While some home buyers pay the entire sales price of their home with cash, many people opt to apply for a home loan. A home loan may have a term length up to 30 years or longer, and this means that the financed portion of your purchase price is spread out across several hundred monthly payments. If you have decided that you would like to apply for a home loan, you should learn more about the many loan programs available. By spending time educating yourself about the financing options that you could use, you can more easily make a wise decision about which program to apply for.
Understanding Home Loans
All home loan programs have similar features. For example, all programs have a specified term, which is commonly between 15 and 30 years. Payments are usually made on a monthly basis throughout the term length. All loan programs also have a defined loan amount. In some cases, this loan amount may be 100 percent or more of the sales price. However, it is more common to find a loan amount that is 90 percent of less of the sales price. Any amount of the sales price that is not paid for with loan proceeds is your down payment. In addition to the down payment, you will also be responsible for closing costs. However, some programs allow the seller to pay for at least a portion of the closing costs.
Many buyers are most interested in what the monthly mortgage payment will be. The monthly loan payment is calculated using the loan amount, term length and interest rate. You can use an online loan calculator or contact your lender if you want to manipulate these numbers. By manipulating them, you can determine which loan terms available may yield an affordable monthly mortgage payment.
You also should be aware that there are three primary mortgage types available. These are a conventional loan, an FHA loan and a VA loan. When you understand the differences between these programs, you can better determine which loan program to take a closer look at.
A conventional loan is unique from an FHA and VA loan because a conventional loan is not backed by or insured by a government entity. These loans are most commonly offered by banks, and the banks have full control over establishing their own underwriting guidelines. In many cases, these underwriting requirements may be less stringent than the guidelines for an FHA or a VA loan. However, because conventional loans are not backed by a government entity, you may find that the loan amount is more conservative and that the interest rate is slightly higher than the other options. Most lenders offering conventional loans want borrowers to have a higher credit rating. This reduces their risk associated with extending a loan that is not backed by the government.
An FHA loan is unique because it is backed by the Federal Housing Administration. Be aware that the FHA is not the actual lender. You will still need to go through a bank or another type of financial institution to apply for an FHA loan. However, in the event that you default on an FHA loan, the FHA will reimburse the bank for the financial loss it may incur. Because of this extra backing, the interest rate may be lower and the loan amount may be higher than what you may find with a conventional loan.
On the other hand, because the FHA is backing these loans, it has specific requirements for acceptable loans. These loans usually have a higher debt-to-income ratio requirement than conventional loans, which may help you to qualify for a higher loan amount through an FHA loan. In addition, you may qualify for a loan amount up to 97 percent of the sales price or higher in some cases. Credit score requirements are usually not as stringent as with a conventional loan.
The primary downside associated with an FHA loan relates to mortgage insurance premiums. Loan applicants usually must pay 1.75 percent of the loan amount up-front at closing. In addition, an annual premium of up to 0.8 percent of the loan amount may be payable annually if you put down less than five percent on the purchase. This premium will remain in place until you refinance your loan or until you pay the loan off.
A VA loan is backed by the Veterans Administration in the same way that an FHA loan is backed by the Federal Housing Administration. VA loans are only available to active or retired military professionals, reservists and their surviving spouses. The interest rate on a VA loan is usually very competitive, and many applicants enjoy being able to borrow up to 100 percent of the sales price. However, there is a funding fee that is payable with these loans, and the funding fee may be as high as 3.3 percent in some cases. While the seller may pay some or all of the closing costs, this is not a VA requirement. There is no maximum loan amount for this program.
Finding the Right Loan Program for You
Before you compare the loan programs that may be suitable for your specific situation, you must understand how much money you have available to pay for a down payment and closing costs. You also must determine what maximum monthly payment you are comfortable paying. Keep in mind that you are also responsible for other housing-related expenses, such as HOA dues, property taxes, property insurance and more. Understanding your debt-to-income ratio and credit scores is also helpful when determining what loan amount you may qualify for and which loan program is affordable for your budget
As you examine the home loan programs that may be suitable for you, eliminate options that are not suitable for you based on debt-to-income ratios, property requirements, down payment requirements and more. Once you have narrowed down the option to the right loan program for your needs, you can use an online calculator to adjust the term, loan amount and interest rate as needed. These steps can help you to set up an affordable loan that meets your needs.
In some cases, loan applicants will realize that the available loan programs are not suitable for their needs. For example, your credit scores may be too low to qualify for your desired loan amount may not generate an affordably payment. When you run into these or other similar problems, it may be necessary to regroup. This means that you may need to find a more affordable home to buy, save up more money for a down payment, improve your credit rating or take other steps before you apply.
Everybody dream of being a home owner and this is one single huge investment that many people undertake. Owning that dream home starts with ensuring that you have access to the right mortgage from the start. Although there are different mortgages available in the market each with its own advantages and disadvantages, one the most convenient and preferred mortgage is the conventional mortgage. A conventional mortgage is a type of loan that is given to home buyers without the security offered by government agencies such as the US Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or the USDA Rural Housing Services. Instead, the loan is guaranteed by private lenders such as credit unions, banks, mortgage companies, or through the Federal sponsored enterprises like the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Federal National Mortgage Association (Fannie Mae)
What Comprises Of A Conventional Mortgage?
A conventional mortgage can comprise of the following loans:
- Conforming loans: In United States, this is a loan that sticks to the guidelines provided by GSE guidelines (Freddie Mac and Fannie Mae)
- Sub-prime loans: A loan that is provided for individuals who do not qualify for prime rate loans at a rate that is above the normal lending rate.
- Jumbo loans: A jumbo loan is a term used to refer to mortgages that have great credit quality although they are usually above the conventional loan limits.
- Non-conforming loans: These are the kind of loans that go against the regulations set by Freddie Mac and Fannie Mae commonly known as the GSE guidelines. As the word suggests, this kind of loans violate these guidelines hence the name non-conforming loans.
- Portfolio loans: A portfolio loan is meant for aspiring homeowners who find themselves in unique homes. This kind of loans can be held permanently by a lender that provides it.
What Determines Your Qualification For A Conventional Loan?
- You will need to prove that you are a safe borrower. The firms that provide you with a conventional loan will require you to provide them with a history of your addresses for the last two years and official documents to identify you. An identification document can be either a social security card or a driver’s license. You are also required to give them your employment history and a history of previous salaries including tax returns as proof of previous incomes. Self-employed individuals are required to provide further documentations as proof of their income status.
- You will need to keep a low debt to income ratio. A debt to income ratio is calculated based on all your gross monthly income. The general acceptable debt-to-income ratio for a conventional home loan is 43 percent. Depending on what lender you will approach, there are some lenders who will allow a debt-to-income ratio that is as high as up to 50 percent when there are compensation factors that can include significant cash reserves.
- You should maintain a minimum credit score. Most lenders adhere to the borrowing guidelines set out by the country’s top largest financial institutions, Freddie Mac and Fannie Mae. These two large financial institutions purchase loans from other insurance groups although when they are not in line with the Fannie Mae and Freddie Mac regulations, they never purchase them. Your credit score determines your access to a conventional loan with Fannie Mae sets a credit score of at least 620 when applying for fixed-rate loans. When your credit score is below 620, you will find it hard to qualify for a conventional home loan.
- A huge down payment will provide you with better rates. There is a major misconception that when applying for a conventional loan, the down payment should be minimal ranging between 1 and 20 percent. Although you might be tempted to get attracted to a firm that requires you to make a low down payment, it is important to remember that putting a huge down payment for a conventional loan ensures that you secure better interest rates and achieve equity in your home.
- The amount you are seeking. The loan amount you apply for determines whether you will qualify for the finances. Mortgage companies sell their loan rights to the huge financial firms like Freddie Mac and Fannie Mae. To do this, however, they provide loans that must be in compliance with regulations set by these financial institutions. Most lenders conform to the set maximum borrowing of about $ 424,100 although this rate can vary depending on your state of residence and current home prices.
What Are The Benefits Of Conventional Mortgages?
- A conventional loan is a quicker loan compared to their conventional loans. A conventional loan is less hectic compared to loans insured by provided by the federal government. Once you qualify for a conventional loan, you will need the approval of the lender only without any requirement for a review from other agencies. A customer does not need to undergo a FHA inspection that could be time-consuming.
- A conventional loan has no limits. When applying for a conventional loan, you will not be required to conform to a dollar limit and this minimizes the monthly payments. With a conventional loan, you will have the option of paying your taxes or insurance premiums directly. You are also likely to enjoy options such as adjustable interest rates or an interest only.
- You can get financing above the homes’ value. When you want to move into your new home, you will need extra financing to cater for the furnishings. A conventional loan can sometimes come with financing options that are more than the value of your home and this will help you to pay for furnishing. A conventional loan can cater for home improvement expenses that will ensure that you move into your dream home with ease.
- A conventional loan is highly flexible. For an aspiring homeowner, access to a loan that is competitive and affordable. Many lenders strive to make loans flexible to accommodate their customers. A conventional loan can provide you with incentives aimed at attracting more customers and making the loans more accessible. Depending on the lender you approach, some might provide you with an option of providing collateral as a security for the loan while others may use other ways to secure the loan.
A conventional loan will finance a home that adheres to the FHA backed mortgage. A conventional loan will be approved if the home adheres to the set FHA appraisal and inspection regulations. This aspect of the loans is meant to ensure that customers are protected from purchasing homes of low qualities, which further ensures that you do not pick homes that will not last for long. A conventional loan makes it easy to purchase a home that might be of less quality but at an affordable.
Buying a house is a huge step in life that requires dedication and a whole lot of concentration to get it right. Buying a house is not something anyone plans to do several times. It is usually a one-time deal and so you have to get it right the first time. With the real estate market expanding every day, it has become even harder for someone to make the decisions on what mortgage they should get and for how much.
However, this process doesn’t have to be tedious and brain-wrecking. By following several guidelines and sticking to your budget you can get just the perfect home for you. Start by looking into the following areas.
- The type of mortgage that appeals to you
- The specified interest rates
- The amount on the mortgage
Type of Mortgage
There are many types of mortgages for you to choose from. This includes conventional mortgages and government mortgages. Here are some of the choices you can look at.
The Federal Housing Administration mortgage loans are especially suitable for first time home buyers. They are designed to make the home buying process simple and affordable. The eligibility criteria are also simplified to allow everyone a chance to get this loan. The down payments are set from as low as 3.5% of the original buying price.
If you are a first time home buyer then you should check out the FHA loans. They also don’t require a very high credit score. Almost anyone can qualify for this mortgage.
These properties are acquired after people default on their FHA loans. The department of housing and urban development takes back possession of these properties and offers them for sale. With a decent credit score, down payment and an ability to repay the mortgage, you can buy one of these homes from HUD.
Veterans and their families have been provided with their own special type of mortgage – veteran affairs loans. They come with benefits such as no need for a down payment when taking this mortgage. Every veteran can be eligible for this loan anytime they wish to buy a home. The rates are very affordable and designed to help the veterans get decent homes.
You can also look into conventional mortgages offered by other agencies such as banks, private lenders etc. however, these type of mortgages can be expensive as they come from private lenders. Since the lender has no guarantee that you will repay the loan, the terms are made to be strict.
They require a much higher down payment as well as high-interest rates. In a way, this loan can be beneficial than a government-backed loan. If you choose to pay a down payment that is less than 20% then you have to pay for insurance to give the lender some assurance.
If you have a good credit score then save enough money on your mortgage then you can pay a large down payment for added benefits. This will help you avoid additional fees and also earn you a lower interest rate.
Mortgage interest rates come in two types. Fixed interest rates and adjustable.
Fixed Interest Rates.
If you choose fixed interest rates it means that you will pay a fixed amount from the beginning to the end. The monthly principal and interest don’t change until you finish repaying the loan. These type of mortgage usually lasts from around 15 to 30 years.
The rates don’t change no matter what. When the market rates go up, your rates will still remain the same. If the rates go down, yours still remain the same unless you decide to refinance your mortgage to get those lower rates. This mortgage is very nice if you have a stable home and a stable job with a settled life.
When it comes to the adjustable-rate mortgage (ARM), your interest rates change after a specific time. They usually remain the same for a period of time then either decrease or increase with the changes in the real estate market.
The initial interest rates are set lower than the market price which makes the home a lot more affordable than with fixed interest rates. The rates are set to entice buyers to enjoy the low rates at the beginning.
This type of loan is recommended for people who like freedom and are not ready to settle yet. Most people enjoy the low-interest rates and the refinance the mortgage when the rates start to fluctuate. Beware that the interest rates may fluctuate to a higher amount that you might have problems coping up with. Before you choose the adjustable-rate mortgage, be ready for anything at any time.
The Mortgage Amount
Eventually, you will have to check your bank account before you get a mortgage. With so many prices in the market, you have to make a decision which one you can afford and which you should avoid. There are situations where people opt to buy a house that is out of their price range. This is called the non-conforming mortgage loan.
A mortgage can be non-conforming in several ways. If your credit score is below the required, high debt levels, the loan is higher than the normal limit in your area then your mortgage is non-conforming. This will make everything about your mortgage become more expensive. The lender will set a higher interest rate, high down payment, and might require insurance for the mortgage.
That is because non-conforming loans are more risky for the lender. They stand to lose if anything goes wrong. Therefore you have to give them assurance that the loan will be repaid.
It is usually wise to remain below the required limits for you to get the best rates. It also makes things easier for you and the lender. Here you can now get good rates and a low down payment on the mortgage.
Before you go mortgage shopping, check your finances and all other factors first. Improve your credit score as much as you can as this earns you a good mortgage and decent rates. You can also use tools such as the mortgage loan calculator to get estimates on how much you will spend on your mortgage.
Buying a home is an important task which requires preparation. Get as much information on various mortgages before you make the final decision. It doesn’t hurt to shop around first and get to understand the different lenders and mortgage types so that you can make an informed decision.