Real estate is one of the most common investment methods used today. It’s also a type of investment that’s available to both wealthy people and median earners alike, because of the existence of the mortgage loan. The process of purchasing a home is relatively straight-forward: Get the money, find the house and sign all of the papers. Whether this is the best investment option for you is a bit more complex and will depend on where you fall in that process.
Let’s look at financing the purchase with a funnel approach, starting with the most common and narrowing down to specialty programs.
- Conventional loans are available through banks and mortgage lenders, requiring 20 percent down payment to get the remaining 80 percent as a loan. In other words, you would need $20,000 down payment, plus closing costs, for a purchase of a $100,000 property. These loans are available to anyone with a lender acceptable credit score, approved income, and 20 percent in the bank.
- The next tier down is the government backed loans like FHA and Fannie Mae. When advertisements claim “first-time homebuyers programs,” it is generally an FHA loan package they’re offering you. Government-backed programs have more lenient credit restrictions, only require between 3 and 5 percent down, and allow some of the closing costs to be rolled into the loan.
- Under each of these categories are specialized loan packages that target special populations. These loan programs may be federally driven, like the Veterans Administration loans for military service, or they may be county-run, which includes down payment grants for people with low incomes or teachers and officers choosing to purchase in a revitalization area.
Understanding the Market
Knowing whether this is the best time to purchase is dependent on your overall investment and housing goals, which is one of the reasons to start with financing. The lending process naturally helps identify objectives and narrows the field when analyzing the housing market. Even if you are planning on using the house as your main residence, it has two income components that make it an investment.
- The first is the asset developed from paying down the mortgage. For every payment that you make, some goes to the principle. At the end of the loan, you have a property that you can liquidate via sales if you wish.
- The other investment component is the increase in the market rate. This is where the purchase market becomes important. The national database on Realtor.com will give you a list of all of the properties on the Multiple Listing Service (MLS) that real estate professionals use.
If you are looking for a deal, Equator.com is a database of bank-owned properties. A word of caution: These homes are sold as-is, so they may have issues. You may want to have home warranty policy to protect against unexpected costs.
The final transaction in buying a home will be handled by an attorney or title company. During this time, they will calculate all of the costs for you and place them on a standardized form called the HUD 1. This statement will show all of the costs, including the loan fees, recording fees and the title company’s fees. Be careful, as closing costs can be high and kill a deal for a buyer on a budget. Bank of America has a good closing cost estimator to help you make informed decisions.