Ready to buy but not sure where to start with getting financed? First things first you need to know where your credit score stands then take inventory of your debts and monthly expenses versus your income. Now you can better decide how much house you can afford and have a great start to making an informed decision of which mortgage is best for you.
Next you will need to gather the main documents you will need to apply for a loan. You will need personal identification, proof of address, and verification of income. For personal identification you can use your driver’s license of course, but you may also use your social security card, military id, passport, non-drivers state id, or a certification of citizenship. To prove your address a utility bill is always great but you can also use a lease agreement, voter registration, change of address form from the US Postal Service, or insurance info from your car, rental, or current home.
After you get all your ducks in a row you will need to decide which mortgage type is best for your situation. There are many types of mortgages, but they all fall under one of two main categories, government backed or conventional loans. There are options no matter your circumstances, whether you have a low credit score, are buying for the first time, buying a fixer upper, buying in a rural area, or refinancing your existing home to save on your monthly payment, there is a mortgage loan for everyone.
First let’s start by going over government backed loan types of which there are three concerning real estate. However, don’t make the mistake of thinking that government backed loans are not still loans through lenders because they are, they are just limited to designated lenders and the government is in essence cosigning for the borrower. Although the government agencies themselves do not always set minimum credit score requirements you may still have to meet a minimum requirement with the lender which is often 620. There are exceptions of course depending on certain factors such as profession, income level, necessity, and location of the property. The most common exception to the minimum credit requirements is the FHA loan. A FHA loan is backed by the Federal Housing Administration. They allow lower down payments and lower credit scores than most other options. Your down payment can be as little as 3.8% of the purchase price and they entertain credit scores of 500 and up, however if your score is on the lower end your down payment can be as much as 10%. In addition, you will need to purchase mortgage insurance. These loans are easier to get than many others and are popular among first time home buyers. The second type is VA – A VA loan is backed by the Department of Veterans Affairs. Active or former military service members and their spouses are eligible. They offer no to low down payments and great mortgage rates and although there is no minimum credit requirement set by the VA, the common benchmark lowest acceptable score is 620. Another perk is that mortgage insurance is not required. Though you will need to obtain a VA certification of eligibility. They are easy to obtain and if done online are usually issued quickly. The third and likely least known type is USDA – A USDA loan is backed by the U.S Department of Agriculture and like a FHA loan can have lower credit minimum standards. It mostly covers rural areas but there are pockets of suburbia available, deciding factors include income levels in the region and household size. There are three types of USDA loans. The first type is more like a VA or FHA loan backed by a designated lender, they can offer low mortgage interest rates and dependant upon credit, no mortgage insurance. The second type are direct loans from the USDA for low income applicants who don’t have enough income or credit to qualify for a traditional mortgage. This is the only government direct loan option. The third is a home improvement loan and under certain conditions even grants that don’t have to be paid back. All of these USDA loans can also include, not only the purchase price of the home, but costs for installing utilities, essential household equipment such as ovens and refrigerators, provisions for handicapped accessibility, and items that promote fuel-efficiency such as solar panels or double paned windows.
After government backed loans the other options are conventional loans that are backed by private lenders or by Fannie Mae or Freddie Mac, which are often confused for government agencies but are actually government sponsored enterprises that are for-profit private companies that do not directly lend money but help to fund certain lending institutions. Fannie Mae is the National Federal Mortgage Association which purchases and guarantees loans through the secondary mortgage market in order to help moderate to low income buyers. Freddie Mac is the Federal Home Loan Mortgage Company that buys mortgages and packages them into mortgage backed securities. Banks then use those funds to help lenders lend to home buyers. Conventional loans have two categories of their own, conforming and non conforming. Conforming means it adheres to the standards of Fannie or Freddie where as non conforming means it does not. A conventional loan has stricter qualifications than other types of loans, to qualify you need to be in the 640 range and depending on qualifications you will need a down payment of 3%-20%. However, even if you are well qualified for a low down payment you may still want to put down a larger one to get a lower monthly payment. Other perks to a larger down payment are less money to borrow and lower interest paid overall.
This brings us around to interest rates, all loans are subject to interest rates, either fixed or adjustable. A fixed rate, as the name suggests, has a fixed rate for the lifetime of the loan. These are predictable and popular but the only way to change your rate is to refinance your home. An adjustable rate mortgage, otherwise known as an ARM, can fluctuate over the years. They usually have introductory periods with a low rate that raises after the intro period is over. They are also tied to the measure of interest rates called the index which can raise or lower your rate. These types of rates often tend to have caps and minimums on them as well so that they can only be raised so high or fall so low. An ARM, like many things has its pluses and minuses, if you are concerned the payments will get too high and become a strain it’s not the best choice for you, but if you have the means, it can be advantageous to take advantage of the lower rates of the introductory period. This period tends to come in 5, 7, or 10 year terms, meaning you have the same low rate for that amount of years then the rate is adjusted yearly for the remainder of the life of the loan.
Now that you know the basics let’s explore a few other options that are lesser known. Probably the most known of the lesser known programs is the Good Neighbor Next Door program that is a FHA loan through HUD, Housing of Urban Development. These loans are only for teachers and first responders such as EMT, firefighters, and law enforcement. They can feature down payments as low as $100, are eligible for up to 50% off the list price, and often closings costs can be financed as well to save you money upfront. Other than being a pre k-12th grade teacher or first responder you must also live in the home at least 36 months and it must be in a HUD qualified revitalized area. The next often overlooked programs are state run, for example the Missouri Housing and Development Commission offers 30 year fixed loans with below market rates. They have an option for first time home buying called First Place to help you get in a home often with lower down payments than standard loans by offering assistance grants of up to 4.5% of the loan amount. It doesn’t even have to necessarily be your first home, you just cannot have owned a home for the past 3 years. The Kansas Housing Assistance Program also helps buyers with 30 year fixed mortgages and helps qualified applicants with grants of up to 5% in cash assistance for down payments or closing costs. These state level programs can be obtained in conjunction with national programs such as a VA or USDA loans. Another often overlooked option is a renovation loan for fixer uppers. The market is tight lately and there is a shortage of median and lower range homes available. One way to counteract this is to buy a fixer upper with a FHA home improvement loan otherwise known as a HUD 203k loan that helps you obtain a home in need of a little TLC. You get a great mortgage rate and a chance to put your personal stamp on a new home. What’s not to love? Many national and state programs are in place to assist buyers but there are options for refinancers too. Maybe you don’t need a new home you just need a new mortgage rate. Refinance loans help you accomplish this whether you want to switch from a fixed to an adjusted rate mortgage, consolidate debt to one single payment, or even to pay off a balloon payment and get longer loan terms to repay the remainder of the debt.
Now that you know what kind of loan fits your unique situation, the question becomes, which mortgage terms are best for you. The mortgage term is the amount of time you will spend repaying the loan. Should I get 30, 15, 10 years??? The standard is 30, the second most common is 15. The main things to bear in mind is that with a longer loan period you will have a lower monthly payment, but you will pay more interest at a higher rate and with a shorter term loan you will have a higher monthly payment but less interest paid at a lower rate. If you can afford the higher monthly payments for the shorter term, that is a great option to save money in the long run on interest.
Now that you have a good idea of the types and terms of mortgages available for your situation you can be better informed on your road to purchasing (or refinancing) a home. Your next step is to find an experienced realtor to guide you through the home buying process who knows all the best lenders in town. May I suggest myself?