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Ah, the American Dream…owning your own home. A place that you can do what you want without asking permission. Well, at least within your walls! However, what can be a struggle for many is finding out how to finance a house purchase.
The cost of housing is rising across the country. We’ve had our house in Alaska on the market off and on over the past year with only one lowball offer. Sadly, Anchorage has a semi-soft housing market. But, that isn’t the case for the Denver area where my husband took a job. Here the same house and property can easily be TWICE the price if not more depending upon the community you choose.
Even when we sell our house (or now we are saying IF as the thought of moving back sounds appealing to some of the family), there will be a lot of juggling to afford to purchase a place in Colorado.
How to Finance a House Purchase: Types of Loans
Home loans come in lots of shapes and sizes. Each one has benefits to it and drawbacks as well. However, many people can find with the help of a good lender a loan that allows them to finance a house purchase.
Below is a little bit about two of the more popular options as well as how self-employed individuals can secure a home loan.
Finance a House Purchase: Conventional Loans
Part of the problem is that in a market with high housing costs is that many people can not afford to do a traditional home loan. With those loans, you need 20% of the purchase price down. Then you select whether to pay it off in 15 or 30 years.
If we are looking for something remotely comparable to what we have in Alaska, our price point is most likely $750,000 to $900,000. That means we’d need $150,000 to $180,000 as a down payment. Plus have the funds for closing costs. Even with a lot of equity in our Alaskan home, we’ll be lucky to get $130,000 out of it.
Finance a House Purchase: FHA Loans
An option many people will choose when they don’t have that much for a down payment is an FHA Loan. This is how we bought our house in Alaska as we still owned a house in Ohio with equity tied to it. You only need 3.5% as a down payment and a credit score of 580. For people with a credit score between 500 and 579, you can still get an FHA loan with 10% down.
Now, using an FHA loan includes the addition of mortgage insurance, protection for the lender in case the buyer defaults on their payments. When you purchase, you’ll find an additional 1.75 percent of the loan amount wrapped into the total purchase price. This is a one time fee. But, where it can start adding up for some is that you then pay an annual premium anywhere from 0.45 percent to 1.05 percent. This annual premium used to go away over time, but I heard that it now stays for the life of the loan for most situations.
Finance a House Purchase: Self-Employed Loans
Added into the mix is that most of my recent income has been from freelancing or other self-employed activities (blogging and teaching science classes to homeschool students.) Not all lenders are willing to do self-employed loans. There is an element of risk on their part as many self-employed individuals see wide fluctuations in their cash flow.
However, with many people embracing more of a gig economy for their livelihood, it is becoming more common and not impossible. These alternative income verification processes often carry the need for more liquid assets in your portfolio (sorry to those who live paycheck to paycheck!) and may require a higher level of down payment.
Do you own your own house? If so, how did you finance it?
Or, are you looking to buy and struggling with how to finance the purchase?