Purchasing A Property: What’s The Difference Between Loan Amount and Purchase Price?
Buying a home is an exciting time. The feeling of owning your own property can be exhilarating. If you have your heart set on purchasing a property, you would want to know all the details right? Of course.
When purchasing a property, many people have been given the loan amount by their mortgage brokers and are told that this is what they need to buy the property. However, there is more to the story. There is another price involved and that is the purchase price. Though there is another term to consider, loan to value, in this article we’re going to focus on what the difference is between loan amount and purchase price.
What is the Loan amount?
The loan amount is the total amount that you will have to pay for your home after all the fees and down payment are accounted for. You will be required to pay this amount in installments to your lender over a period of time.
It also becomes your principal balance when taking out a loan, which is the total debt on your home before interest charges are calculated. This principal balance can increase or decrease over time depending on whether or not you make additional payments to pay off your loan faster or decide to refinance your home loan.
What factors can influence the loan amount you’re approved for?
Several factors influence how much you’ll be approved for when you apply for a mortgage.
Your credit score
A good credit score will help you qualify for lower interest rates and make it more likely that your application will be approved. If your score is bad or low, however, it could affect how much money the lender is willing to give you in a loan amount. Checking your credit score can easily be done by visiting sites like Credit Karma and Experian
Type of loan
Different types of loans have different requirements when determining what they’ll lend people and thus what properties they can afford to buy. As experts in the industry you can be confident that at Hard Money Lenders we can help you get into the perfect loan program that best suits your needs.
- FHA loans – These loans are reserved exclusively for first-time homebuyers who need smaller amounts than typical mortgages have traditionally required.
- Fannie Mae/Freddie Mac (or “conventional”) loans – Require larger down payments but offer more flexibility on what kind of property can be purchased with them.
- VA loans – These are only available to veterans and those with active service members (and spouses).
Location of the home
Different locations have different housing markets, which means that homes in more desirable areas will be worth more and cost more to purchase. But if you’re trying to buy a house in a less popular area, your lender may not be willing to let you borrow as much money against it.
Type of property
Some types of homes are more valuable than others. A house on a lake or oceanfront property will cost more than one in an inner-city suburb, for example. A condo might be cheaper than a detached home with a yard, but it still requires the same amount of money upfront before any lender will approve your loan.
Condition of the home
The less maintenance the home has had, the more likely it is that you’ll need to make repairs and improvements before you can move in. This can be especially costly buying an older property. If you’re looking at a home that needs work done, make sure it’s something that can be finished without breaking your budget.
What is the Loan to Value Ratio?
The loan to value ratio is a term that you will often hear when buying a property. It is the percentage of the property price that you will be required to pay as a down payment or deposit. This can also be known as equity, which is the difference between what you owe on your mortgage and how much your property’s worth. It is calculated by dividing your total mortgage amount by the total purchase price of real estate.
Loan amount / Purchase price = Loan-to-Value Ratio
For example, if you are buying a property for $500,000 and want to put down 10 percent as a down payment, you will need to come up with $50,000 in cash. The loan-to-value ratio would be calculated as follows: $500,000 / $50,000 = 10%
The loan-to-value ratio is an important factor in determining how much money you will need for a down payment. It’s also used by lenders as a measure of your financial stability and ability to repay your mortgage debt.
The higher your loan-to-value ratio, the less risk you pose to a lender. That’s because if you default on your mortgage, they will be able to sell your property and recover some of their losses through foreclosure.
Bank Rate has an easy-to-use calculator that will help you determine your LTV Ratio
What is the Purchase Price?
The purchase price is the agreed amount on the property between the buyer and the seller. It’s what you will pay for the property excluding all other expenses such as commissions, legal fees, etc. This could be a bit confusing because it may seem like the loan amount and the purchase price are one in the same. However, they are not. There are many reasons why your purchase price would be different from your loan amount, so you’ll want to make sure that you’re prepared with enough money set aside for closing costs. This will help you avoid any surprises later on down the road.
What are closing costs?
Your final cost of purchasing might be different than what was originally listed in your sales contract because of extra fees also called closing costs
Closing costs are additional fees that you pay when you buy a home. They’re not paid to the lender, but rather to third parties such as real estate agents, attorneys, and title companies.
Real estate agent fees
Real estate agents can charge buyers and sellers for their services. The home buyer or seller typically pays the fee at closing, but some states allow for it to be split between both parties.
Title insurance is a type of insurance that protects against loss resulting from defects in the title to real estate. Title insurance policies vary depending on the property and company you choose. It generally costs between 0.5% and 1% of the purchase price, depending on your location and whether you have any unique features or conditions that may increase your risk of loss (for example, if you’re buying an older home). The main thing to remember when purchasing a title insurance policy is that it protects you against loss due to defects in the title (such as unpaid taxes), not just theft or fraud by sellers.
Attorney’s fees (if applicable)
The fee structure for attorneys can vary from state to state and from one firm to another. In some states, attorneys charge flat fees while others can charge an hourly rate. Also, the complexity of your purchase can make a difference in the cost of the fees.
When purchasing a property it is a good idea to consider having an attorney to help. An attorney can negotiate the best deal, ensure all contract terms are met, and avoid problems that could arise after closing. Property taxes that were due before you bought the home.
Property taxes are a percentage of the value of your property. They’re usually paid to the county in which your home is located, and they’re generally payable monthly, quarterly, or annually. Your county assessor’s office will determine how much you’ll owe based on two factors:
1) How much your property is worth.
2) What percentage of that value you’ll be paying each month.
The amount of money you pay can fluctuate significantly from year to year if there’s been a significant change in market values for properties within that jurisdiction.
Closing costs might seem like a hassle at first but they’re part of the closing process. This means that they can’t be avoided completely, so your best bet would be to work with your lender to keep them down so that they don’t hinder your ability to get into a new home.
Ultimately, whether you are a first-time buyer or an experienced one, understanding how the loan amount and the purchase price work as well as how each affects the other will help you know what to expect in your case should you be purchasing a property. With all the different costs involved with purchasing a property, it is easy to get confused. Please feel free to reach out to us by giving us a call at (786) 475-7691 as one of our lending experts will be available to help.
We hope we have provided you with some insights into how the loan amount and the purchase price differ and how you can use them to your advantage when buying that much-awaited house!
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.