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.