”. So, what do you need to know about collateral and how does that affect the type of house you want to buy? Lets dive in and discuss a few different aspects of what we look at as a lender when we decide whether or not to write a loan on the house you want to buy.
Is my house worth what I’m paying for it?
Home interest rates are really very low if you think about it. Anyone have a credit card that’s past the introductory offer? My credit score is really good, but they still want to charge me something like 18.99% interest. But, when I go to buy a house my lender wants to charge me 4% interest. Maybe 5% if my credit isn’t super awesome. Maybe, if my credit has lots of problems but I want to put a bunch of money down, the lender wants to charge me 9 or 10% interest. So, what gives? Why the difference?
The difference is that your house is a secured debt. What that means, in a nutshell, is that lender is loaning you money to pay your house, but if you don’t make the payment they will come and take your house from you through foreclosure and kick you out. So, it’s considered a less risky loan because they have an asset that they can come take ownership of if you don’t make the payment, so they pass along a lower interest rate to you. Everybody wins. Provided, the house is actually worth what you are paying for it.
How does the lender know that your house is worth what you paying for it when you negotiate your contract? Simple, they let a professional go out and tell them how much the house is worth. That professional is an appraiser and the appraiser goes out, takes pictures of the house, looks at it’s condition (not in a granular sense, that’s for the inspector, but in a general sense of is this house in reasonably good shape), compares it to other sales in the area and tells how much that house is worth based upon what the other houses were selling for. If the house is in good shape and the appraisal comes back that it’s worth what you are paying for it then the lender signs off and everything is ok. But…
What happens if my house doesn’t appraise for what I said I was willing to pay for it- does that mean I can’t get a loan for this house?
No! But, we have some negotiating to do, some decisions to make, and some things to work out. Sometimes this kills a deal, sometimes it doesn’t. There are three ways this ends, generally:
1. Seller agrees to modify the sales price to be whatever the house appraised for. If this is how it works out- congratulations! You just ended up paying less for your house than you were willing to pay 5 minutes before you got the appraisal report back. You got a deal.
2. You decide that you will make up the difference and go through with the deal anyway, after the seller refuses to back down. So, what does that look like? Some simple math: I wrote an offer for a home for $100,000. I want to do a 5% loan- so that means I’m going to borrower $95,000 from the lender and pay $5,000 myself as a down payment. But, the appraiser said my home was only worth $95,000. Well, the lender is willing to loan me 95% of $95,000, which is $90,250.00 So, you can buy this “$100,000″ house, if you still want to, but you now will have to put a down payment of $9,750.00 to make the deal happen.
3. The seller doesn’t want to give on the sales price, the buyer doesn’t want to write a check, I can’t save the deal, the realtor can’t save the deal and we all go home and pour ourselves a stiff drink and die a little on the inside. When I’m in this kind of mood, sometimes I like to listen to something that puts me in touch with my feelings.
Does my house have to be in good shape to qualify for a loan?
So, yeah, not every house will qualify for financing. The lender doesn’t just want to know that your house is worth what you are paying for it, they want to know that if something goes wrong with you paying the loan, and they have to foreclose, it won’t be a complete and total nightmare to try to sell your house. So, there are minimum standards in play as to the condition that the house needs to be in to qualify. The above picture probably doesn’t work, obviously, as even if the price is low enough for you to justify buying the house not many people are going to want to buy that house. The lender wants collateral that is easy to sell if they get stuck owning the place
Can I buy an unusual house and still get a loan?
So, this picture is a picture of my kids at our local park, hanging out by the log cabin. I’ve had people that want to buy log cabins. I’ve had people that want to buy modular houses. I’ve had people that want to buy a small house on 40 acres where the house isn’t in great shape but the land is pretty cool. They all want to know- can I get a loan for this property The answer is, of course, it depends! Ha, I can’t believe you thought I was actually going to get thru a blog post without saying every deal is unique. If you’ve got an unusual situation call me at 832-557-1095 or email me at firstname.lastname@example.org
Can I buy a Manufactured Home?
Maybe. It depends. I don’t do conventional financing on manufactured homes because it doesn’t fit our lenders typical risk portfolio. However, we can do financing on many manufactured homes through the FHA program. The home has some requirements that you can read about by clicking here. Some things to know about financing a manufactured home:
- It has to be real property (meaning the seller has surrendered title)
- It has to be on a permanent foundation
- It has to have been installed directly on the property from the manufacturer (you can’t move it from somewhere else)
- The home has to fit the character of the neighborhood
- The home has to have enough value to make the deal make sense as somewhere you are living in, not a disguised land sale that you are financing as if it was your regular home.
Are there loan programs where I can buy a fixer upper?
Yes. You can always try your hand at a hard money loan. Sometimes one program might be ok with the state of a house but another one won’t. VA loans and FHA loans can sometimes be pickier (and sometimes less picky) than a conventional program. If what you are trying to buy is different than a typical house for the neighborhood in generally ok condition then it probably deserves a conversation before you write an offer.
Generally, having a house qualify for a loan is the easiest, simplest and most straight forward part of the process of getting a home financing deal done. Like with everything in real estate, however, it can have it’s pitfalls. Generally an appraisal will tell us how much a home is worth and that’s generally enough for a straight forward answer as to whether or not a home qualifies to have a loan placed on it. If there is any way we can help you answer the question of whether or not your “dream house” qualifies for a mortgage we’d love to help. Call me, Gabe Winslow, at 832-557-1095 or email me at email@example.com