Cash and Credit for a Real Estate Purchase

By: Seb Frey

In an age of instant gratification, this may be a bitter pill to swallow. But when it comes to buying a home, The first thing to know is that maybe you can't buy a home today. Depending on your situation, it may take some preparation.

You have heard about 100% financing - this kind of financing does exist for people with stellar credit, but it is now much more difficult to get than in years gone by. Even if you can get it, however, you will still need some cash (at least 3% of the purchase price, typically) to purchase property in most places.

So if you have absolutely no cash, start getting some together now. This might be easier than you think, though. You can borrow against your 401k plan if you have one. You can liquidate an IRA. You can get a gift or a loan from your family. You might also consider doing an equity share - find someone to provide you with the down payment, in exchange for a small ownership stake in the property. There are many creative ways to get sufficient cash together.

How is your credit? You can pull a credit report yourself from many sources online. However, it is a good idea to start talking to a Mortgage Planner (loan broker) as soon as possible. Very likely, he or she will pull your report for free.

The Mortgage Planner will go over your report with you, and talk about ways to improve your credit score if it is low. Credit scores will rise over time, so long as you address the issues which are dragging your score down.

In six months or a year, it's very possible you could raise your score to the point where you can get a loan at a rate low enough to make your mortgage payments affordable.

Your Mortgage Planner (loan broker) will be able to supply you with a key instrument in buying property: a pre-approval letter. This is a guarantee of a loan for a certain amount of money, subject to approval of the property. That is, before the lender actually gives you the money, the lender will have an appraisal done on the property, to ensure that it is at least equal to the value of the amount being loaned.

If the property appraises, and if nothing significant has changed in your financial picture between the time you were approved and the time the loan funds, you will get the loan.

Armed with a pre-approval letter from a lender and at least 3% of the purchase price of a property, you will be in an excellent position to purchase a home.

Where does that 3% come into play? You'll need at least that much even with 100% financing. You will need 1% of the purchase price for "earnest money." You pay that immediately after the seller has accepted your offer.

You will then have a period of time (the "contingency period") to inspect the house to make sure you know what you are getting. When you release your contingencies, you are committing to buy the house. At that time, you will increase your deposit an additional 2% of the purchase price, to a total of 3%.

During the contingency period, you will need some additional money to do inspections: home inspection, termite inspection, septic inspection, etc. The 3% you use as the deposit can be used to cover your closing costs (typically about 1.25% of the purchase price), and the balance can be returned to you at Close of Escrow (COE).

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