Home, For Sale, Mortgage, Preapproval, Home Search, Lending, Loan to Value, Debt to Income Ratio
Posted: October 11, 2017 by Bailey Gordon
If you're a first time home buyer, you're probably not 100% sure of how to begin the process, what you'll need along the way and how to determine what range of home prices you should begin looking at, and that's okay! Today we're going to talk to you about different types of loans because we think this is a good place to start your home buying experience!
Whether you've been saving up for a down payment or you're hoping to obtain 100% financing, there's a loan out there for everyone, you'll just need to sit down with a lender and weigh your options to determine which type of loan best fits your needs. While we are not lenders, we do have a few helpful tips for those of you applying for a mortgage!
If you're interested in buying a home, it's always a good idea to speak with a lender for multiple reasons, the first being to determine how much house you can afford. If you've prepared a budget and you have an idea of what you can afford as a monthly payment, it's a great start, but it's always a good idea to have a lender confirm your debt, your income and your stability in order to make sure that monthly payment will be comfortable for your lifestyle!
The second reason it's good to meet with a lender is because most brokers will want a preapproval letter before they spend their time showing you homes you may not be able to afford. In order to make sure you're serious about buying and that you're prepared to view homes within a certain price range, having a predetermined idea of what you can afford will save you time when it comes to viewing properties. This will also make it very easy for your broker to do some research and form a list of home options to show you that are realistic in relation to your income, rather than wasting your time on homes that aren't within that range.
Being preapproved is a good way to set the range for what you'll be able to buy, but a common misunderstanding with preapproval is the difference in qualifying for a loan or actually being approved. Getting pre qualified does NOT mean you have been approved for any concrete amount. You will need to submit several documents such as bank statements, pay stubs, credit scores and any debt in order for the actual loan to be approved once you've found a home you love! A lender will be looking at these criteria to determine how much of a risk you are to a lender, your debt percentage in comparison to your income and any other expenses that should be factored into your monthly spending, all in order to determine what you can actually afford to pay.
So now that you know why it's a good idea to speak with a lender, it's time to lightly expose you to a few different loan options that exist. While there are different situational factors that contribute to the type of loan you choose (or are approved for) a lender will be able to show you your best option and explain why that option fits your needs.
First, lets talk interest rates! The first type of interest on a loan we will be looking at today is a Fixed Rate. In a fixed rate loan, the monthly interest and principle payments remain the same throughout the lifetime of the loan. This type of loan is usually best suited for a buyer with a good credit score, someone who plans on staying in the home for a long period of time and can put a 3-5% down payment up front. The benefit to this type of loan is its stability and predictability. With this loan structure, there are no surprises, your payment remains the same every month for the duration of the loan payback. The opposite side of this type of loan is you can have a higher interest rate.
The second rate of interest you need to know is an Adjustable Rate. In an adjustable rate loan, your interest rates adjust over time at predetermined intervals. This can also be a good option for those with a good credit score and a long term residence with a small down payment. The pro to this type of loan is an initially lower interest rate, but the con is that future adjustments to that interest rate could end up being higher over time.
Now onto more types of loans that are available...
Let's start with Conventional Loans. This is a loan with a low rate for borrowers who have excellent credit and there are no limits on income, location or occupancy type. Conventional Loans (Fannie Mae & Freddie Mac) require a down payment, but only require mortgage insurance if financing over 80% of the purchase price. Conventional Loans are the most common mortgage option for repeat buyers and usually have the best interest rates. Because Conventional Loans are not guaranteed by the government against default, they are qualified more on the borrower's credit score and loan to value, meaning the higher your credit score and lower the loan to value, the better your interest rates will be!
Then there are FHA or Federal Housing Administration Loans which are funded by the Federal Housing Administration and are better suited for those who have limited funds for a down payment or an understablished credit history. The benefit to this loan is that there are much more flexible lending requirements, but the interest rates are usually higher and you may be required to purchase Mortgage Insurance. This loan option makes ownership more affordable with less down and easier credit requirements.
The next type of loan available is a VA Loan. VA Loans are government backed loans available to active military members or veterans, as well as military spouses who have lost their partners in service. With a VA loan, a buyer may obtain 100% financing, flexible lending requirements and no mortgage insurance, but they must pass VA qualifications and lender requirements.
There are also USDA Loans (Department of Agriculture) which was developed to encourage the purchase of rural land. This type of loan requires no down payment (100% financing) and can be great for investors or lower income families looking to purchase in more rural areas. While USDA loans have strict location requirements (this type of loan is only available in eligible areas) they are an available option for those with good credit, but a lower monthly income.
Then, there are loans for those with a higher income, a 20% down payment and higher credits scores, usually used on higher priced home purchases, which is called a Jumbo Loan. This loan allows those who qualify to purchase a higher priced home, but can have strict qualifications and lending requirements along with high interest rates.
While there are other loan types available, this is just an overview of the most common loans, all of which a lender will be able to tell you more about and help you determine which fits your situation best. It's always good to be prepared and know you options when you go to speak to a lender, but you can find relief in knowing that they will take all of your information in relation to debt and income and determine exactly what your loan payment would look like each month.
Now, that you're equipped with a brief overview of some possible loan types, let's go over a few tips that will help you achieve approval! First, when you go to meet with a lender, be prepared. Have copies of your tax returns, bank statements, pay stubs, credit history and any other investments available. You'll need these to complete the loan eventually, so go ahead and save yourself a step and have these documents organized when you go to meet with a lender!
You'll also want to pay off any pending credit card debt that may impact your credit score, but don't make any large payments, adjustments or purchases without your lender's advice or recommendation. It's always good to pay things off, but any large financial changes could also impact your approval. It's a good idea to ask your lender what steps you should be taking to improve your credit throughout the loan process.
Don't make any large purchases. We know you're looking at homes and about to purchase, so it's easy to want to go buy all new furniture and invest in appliances, but the best thing you can do during your loan process is NOT SPEND MONEY! Wait until you've been approved and you've actually closed on your new home before you go start spending money on furnishing it. The last thing you want to do is find your dream house and then have the loan fall through because you've drastically spent a large sum of money on other items.
You'll also want to make sure not to change jobs. One important part of the loan application is financial stability. If you can't guarantee a consistent income, you become a very high risk to the lenders and who wants to give out money that can't be returned? No one! If you have a job opportunity during your application process, speak to your lender and see what they suggest you do in terms of a career change. They will be able to tell you if that change will affect your loan process negatively or positively!
If you have ANY questions about your credit, debt or income during the loan application process, talk to your lender before making any changes, payments or decisions! You definitely want to make sure you get approved to buy the home you want and after all the work you'll put into it, you won't want the loan to be the one thing holding you back from making your home ownership dream come true!