What you need to know about lending, before you buy a home
You start looking online for homes. The problem is how do you know what you can afford? What is your credit score? How much debt do you have compared to your monthly income? Well, that’s where we can point you in the right direction. A majority of people purchasing homes do not pay cash…it’s rare! That means you have to get a home loan referred to as a mortgage. There are a few different types of lenders and that is something that keeps changing. There is what’s called a mortgage bank, a mortgage broker or affiliate lender, and your traditional depository bank…they all can offer similar things but the bottom line is that you want to go with someone who can help you through the process and close the loan on time to avoid headaches later. Most Lenders have online applications that they will direct you to. Go fill it out and try maybe 2 or 3 lenders so that you can get the best rates and service! Below is a list of important items that you will need during your loan approval process so it’s good to get it together before you start moving forward.
Things you need to help with the application process:
- Last 2 years Tax Returns (with W2)
- Last 2 months pay stubs
- Last 3 months Checking and Savings Statements
- Assets Statements (mutual funds, retirement funds, 401K, etc.)
- Homeowners Insurance (you will need this when you are under contract)
- Copy of Driver License
It’s good to get pre-qualified early on in the process because 1) you know what you can afford 2) if there are any problems with your credit, etc. you can address those and improve your credit score.
The higher your credit score the better your interest rate will be…the lower your interest rate, the less your payment will be. Look at an amortization schedule and you will see how much per year you pay in interest…so get that credit score up! A good site to find out what your payment will be based on your interest rate and down payment is http://www.mortgagecalculator.org/
Types of Loans
Conventional/Conforming Loan
Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit and income requirements, down payment, and suitable properties. Fannie Mae and Freddie Mac announces new loan limits every year. This type of loan usually yields a better interest rate and fewer fees associated with the mortgage.
FHA Loan
There are a number of specific FHA loans. FHA is a federally insured loan available for people who don’t meet conforming qualifying criteria such as credit or income. The rates are usually similar but slightly higher and there are certain fees that are required with this program.
A section 203(b) is the most frequently used FHA program used to purchase 1-4 family homes.
A Section 234(c) provides mortgage insurance for buyers who wish to purchase a unit in a condominium project. The condominium may consist of more than one building, such as a group of row apartments, high-rise buildings, townhouses, or any combination of these structures. Any condominium project must be approved by HUD, as well as meet minimum owner occupancy criteria in order to qualify for FHA financing.
A section 203(k) loan allows you to purchase or refinance and rehabilitate a home at least 1 year old. A portion of the loan proceeds are used to pay off the existing mortgage, and the remaining funds are placed in an escrow account and released as rehabilitation is completed.
VA Loan
VA loans are guaranteed by U.S. Dept. of Veterans Affairs. The guaranty allows veterans and service persons to obtain home loans with favorable loan terms, usually without a down payment. In addition, it is easier to qualify for a VA loan than a conventional loan. Lenders generally limit the maximum VA loan to $203,000. The U.S. Department of Veterans Affairs does not make loans, it guarantees loans made by lenders. VA determines your eligibility and, if you are qualified, VA will issue you a certificate of eligibility to be used in applying for a VA loan.
Adjustable Rate Mortgage (ARM)
An adjustable rate mortgage is a loan that usually has a lower than typical interest rate in the beginning but the ability to fluctuate up if the mortgage interest rates change. These loans have a time for maturing based on an index and a time frame for maturity. The advantage of this loan would be if you were only planing on staying in a home for a short period of time to take advantage of the lower payments and interest rates. You must be careful because interest rates can change and cost you more money as a result so be sure that you know what you are getting with an Adjustable Rate Mortgage.
Jumbo Loan (Over $417,000 currently)
Loans above the maximum loan amount established by Fannie Mae and Freddie Mac are known as ‘jumbo’ loans. Because jumbo loans are bought and sold on a much smaller scale, they often have a little higher interest rate than conforming, but the spread between the two varies with the economy.
USDA Loan ($0 Down)
The USDA program was created to meet the needs of rural housing. It was designed for low to moderate income rural residents in order to make home ownership a possibility. Purchasers and the properties must meet the qualifying standards that can be found at this site. USDA site
