Finding the right house is the fun part of the home-buying process; finding and securing the right loan is probably the most stressful part of the process.
Ideally, you – the prospective buyer – should get pre-qualified so you will know how much home you can afford. Loan officers at mortgage companies will calculate the loan amount the buyer will qualify for based on income, employment, and monthly debts and expenses.
Compare mortgage companies, loan programs, rates and closing costs to determine which company will offer the best home loan for your situation.Pre-approval will require a credit check, and qualifying for a specific loan program with a quoted interest rate. Securing a written pre-approval lets your real estate agent and the seller know that you are a serious and ready buyer.
So what loan options are available?
Fixed Rate, Adjustable Rate, or Hybrid: all loans fit into one of these categories. A fixed-rate mortgage loan will have the same interest-rate for the life of the loan, and consequently payments will remain the same each month for the term of the loan. The loan may be amortized over ten, 15, 20, 25, 30, or 40 years. Thirty-year loans are the most common. The stability and certainty of the payment appeal to some buyers.
Adjustable-rate loans (ARMs) typically feature a lower entry rate that adjusts periodically according to a certain financial index and margin. Rates and monthly payments can rise over time. Hybrid loans – loans with a fixed lower interest rate for a certain period of time before switching over to an adjustable rate – have become a popular option. Typical hybrid ARM loans feature fixed rates for a period of 10, 7, 5, or three years. For example, a 5/1 ARM loan will have a fixed rate for the first five years; it will adjust annually thereafter. Lower interest rates and lower initial payments appeal to many buyers, especially those who may not stay in the property beyond the fixed interest period and those who anticipate growth in income.
Conventional or Government-Insured Loans: for certain approved lenders, the government will insure loans to reduce the risk of loss if a borrower should default on their mortgage payments. Conventional or “regular” loans are not insured by the government. There are three government-backed mortgage types: FHA, VA, and USDA.
HUD (Department of Housing and Urban Development) administers the Federal Housing Administration (FHA) loan program, available to first-time and other buyers who cannot afford a traditional twenty percent down payment. The program – intended to stimulate the housing market by making loans accessible and affordable – allows buyers to purchase with down payments as low as 3.5 percent of the purchase price. Buyers will have to pay mortgage insurance premiums (MIP) for the insurance, thereby increasing their monthly payment. FHA loans may not be used for second homes or investment properties.
Military service members and their families can qualify for the U.S. Department of Veterans Affairs (VA) loan program that is also guaranteed by the federal government. Buyers can receive up to 100 percent financing for the purchase of the home, i.e., they can purchase a home with no money down. The VA does not lend the money; they back the loans made by the banks, mortgage companies and savings and loans companies.
The United States Department of Agriculture (USDA) also offers a loan program for rural buyers with “a steady, low or modest income” who are unable to secure housing through conventional financing. The program is managed by the Rural Housing Service and utilizes a county-by-county adjusted Area Median Income (AMI) to determine eligibility. Loans can be used for the purchase, repair or renovation of a home in a rural area.
Conforming or Jumbo Loans: refers to the size of the loan and the underwriting guidelines established by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The two government-sponsored enterprises purchase loans from lenders and sell them to investors (via mortgage-backed securities on Wall Street). A “conforming” loan is one that falls within their specified maximum size limits.
A jumbo loan exceeds those established loan limits, theoretically representing a higher risk for the lender. Borrowers must have larger down payments and excellent credit; interest rates are generally higher.
Since the Economic Stimulus Act was passed in 2008, the FHA loan limit in Riverside County had been $500,000. As of January 1, 2014, the maximum loan limit was reduced $144,650 to $355,350. The 28.9 percent decrease is the highest in southern California. This decrease will affect a number of buyers in the $360,000 to $500,000 range who will no longer qualify for FHA financing.
Also worthy of note, are HomePath Mortgage Products that are specialty programs available only on Fannie Mae-owned homes. These properties are exclusively foreclosed homes and homes taken back as deed-in-lieu of foreclosure or forfeiture. The Home Path financing programs are designed to help sell these homes and have several additional benefits: 5 percent down on owner-occupied properties, no PMI, no lender-required appraisal, and flexible mortgage types. Investors can also take title as an LLC and can possibly finance up to twenty properties.
Finding the perfect home requires a lot of looking; so does finding the money – the right loan — to purchase that home.