Q: I want to buy a home but I don’t have a lot of cash saved. If I choose a VA loan or even an FHA loan, how can I “roll in” my closing costs to the mortgage? I really want to get a house right now, but I’m not sure I can afford the closing costs.
A: You have several options here. There are, in general, four main types of mortgages in the Tampa Bay market right now. VA loans are for military and ex-military are 100% loans, meaning no money down, but you will still have closing costs to pay. There is an FHA loan, which is a 96.5% loan, so you’d need 3.5% of the purchase price in cash at closing, plus your closing costs. In some areas of Tampa, you can get a USDA Rural Housing loan, which is 100%, but you still have closing costs. Finally there are conventional mortgages, which are typically 80% loans, and require 20% in cash to close plus your closing costs.
So what if you have enough, for example, to do an FHA loan and cover the 3.5% down in cash, but you are coming up a bit short on those closing costs? Let’s say the home is listed for $150,000 – and this is fair market value (i.e. its not overpriced). You can overbid in the offer price, perhaps offer $155,000, to offset the amount you ask for in closing help – let’s say in this case $5,000. If the home will appraise for at least $155,000, the Seller should not turn down the offer because assistance is requested in the way of closing costs, because they will still net the same amount – $150,000 after closing costs are paid. However if the home appraises for only $152,000 – you may only be able to roll $2,000 in closing costs into the loan and would have to come up with the balance in cash. In general most people ask for between 3% and 6% towards their closing costs, and you cannot exceed 6% for these types of loans.
Depending on the types of homes you’re considering purchasing, some properties may not pass an FHA or VA home inspection and would require conventional financing or cash to close. For example, if you’re considering a distressed property, and there is mold present or it needs a new roof, or other repair concerns exist, and the seller is aware of these issues, an offer having a FHA or VA loan approval would most likely not be accepted or able to close. Similarly some condos cannot be purchased with an FHA or VA mortgage depending on whether the building has received FHA approval by HUD or not. More on that here.
The type of financing you use does play a part in whether your offer will be considered by a Seller. A REALTOR® can tell you more about which listings have specific loan restrictions will show you homes according to what loan you decide to use. If you’re not considering homes with serious repairs involved or condos, then you’re pretty safe in choosing any loan type, FHA, VA’s or conventional financing. A final option to check out is purchasing a brand new construction home – because often the builders will pay all of the buyer’s closing costs and may offer no or low money down, which is why so many first time home buyers are choosing new construction.
Got a question for the Realtors at Jamason & Associates? Contact us!