Mortgage

What Are the Most Common Types of Mortgages?

There are many different types of mortgage loans available that will suit a number of different needs. It is important to speak with a qualified mortgage professional to determine the loan that best matches your personal situation. It is imperative that you fully disclose your needs and abilities so they can accurately advise you.

CONVENTIONAL LOAN: This is also called a fixed-rate loan. The term can be anywhere from 10-50 years, but is traditionally a 30 year loan. This means that for the life of the loan, you will have the same interest rate and the same principal and interest payment. At the end of your mortgage’s term, your loan will be paid in full. The only change that may occur in your payment will be adjustments for property taxes and homeowner insurance should those amounts change. This type of loan offers the most security and is best for those who are planning on owning the same home for a long period of time. The loan will be given for the balance of the purchase price that remains after the down payment is made. The percentage of the purchase price that is required as a down payment can vary, so it is important to verify this information with a mortgage professional. This type of loan also requires full documentation including W-2 forms which show your wages, recent paystubs, recent bank statements, and explanations for any derogatory accounts. Depending on the loan-to-value-ratio, there may be a requirement for private mortgage insurance. This insures the lender against any loss if the borrower defaults on the loan and is automatically included as part of your monthly payment.

FHA LOAN (Federal Housing Authority): These loans are insured by the government and are beneficial because of their lower down payment requirements and often lower interest rates. These loans also accept a higher loan-to-value-ratio than a conventional loan might. These loans still require full documentation (W-2 forms, recent paystubs, and recent bank statements). It does not rely as heavily on your credit score and trade lines (number of active credit accounts). The terms and limits are the same as with a conventional loan, but can have a reduced rate for mortgage insurance.

ARM (Adjustable Rate Mortgage) and INTEREST ONLY LOANS: These types of loans start out with a lower interest rate with the expectation and knowledge that it will increase over time. In an interest only loan, you are initially paying only the interest with nothing going to reduce the principal loan amount. The principal is generally paid in one lump sum payment at the end of the loan’s term. There are many different types of ARMS, with many different adjustment intervals, and it is important to understand exactly what those terms are when determining whether this is the best type of loan for you. Although this type of loan has been the subject of a lot of negative press as of late, there are still situations when they can be beneficial. An example would be when a borrower knows they will only be in the home for a short period of time.

Why Do I Need to be Pre-Approved?

It is very important to speak with a mortgage professional at the start of the process of purchasing a home. You need to be very clear about what you can afford. The last thing you want is to enter into a contract, only to find out you are unable to meet the requirements for the loan, especially with REO (Real Estate Owned, or bank owned) properties because of the time constraints on these types of closings. Having a pre-approval in your hands expedites the process and makes your offer comply with the guidelines of any lending institution.

When you have decided that it is time to buy a house, one of your first steps should be to find a qualified mortgage professional that you are comfortable with and trust to guide you through the financial aspects of this process. Be open and candid about your financial situation, your income and your monthly expenses. Once you have been pre-approved you will know how much you are able to afford to spend on your new home and you will have a good idea about what your monthly mortgage payment will be.

Also, be sure to understand the difference between pre-qualification and pre-approval. To issue a pre-qualification the loan officer will usually take your word on information such as income and debts, pull your credit and give you a figure right there in the office. With a pre-approval, they actually submit your information through a program with a lender and have a firm commitment securing your ability to obtain a loan and the necessary conditions that must be met.

A pre-approval also prevents mortgage officers from trying to undercut each other by making promises regarding time frames, the amount they can get you qualified for, your interest rate, their fees, etc. and then being unable to follow through with those promises. With a pre-approval, you have all of this information in writing so there should be no unexpected changes along the way.

What Are Typical Closing Costs?

Closing costs are the costs associated with obtaining a loan and can typically run anywhere from 4-6 % of the home price. However, this percentage can increase or decrease depending upon any number of circumstances. These are costs beyond the price of the home and must be paid at the closing or built into subsequent mortgage payments. Be sure that you discuss the estimated costs with your loan officer so there are no surprises on the day you finalize your purchase. A Good Faith Estimate which discloses an estimate of costs associated with closing costs will arrive shortly after your application has been submitted to the lender.

Some of the fees included are those associated with attorneys, escrow (property taxes and homeowner insurance), loan processing and underwriting, title insurance (lender’s and owner’s policies), appraisals, inspections, credit reports, transfer fees (title and homeowner’s association if applicable), and the recording of the deed.

Buyers will also encounter what is called recurring costs that must be paid in advance, often called pre-paids. A typical mortgage payment includes your payment, interest, property taxes and homeowner insurance. Often, the taxes and insurance, including mortgage insurance, are paid in advance by your lender and then included in your monthly payment. Therefore, when you first purchase the home, the initial advances made for escrow items must be paid at the closing.

In some cases, a buyer will purchase discount points that are due at closing. This is when the buyer actually buys themselves a lower interest rate and the fee for this will be included in your closing costs. Take note that a loan officer with the bank who is lending the money does not charge points. However, a broker who is searching out the best program for you may charge points, although not always. These points will be included at closing as well.

Another important thing to keep in mind is that most of these costs can be negotiable. A buyer can include provisions in their offer that make the seller responsible for paying the closing costs, either in part or as a whole. This needs to be part of the offer negotiations up front and cannot be added as a condition once the offer has been accepted since it will materially change the terms of the agreement.

When is a Rehab Loan or 203K Loan Needed?

A rehab or 203K loan is insured by FHA and is available when a home is in disrepair or has become uninhabitable. It is essentially the same as a conventional loan, with a fixed interest rate and a term anywhere from 10-50 years.

The benefit of this type of loan is that the amount is based on the value of the house when it is fixed, with the extra money placed in an escrow account to complete the necessary repairs. An example would be a home priced at $200,000, but with a repaired value of $250,000. The bank would give you the loan for $250,000 and put the remaining $50,000 into an escrow account.

It eliminates the difficulty in obtaining financing due to the condition of the property when buying the house. Also, you avoid having to secure financing or save up to complete the repairs after the purchase is already complete.

This type of loan is very popular for REOs or bank owned properties. Many of these homes were vacated as a result of foreclosure and/or eviction actions. The homes are often in disrepair and some have been vacant for long periods of time leaving the property vulnerable to vandals or the elements.

There are some conditions and limitations you should be aware of when considering this type of financing. The money held in the escrow account is not available to you as the homeowner and you can only complete the repairs yourself if you are properly qualified and are prepared to be subject to the bank required inspections. The funds will remain in the established escrow account and be paid in draws directly to contractors who finish the work, with inspections conducted throughout the process, as well as pre-determined time frames that must be adhered to. The benefit of this is that the bank will often act as the mediator between you and the contractor to ensure that their money is being put to good use.

Tips From Mortgage Lenders

• Find a reliable loan officer: Word of mouth is your best tool for this. Speak with your real estate agent, title attorney, close friends or family members. You want to make sure that your loan officer is someone you can trust and that you feel confident will get you the best mortgage possible. You’ll want to make sure they return your phone calls and answer your questions in a timely and honest manner.
• If it sounds too good to be true, it probably is: When it comes to making such an important purchase as your home, it’s easy to fall prey to what sounds like an incredible deal. Make sure to get all the details of your loan in writing before you sign contracts to purchase a house. Be sure all the terms and conditions are clearly written and that you question anything that seems vague.
• Ask questions: A home is the largest purchase most people make in their lifetime and a mortgage payment may be the largest expense you have each month. It is vital that you feel comfortable with the process of getting your loan and with its outcome. Do not feel pressured by anyone to agree to a loan you are not comfortable with. You are the one who will be responsible for the mortgage payments and you will face the consequences if you are unable to maintain them.
• Compare lenders: Banks and lenders have numerous programs available to them and sometimes they offer special programs that are not offered by other lenders. Be sure to explore as many options as you can. There are a wide variety of loan programs available and it is important that you are getting the best loan possible for your individual needs.
• Have your financial documents ready: Most institutions require actual income documents. Have them ready in order to expedite the process. Two years of W2 forms, 1 month of recent pay stubs, 2 months of recent bank statements, explanations for any derogatory credit reports, etc.
• Know the steps to your loan process: Familiarize yourself with what to expect. It will help ease your stress, and help prevent you from being taken advantage of. Your loan officer will thank you as well!

Key Terms:

Pre-approval: This indicates your ability to obtain a loan and that your information has actually been submitted to a lender.

Rate Lock: Make sure you have a “locked-in agreement” from the lender that will be providing your loan. This will ensure that the interest rate you agreed to will still be your interest rate at closing regardless of changes to the market.

Disclosure and Good Faith: Within three days of your application being submitted to the underwriting department you will receive a package of disclosures. This will include the Good Faith Estimate, which will give you an idea of how much you will need to bring to the closing table in order to cover your closing costs.

Conditions – About the time you receive your Good Faith Estimate you will also receive a notice to provide any further documentation regarding your income and/or debts. These are conditions that must be met in order to continue with the underwriting of your loan. Once this is submitted to the lender, your loan will be prepared for closing.