Home Buying For the First Time?

Home loan options can be overwhelming...

Many people who are considering buying their first home can be overwhelmed by the myriad of financing options available. Fortunately, by taking the time to research the basics of property financing, homeowners can save a significant amount of time and money. Buyers should also take a look at their own finances to ensure they are getting the mortgage that best suits their needs. Read on to find out which financing option may be right for you.

What Types of Loans Can I get?

There are several mortgage loan types; these are differentiated by loan structure and the agencies that secure them.

  • Conventional Loans 
Conventional loans are fixed-rate mortgages that are not insured or guaranteed by the federal government. Although they are the most difficult to qualify for due to their requirements for criteria such as down payment, credit score and income, certain costs, such as private mortgage insurance, can be lower than with other guaranteed mortgages. Conventional loans are defined as either conforming loans or non-conforming loans. Conforming loans comply with the guidelines set forth by Fannie Mae or Freddie Mac. These stockholder-owned companies create guidelines, such as loan limits - $417,000 for single-family homes, for example - because they package these loans and sell securities on them in the secondary market. 
A loan made above this amount is known as a jumbo loan and usually carries a slightly higher interest rate because of the lower demand for loan pools with these loans in them. Non-conforming loans, usually provided by portfolio lenders, have guidelines that are set by the particular lending institution underwriting the loan.
  • FHA Loans 
The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development, provides various mortgage loan programs. An FHA loan has lower down payment requirements and is easier to qualify for than a conventional loan. FHA loans are excellent for first-time home buyers because in addition to lower upfront loan costs and looser credit requirements, they allow down payments of as low as 3%. FHA loans cannot exceed the statutory limit. (For more on this type of loan, see Insuring Federal Housing Authority Mortgages.)

  • VA Loans 
The U.S. Department of Veterans Affairs (VA) guarantees VA loans. The VA does not make loans itself, but guarantees mortgages made by qualified lenders. These guarantees allow veterans and service people to obtain home loans with favorable terms, usually without a down payment, and in most cases they are easier to qualify for than conventional loans. Lenders generally limit the maximum VA loan ($417,000 in 2008). Before applying for a loan, request eligibility from the VA. If you are accepted, the VA will issue a certificate of eligibility to be used in applying for a VA loan.


What is the Difference Between Fixed vs. Floating Rate Mortgages

  • Another thing to consider when shopping for a mortgage is whether to obtain a fixed-rate or floating-rate mortgage. A fixed-rate mortgage is one where the rate does not change for the entire period of the loan.
  • Floating-rate loans usually allow borrowers to obtain lower introductory rates during the initial few years of the loan, allowing them to qualify for a larger loan than if they had tried to get a more expensive fixed-rate loan. Although the benefit can be great, these loans entail a substantial risk for those borrowers whose income does not grow in step with the change in interest rate. The other downside is that in most cases, the rate change is not known at the outset of the loan because it is usually pegged to some market rate that is determined in the future.
  • The most common types of ARMs are a one, five or seven-year ARM. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. Once an ARM resets, it adjusts to the market rate, usually by adding some predetermined spread (percentage) to the prevailing Treasury rate.

Borrowers must weigh the benefit of obtaining a larger loan with the risk.

Conclusion

If you're looking to find a home mortgage for the first time, there are a few things that can be done to reduce the difficulty of sorting through all the financing options. The best approach is to put some time into deciding how much home you can actually afford and then finance accordingly. Homeowners who can afford to put a substantial amount down or who have enough income to create a high coverage rate will have the most negotiating power with lenders and the most financing options. Those who push for the largest loan will undoubtedly receive a higher risk-adjusted rate and then may have to deal with adjustable-rate mortgages and private mortgage insurance. A good mortgage broker or mortgage banker should be able to help steer you through all the different programs and options, but nothing will serve you better than knowing what you want and what you can ultimately live with.

Content derived from Investopedia

Written by dvdscttbckr on Tuesday October 20, 2015
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