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During the home buying process, you will encounter many unfamiliar terms, some of which may seem like the same thing. One such pair might be “sales price” and “appraised value.” They both refer to how much the house is worth, right? Actually, there is a difference between these words and it is important to understand what they each mean.

Sales Price

The sales price is the exact amount you pay for the home. This could be the list price, but it could be lower or higher depending on the market conditions and your agent’s negotiating skills. In a seller’s market, you are likely to pay more than the asking price because of stiff competition and bidding wars. However, in a slower market you might be able to talk the seller down to a lower price if they are motivated to sell.  If you go under contract and the inspections turn up major damage or problems, you might also be able to have the seller knock off the price to compensate for needed repairs.

Appraised Value

The appraised value is decided by a licensed home appraiser. This professional will come to the house, and evaluate the location, home’s condition, features, any improvements that have been made, and will factor all those things into account along with the general market trends.

When the Difference Matters

While the sales price is essentially a measure of how much buyers are willing to pay for the property, the appraised value is supposed to be a gauge of the “true value” of the home. One is all about supply and demand while the other is about the fundamentals of the house.  Where this difference could matter in your home buying experience is that if the appraised value ends up coming in lower than the amount you agreed to pay the seller, paying for the discrepancy will be your responsibility, not the lender’s. 

For example, let’s say you have been pre-approved by your lender for a mortgage of up to $400,000. You find a property you want, and you win it with a bid of $500,000. You plan to contribute $100,000 of your own money as a down payment, so the bank should be able to cover the remaining $400,000, right? Yes, unless the appraised value comes in lower than your offer to the seller. Because of the neighborhood or the condition, say the appraiser determines the house is only really worth $460,000.  So now you need to be able to pay for the difference on your own as well. Subtracting the appraisal value from the offered price ($500,000 - $460,000) leaves you with $160,000 to contribute instead of just your original $100,000 down payment. If you are unable to do this, the deal will likely fall through and you’d lose out on that sale. 

However, in certain cases, the appraised value comes in higher than your buying bid. This does not affect your mortgage financing, but it is great news for you. It means that as soon as you close on the house, you will instantly have more equity in the property than you put into it.

Strategies to Avoid Financing Trouble

If you are buying in a hot market, you may need to stay away from properties that are at the very top of your budget. Otherwise, you could easily over run your loan limit if the appraised value is lower than the sales price. 

In a seller’s market it can be easy to be outbid, though. So, you could also look to friends and family or non-profit organizations for down payment gift money to help stretch your budget.

If you are looking to buy a vacation home in one of your favorite spots, one of the most important questions to ask yourself is “Can I afford to buy a second home?” The answer will depend on a variety of factors.

While some buyers have the cash to buy a second home, you’re likely one of the 70% of vacation home purchasers that need to take out a mortgage. Since this is a second home, you’ve already been through the mortgage process before. However, because this new mortgage is for a property other than your primary residence, there are a few differences.

Differences Between Primary Residence and Second Home Loans

As buying a second house could put additional strain on your finances, it is considered riskier to the lender than your primary residence mortgage. As a result, the interest rate will likely be roughly 0.25% to 0.5% higher and you will probably be required to put down a larger down payment, upwards of 10%, instead of just 3.5% like on some first mortgages. You may also need a slightly higher credit score for this purchase than you did with your original loan. 

What Costs Go into a Second Home?

Although you plan to live in your second home only part-time, you still need to be able to afford the mortgage payments and property taxes ALL the time. It is also important to add in the cost of the utilities, insurance, maintenance, repairs, landscaping and travel expenses. 

How Can I Pay for the Down Payment?

There are other ways to finance your second home down payment than just saving up your own cash. If you have significant equity in your first home, you could take out a cash-out refinance loan. This creates a new mortgage on that property for a larger amount, and you get a lump of cash that you can use for any purpose, including as a down payment for another home. You could also take out a home equity line of credit. This is a second loan tied to your first home that allows you to pull out cash from your equity as needed. These types of mortgages offer lots of flexibility. 

Can I Rent Out my Second Home?

To offset your vacation home costs, you might want to rent it out for part of the year. This is usually possible but you should first check your mortgage contract to make sure there aren’t any restrictions on how long you have to use it as a second home before turning it into an investment property. You should also be aware that this will affect your tax situation. The IRS defines a second home as one that you live in for more than 14 days a year or at least 10% of the total days you rent it out. You will need to report your rental income on your taxes.  One good benefit of using your vacation home as a part-time rental is that you can typically write off the mortgage interest, maintenance, and utility bills as business expenses on your taxes, something not allowed with second homes.

If you’re still not sure about your ability to afford a second home, bring your questions to us. We can help you go through your qualifications and resources to make a final determination. 

It’s a new year and a new chance for many people to become homeowners. There are several mortgage products that are designed for first-time buyers; the FHA loan is especially helpful. Here’s what you need to know about them and the changes that have been made for this year.

What is an FHA loan?

It stands for a Federal Housing Administration loan, meaning it is backed by the U.S. government. It is not made by a government agency. You deal directly with a mortgage lender or broker to get the loan, but the FHA will typically buy the loan from the lender after it is made or guarantee the lender against loss. They require lower down payments and credit scores than most conventional loans, making them a clear favorite among first-time buyers.

What Are the Terms?

These loans can have terms of either 30 years or 15 years. The interest rate is fixed for the entire loan length. As long as borrowers have a minimum credit score of 580, they only have to contribute a down payment of 3.5%. Closing costs run between 3% to 5% of the loan total and up to 6% of those can be paid for by sellers, builders, or lenders. 

FHA borrowers do have to pay mortgage insurance premiums for at least 11 years, not just until they reach 20% equity like with conventional loans. At the outset of the loan an upfront premium of 1.75% of the loan amount is due but can be financed into the overall mortgage. Then every year, the borrower will be responsible for an annual premium of between 0.45% and 1.05%, that is divided by 12 and paid monthly with the mortgage. If borrowers get tired of paying mortgage insurance, after a few years of timely mortgage payments and earning equity, they may be able to refinance into a conventional loan.

What Are the Qualifications?

To qualify for an FHA mortgage, home buyers need a FICO credit score of at least 500 and a 10% down payment, or a score of 580 or higher and a down payment of 3.5%. These loans also require a two-year employment and income verification and must plan to use the property as their primary residence. If they have had a bankruptcy, they must wait one to two years before applying and three years after a foreclosure. Lenders will also require that a borrower’s debts (mortgage expenses plus all other debts) are no more than 43% of their gross income.

What Are the Loan Limits for 2022?

Each year the Federal Housing Finance Agency sets loan limits for all government-backed mortgages. The limits are based on the average cost of housing in the country and certain regions. In 2022, for most parts of the U.S., FHA borrowers can take out a loan for up to $420,680, an increase from 2021’s limit of $356,362. For the priciest areas in the nation, like Hawaii, California, and Washington D.C., the loan limits are even higher: $970,800 this year, up from $822,375 last year.

With higher loan limits and currently low mortgage interest rates, an FHA loan might be the perfect tool to help you get into a home in 2022! Contact us today to find out more.