Updated: Saturday, October 24, 2020
The Differences Between Financing New Construction and an Existing Home
Financing for new construction as well as financing an existing home both involve getting a loan with real estate as the collateral. Theyre both the same in that manner but clearly different in others. Lets look at the differences between financing new construction and financing an existing property.
When someone decides to buy an existing home and take out a new mortgage, the options are nearly unlimited. First, there are fixed rate and adjustable rate mortgage options. Fixed rate programs simply mean the selected interest rate remains the same throughout the life of the loan. This provides easier financial planning for those who intend to keep the property for the long term, knowing what their mortgage payment will be in say year 28. The payment will be exactly the same as in year 1. These loans can have terms ranging anywhere from 10 to 30 years, with some portfolio type mortgages being as long as 40 years.
An adjustable rate mortgage as the name implies can adjust but to do so the loan must follow very specific rules laid out in the note. An adjustable rate mortgage, or ARM, can adjust based upon a selected index and then adding a margin to that index to arrive at the new mortgage rate until the next adjustment period. There are also consumer protections called caps that limit not only how much the rate can move at the new adjustment period but also how much the rate can adjust over the life of the loan. ARMs also can have various terms. In general, for both types of loans, the shorter the term, the higher the monthly payment but at the same time there is less overall interest paid over the life of the loan.
A construction loan is used to finance new construction. Mortgages used to finance an existing property cannot be used to finance new construction. Construction loans are issued only for as long as it takes to build the home. Once the home is completed, the construction lender sends out an inspector for one last inspection to make sure the home is finished and is ready for occupancy. When this determination is made, the construction loan must be replaced by a permanent mortgage, the same types of home loans used to finance an existing property.
When a construction lender provides financing for a new home, the loan amount is based upon the plans and specifications laid out by the builder. All the costs, both hard and soft are added up. These loans also typically ask for more initial equity from the borrower. While a home for an existing property can have very low down payments, sometimes zero, a construction loan might ask for a down payment of something like 20. If the borrowers already own the lot on which to build, the lot typically accounts for the initial 20 equity required. A loan for an existing home can be found at a mortgage company or through a buyers own bank, while a construction loan is usually provided only by a bank.
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What Are the Differences in Mortgage Pre-Qualification and Pre-Approval?
When youre considering buying a home, there are two terms youll hear, both of which are >
Understanding these terms is critical because theyre going to help you know what you can afford as you search for a home, and theyre also how youre going to demonstrate youre a serious buyer to a seller.
Both are similar in that they are steps along the way to get a mortgage, but if you have a preapproval, you dont necessarily need a prequalification.
What is Prequalification?
A mortgage prequalification means that you provide a lender with some general financial information. The goal is to help provide you an estimate of how much you can afford when youre buying a home.
The information you provide for prequalification is usually self-reported. Most of the time, it doesnt include verification of your credit report. You can get a prequalification without dinging your credit report with a hard pull.
When youre prequalified, you receive a letter that will show you can afford to buy. You can show it to your agent and sellers, and it may be helpful in the process, but not as much as a preapproval.
What is Preapproval?
A preapproval carries a lot more weight in the buying process. When youre preapproved, youve submitted your financial history and the lender has verified the information you provide by checking your credit report, your employment and income, and your assets and debts.
For a preapproval, youll have to submit information like your total monthly expenses, W2s, pay stubs, and if you already own property, your mortgage statement.
Once you submit all the necessary documents, you receive a preapproval letter. This letter will outline the amount youre approved for, and the type of mortgage a lender will give you as well as the terms.
A preapproval serves as an offer by the lender to you, and there is usually an expiration of the offer. For example, you might have 90 days to buy a home based on your preapproval.
How Do You Get a Mortgage Preapproval?
The following are steps to follow to get a mortgage preapproval:
Get your own credit score. The higher your score, not only the more likely you are to be approved but the better the terms youre likely to be offered. With most lenders, if you have at least a 740 credit score, youre likely to qualify for the most favorable terms.
When you check your credit score, go over your report and make sure there arent errors that need to be addressed.
Calculate your debt-to-income ratio. To buy a home, you should aim to have a ratio of 36 or less. Your DTI is a ratio of your gross monthly income that goes toward paying debt.
Gather the documents youre likely to need to submit, such as your tax forms, employment details, and banking and account information. If youre self-employed anticipate showing at least two years of income tax returns.
Finally, when youre applying for preapprovals, shop around and talk to multiple lenders. This will help you find the lender thats right for you so you increase your chances of getting approved, but also so that you can save money on interest with better terms.nbsp;
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Enforcing "Nuisance" Provisions
"Nuisance" has been defined as "something that causes harm" and "a bit of a bother." Nuisances are a pretty common occurrence in homeowner associations since living in close proximity is bound to create friction from time to time. Most HOA governing documents include language like: "No resident shall engage in offensive activities which are a nuisance, or interfere with the quiet enjoyment of other residents."
These "nuisance" provisions trigger the need for the HOA to control certain resident behavior. The problem is there is a growing belief in the legal community that these provisions themselves may be a nuisance for the boards responsible for enforcing them.
One problem is simply defining the term "nuisance." The obvious goal of nuisance provisions is to prevent residents from making other residents miserable. But the broad wording of typical nuisance provisions leads to arguments of whether such provisions apply to almost any activity, or none of them. This ambiguity causes board members charged with enforcing them to echo former Supreme Court Justice Stewarts statement about the difficulty of defining obscenity: "[I cant define it], but I know it when I see it."
In the same vein, many HOA boards would agree that they recognize a nuisance when they see it. However, this approach has mixed results. Behavior that infuriates one person might go unnoticed or overlooked by another. Hyper-sensitive residents may deem all sounds as offensive, while others may refuse to recognize how their neighbors could find the most offensive behavior unacceptable.
The typical nuisance language in HOA documents doesnt offer much guidance to the boards who must mediate these disputes. One option is to list the activities or behaviors that will constitute a nuisance. Generally, the board has the authority to adopt resolutions "to clarify" the governing documents. A nuisance resolution could include:
Barking dogs at any time
Unsupervised pets in the common areas
Loud music, TV, singing. etc. between 10 p.m. and 8 a.m.
Use of chemicals or equipment that cause life or fire safety concerns
Tobacco or barbecue smoke that migrates between units
Housekeeping that causes fire safety or health conditions overly cluttered, attracts vermin, mold, etc.
Other activities that the Board deems to be a nuisance catch all provision
Is a nuisance a bit of a bother or something that causes harm? Good question. But this is an area in which the board needs to establish a policy that works most of the time and then focus on those special cases that require more thought or mediation.
Excerpts used with permission from an article from HindmanSanchez.com
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