Buyer Financing - Explained

Almost everyone knows what a mortgage is – a loan secured by real estate. But how much do you know about the different types of mortgages available? At The Randyl Walters Team, we often get questions about mortgage options. Here’s a simple breakdown.

First Things First

Before exploring mortgage types, consider how much down payment you can afford and what your current credit score is. These factors will influence your loan options. Also, understand your debt-to-income (DTI) ratio, as it affects loan eligibility.

Basic Types of Loans

Fixed Rate vs. Adjustable Rate
Fixed Rate loans have an interest rate that remains constant throughout the loan term. Adjustable Rate loans have interest rates that can change based on the terms in the loan agreement.

Conventional vs. Government-Backed Loans
Conventional Loans are provided by private lenders and are not insured by the federal government. Government-Backed Loans are insured by federal agencies, making them easier to qualify for.

Understanding these basics will help you navigate your mortgage options more effectively. If you have more questions, The Randyl Walters Team is here to help.

Conventional Fixed Rate

• Pros:
  
  • Total Cost: Lower overall cost of borrowing.
  • Flexible Use: Can be used for primary residences, second homes, or investment properties.
  • No PMI: If you put 20% down, you won’t need private mortgage insurance (PMI).
• Cons:
  
  • Credit Score: Typically requires a minimum FICO score of 620.
  • PMI: Required if your down payment is less than 20%.
  • Documentation: Extensive documentation needed, which can be challenging for self-employed individuals.

Conventional Adjustable Rate Mortgage (ARM)

• Pros:
  
  • Lower Initial Rate: Lower fixed rate for the first few years.
  • Smaller Initial Payment: Lower monthly payments initially.
• Cons:
  
  • Adjustable Rate: After the initial period, the rate can increase, raising your monthly payments.
  • Home Values/Equity: If home values drop, it can be hard to refinance or sell.

• Pros:
  
  • Low Down Payment: As low as 3.5%.
  • Flexible Credit Score: Accepts lower credit scores.
  • Capped Closing Costs: Limited to 3-5% of the loan.
  • Seller Assist: Sellers can pay up to 6% of closing costs.
• Cons:
  
  • Mortgage Premiums: Two types of mortgage insurance are required.
  • PMI: Cannot be canceled if you put less than 10% down.
  • Higher Overall Costs: Total cost of borrowing can be higher.

• Pros:
  
  • Zero Down Payment: No down payment required.
  • No PMI: No private mortgage insurance.
  • Capped Closing Costs: Limited to 3-5% of the loan.
  • Seller Assist: Sellers can pay up to 4% of closing costs.
• Cons:
  
  • Funding Fee: An upfront funding fee is required.
  • Primary Residence Only: Can only be used for a primary residence.
  • High Loan to Value Ratio: You might owe more than the home’s value initially.

• Pros:
  
  • Zero Down Payment: No down payment for eligible buyers.
  • No Cash Required: Little to no money out of pocket.
  • Flexible Qualifications: Lenient credit and income guidelines.
  • Seller Assist: Sellers can pay up to 6% of closing costs.
  • New Construction: Can be used to build a new home.
• Cons:
  
  • Geographical Restriction: Only certain rural areas are eligible.
  • Mortgage Insurance: Two types required.
  • Strict Income Limits: Borrower’s income must be below 115% of the area median income.
  • Single Family Only: Only for single-family, owner-occupied residences.

Buying a home can be a daunting financial challenge, but there are various types of assistance programs designed to help you achieve homeownership. These programs can provide financial aid, reduce interest rates, or offer guidance through the buying process. Here’s a look at some common types of assistance available to buyers:

Down Payment Assistance Programs

1. Grants:
   
   • What They Are: Non-repayable funds provided to help cover the down payment.
   • Who Offers Them: Local, state, and federal government programs, as well as non-profit organizations.
   • Eligibility: Often based on income, first-time homebuyer status, or purchasing in a specific area.
2. Loans:
   
   • What They Are: Low-interest or deferred loans specifically for down payment assistance.
   • Who Offers Them: State and local housing finance agencies.
   • Eligibility: Typically aimed at first-time buyers or those with moderate incomes.

Closing Cost Assistance

• What It Is: Financial assistance to cover closing costs, which can include appraisal fees, inspection fees, and title insurance.
• Who Offers It: Government programs, lenders, and non-profit organizations.
• Eligibility: Varies, but often similar to down payment assistance programs.

Mortgage Credit Certificates (MCCs)

• What They Are: Tax credits that help reduce the amount of federal income tax you owe, effectively making homeownership more affordable.
• Who Offers Them: State and local housing agencies.
• Eligibility: Generally for first-time homebuyers or buyers in certain target areas.

Employer Assistance Programs

• What They Are: Financial assistance programs provided by employers to help employees purchase homes. This can include down payment assistance, forgivable loans, or homebuyer education.
• Who Offers Them: Some employers, particularly larger companies, and government agencies.
• Eligibility: Depends on the employer’s specific program criteria.

Federal Programs

1. FHA Loans:
   
   • What They Are: Loans insured by the Federal Housing Administration that allow for lower down payments and more flexible credit requirements.
   • Who Offers Them: Lenders approved by the FHA.
   • Eligibility: Typically requires a minimum credit score and a down payment as low as 3.5%.
2. VA Loans:
   
   • What They Are: Loans guaranteed by the Department of Veterans Affairs, offering zero down payment and no PMI for eligible veterans and service members.
   • Who Offers Them: VA-approved lenders.
   • Eligibility: Veterans, active duty service members, and some members of the National Guard and Reserves.
3. USDA Loans:
   
   • What They Are: Loans backed by the U.S. Department of Agriculture, designed for low- to moderate-income buyers in eligible rural areas.
   • Who Offers Them: USDA-approved lenders.
   • Eligibility: Based on income and location; offers zero down payment options.

State and Local Programs

• What They Are: Various programs tailored to specific state or local markets, including down payment assistance, closing cost aid, and favorable mortgage terms.
• Who Offers Them: State housing finance agencies and local non-profit organizations.
• Eligibility: Varies widely; check with local agencies for specific programs and requirements.

Homebuyer Education Courses

• What They Are: Classes that educate buyers on the home buying process, budgeting, and maintaining homeownership.
• Who Offers Them: Non-profit organizations, government agencies, and some lenders.
• Eligibility: Often required for certain assistance programs.

Thoughts

Navigating the various assistance programs can be overwhelming, but they are invaluable resources for many buyers. Taking advantage of these programs can make homeownership more attainable and affordable. Be sure to explore all the options available and consult with your real estate agent or a housing counselor to find the best assistance programs for your needs.

Big Online Banks vs. Local Mortgage Brokers

1. Big Online Banks:
   
   • Pros:
     
     • Convenience: You can often apply online at any time, which is convenient for busy schedules.
     • Technology: Advanced digital tools can streamline the application process.
     • Competitive Rates: Large banks may offer competitive rates due to their extensive resources.
   • Cons:
     
     • Personalization: You might not receive personalized service tailored to your unique needs.
     • Local Market Knowledge: They may lack detailed knowledge of local market conditions and closing requirements specific to your area.

2. Local Mortgage Brokers/Lenders:

   • Pros:
     
     • Personalized Service: Local brokers can offer one-on-one service, taking the time to understand your specific financial situation and needs.
     • Local Expertise: They have a deep understanding of the local market, which can be invaluable in navigating local regulations and closing processes.
     • Flexibility: They can often provide more flexible options and faster response times.
   • Cons:
     
     • Variety: Local lenders may have a smaller variety of loan products compared to big banks.

Tips for Choosing a Lender

1. Compare Offers: Don’t settle for the first offer you receive. Shop around and compare interest rates, fees, and loan terms from multiple lenders. This can help you secure the best deal.
2. Check Reviews and References: Look up reviews online and ask for recommendations from friends, family, and your real estate agent. A lender with a good reputation can provide peace of mind.
3. Ask Questions: Don’t be afraid to ask potential lenders about their loan products, fees, and the overall process. Understanding what to expect can help you make an informed decision.
4. Understand the Fine Print: Pay attention to the details in the loan agreement, including any fees, penalties, and the terms of the loan. Make sure you understand everything before signing.
5. Consider Pre-Approval: Getting pre-approved for a mortgage can give you a better idea of how much you can afford and make you a more attractive buyer to sellers. It also speeds up the loan approval process once you find a home.

Your Real Estate Agent Can Help

Your real estate agent can be a valuable resource in finding a trusted lender. They often have established relationships with reliable lenders who have a track record of providing excellent service and competitive rates.

Final Thoughts

Choosing the right lender is a vital step in the home buying process. Whether you opt for a big online bank or a local mortgage broker, taking the time to compare offers and ask the right questions will help ensure you get the best possible mortgage for your situation. Happy house hunting!

Understanding mortgage terminology can be challenging, but it’s essential for navigating the home buying process. Here’s a handy dictionary of common mortgage terms to help you get started:

A

• Adjustable Rate Mortgage (ARM): A type of mortgage with an interest rate that can change periodically based on an index. The initial interest rate is usually lower than a fixed-rate mortgage.
• Amortization: The process of paying off a loan through regular payments over time. Each payment covers interest and a portion of the principal balance.
• Annual Percentage Rate (APR): The yearly cost of a loan, including interest and other fees, expressed as a percentage. It helps compare the cost of loans.

C

• Closing Costs: Fees and expenses associated with finalizing a mortgage, such as appraisal fees, title insurance, and attorney fees. These are paid at the closing of a real estate transaction.
• Collateral: Property or assets pledged by a borrower to secure a loan. In the case of a mortgage, the home serves as collateral.
• Conventional Loan: A mortgage that is not insured or guaranteed by the federal government, typically offered by private lenders.

D

• Debt-to-Income Ratio (DTI): A measure of a borrower’s monthly debt payments compared to their monthly gross income. Lenders use this ratio to assess a borrower’s ability to manage monthly payments and repay debts.
• Down Payment: The portion of the home’s purchase price that the buyer pays upfront. It is typically expressed as a percentage of the total purchase price.

E

• Escrow: An account where funds are held by a third party on behalf of the buyer and seller until all conditions of a transaction are met. In mortgages, escrow accounts are often used to pay property taxes and insurance.

F

• Fannie Mae (Federal National Mortgage Association): A government-sponsored enterprise that buys mortgages from lenders and resells them as mortgage-backed securities to investors.
• FHA Loan: A mortgage insured by the Federal Housing Administration, known for allowing lower down payments and more flexible credit requirements.
• Fixed-Rate Mortgage: A mortgage with an interest rate that remains the same for the entire term of the loan.

G

• Ginnie Mae (Government National Mortgage Association): A government corporation that guarantees mortgage-backed securities backed by federally insured loans, such as FHA and VA loans.

H

• Homeowners Insurance: A policy that protects the home and its contents against damage or loss. Lenders typically require borrowers to have homeowners insurance.

I

• Interest Rate: The cost of borrowing money, expressed as a percentage of the loan amount. It can be fixed or adjustable.

L

• Loan Estimate: A document provided by lenders that outlines the key terms and costs of a mortgage, given to borrowers within three days of applying for a loan.
• Loan-to-Value Ratio (LTV): A measure of the loan amount compared to the appraised value of the property, expressed as a percentage. Higher LTV ratios can indicate more risk for lenders.

M

• Mortgage Insurance: Insurance that protects the lender if the borrower defaults on the loan. Required for FHA loans and conventional loans with down payments less than 20%.

P

• Points: Fees paid to the lender at closing in exchange for a reduced interest rate. Each point equals 1% of the loan amount.
• Principal: The amount of money borrowed to buy a home, excluding interest.

R

• Refinancing: The process of replacing an existing mortgage with a new one, typically to get a better interest rate or change the loan term.

T

• Title Insurance: Insurance that protects against loss arising from disputes over the ownership of a property.

U

• Underwriting: The process lenders use to assess the risk of lending money to a borrower. It involves evaluating the borrower’s credit, income, assets, and the property value.

Understanding these common mortgage terms can help demystify the home buying process and make you a more informed borrower. If you have any questions, don’t hesitate to ask your lender or real estate agent for clarification.