Types of Financing: As Unique as The Home You Buy
Once you've committed to buying a new home, your immediate goal is to get approval for a mortgage loan. But you should be aware of your financing options.
The Application Process
If you have already been pre-qualified for a loan, you'll now have to go through the full application process. A Mortgage Loan Officer will meet with you and complete the application and collect the other required documentation. Generally, this includes: Information and documents relating to the property to be financed
Employment information for the borrower and co-borrower
Income information, including wages and salaries, dividends and interest and any other sources
Current and proposed monthly housing expenses, such as rent, mortgage insurance, taxes, etc.
Assets, including savings accounts, certificates of deposit, stocks, bonds and mutual fund shares, vested amounts in retirement funds, net worth of any businesses you own, automobiles, furniture, other personal property, and real estate owned
Liabilities, or debts, such as outstanding mortgage, home equity, personal and auto loans, credit card balances, alimony, child support, etc.
Appraisal
Before lending you money to buy a home, a lender must be sure the property is worth enough to cover the loan balance should you default. An appraiser will be sent to the property to assess its value. Down Payment
For first-time homebuyers, the down payment is the tough part because it's typically a relatively large sum of money that you have to bring to the table at settlement. At many lenders, the minimum down payment on a conventional mortgage loan is 5%, but lower amounts may be available for FHA or new loan programs. Ask your lender what's available for you. Mortgage Insurance
To protect a lender's investment against default, most lenders will usually require that you purchase some kind of mortgage insurance if your down payment is less than 20% of the mortgage loan. The premium will be included in your monthly mortgage payments. Most lenders and brokers do offer programs that do not require mortgage insurance. Points
A point is 1% of the total amount of a mortgage loan. Let's say you're buying a house for $125,000 and put 20% ($25,000) down. You'll be financing the remaining $100,000. If 2 points are charged on the mortgage, $2000 must be paid to the lender. Sometimes the cost is divided between the seller and buyer, by contractual agreement. Interest Rate and Term
You'll see some differences in interest rates charged by lenders on mortgage loans, but all rates tend to rise and fall, sometimes very quickly, based on what's happening with the U.S. and global economies. If you're shopping rates, be sure to notice how many points are being charged. You may see one lender offering a low rate and more points, which means you'll pay more out of pocket initially but have lower payments through the life of the loan. Another lender may have a higher interest rate, making for higher monthly payments, yet fewer points, which will cut your immediate expenditures. Fixed Rate Mortgages
If you want to lock in a specific interest rate and have the predictability of a monthly principal-and-interest payment that will never change throughout the term of the loan, a fixed rate loan from your lender is for you. Terms Available:
The term is how many months or years it will take to pay off the loan completely. The standard term for fixed rate mortgages is 360 months or 30 years. Terms of 15 years and 10 years are also widely available. Many Lenders offers terms of any number of months or years between 10 and 30 years, and special loans such as a 7/23 loan that's advantageous for borrowers who expect to resell or refinance their home within 7 years. Adjustable Rate Mortgages
This type of loan was created to make it easier to handle the payments in the early years of the loan. It begins with an attractively low interest rate, so the monthly payment is lower than it would be with a fixed rate loan. Then, at specified times, the interest rate will shift up or down, depending on market conditions at the time. Prearranged interest rate caps keep the rate from changing too often or by too much. For example, A 5/1 has a fixed rate for the first 5 years, and then may adjust each year thereafter, with caps on how much it may move at any adjustment. FHA Loans
FHA loans feature lower down payments, made possible by government-backed insurance. Guidelines for acceptable credit ratings and the source of your down payment are also more flexible with FHA loans. Construction/Permanent Loans
For those who choose to build a home rather than buy one, lenders offer special construction/permanent loans. During the 6 to 9 month construction phase, draws are paid out as the work progresses, based on the percentage of completion. Then, when the house is completed, the loan converts into a traditional mortgage loan without the inconvenience or expense of going through another settlement. Bridge Loans
In the event that you must begin making payments on a new home, yet are still paying off on your last home, you may be able to arrange a bridge loan. As the name indicates, this loan is designed to make it easier for you to meet both financial obligations, forming a temporary bridge from old to new. If it looks as if you may need this kind of help, discuss it with your lender as soon as possible. To see which program may be right for you, or your situation, get a FREE no cost consultation, or get prequalified, so you'll have a solid position with which to shop for that perfect property and lock in your best rate.
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