Financing, Closing and Settlement
Financing
Financing fundamentals
Buyers typically choose among conventional, FHA, VA, and USDA loans. Conventional loans may require private mortgage insurance above 80% loan-to-value; FHA loans carry mortgage insurance premiums; VA loans often have a funding fee but no monthly PMI. Lenders evaluate credit, income, assets, debt-to-income ratio, and loan-to-value. Fixed-rate loans have stable payments; adjustable-rate loans have initial fixed periods and then reset. The APR reflects the interest rate plus certain fees, so it is usually higher than the note rate. Prequalification is an informal estimate; preapproval is a lender's conditional commitment. A financing contingency protects the buyer if the loan is denied, but only if the buyer acts within the stated deadlines. Traps: treating prequalification as a guarantee; assuming seller concessions reduce the price; confusing APR with the note rate; and forgetting that PMI can be removed when equity reaches certain levels. Worked example: A $300,000 home with 20% down requires a $60,000 down payment and a $240,000 loan, so the LTV is 80%. Rule of thumb: loan-to-value equals loan amount divided by purchase price or appraised value, whichever is lower.
Closing and Settlement
Closing and settlement
Closing transfers title and settles money. The settlement statement lists debits and credits for buyer and seller; a debit is money charged to a party, a credit is money paid to or on behalf of a party. Common closing costs include origination fees, appraisal, credit report, title search and insurance, recording fees, attorney fees, and transfer taxes. Prorations divide ongoing costs such as property taxes, rent, and HOA dues between buyer and seller based on the closing date. The deed must be delivered and accepted, and recording gives constructive notice. In Rhode Island, attorneys commonly conduct closings and issue title opinions; title insurance protects against covered title defects. Traps: reversing debits and credits; prorating taxes using the wrong year or day count; forgetting that the seller's existing mortgage must be paid off; and assuming recording is optional. Worked example: Annual taxes are $3,650 and closing is July 1. The seller owns January 1 through June 30, half the year, so the seller owes $1,825 as a debit at closing, subject to the contract's proration method. Rule of thumb: debit means charge; credit means money in.