With so many new homeowners looking to enter the market because of low rates and low home prices, I know there is often some confusion about loan options. I have tried to give a brief summary of what is available, along with the basic benefits of the program. As always, feel free to contact me for me detail or to ask a question. I hope this is useful.
While financing a home is more challenging today than even a few years ago, it is not as difficult as many people think. If there is a way for you to get a home loan, we will find it for you. And the good news is that while interest rates remain low, a great home can be very affordable on a monthly-cost basis.
There are a number of loan programs to choose from, and this can be overwhelming to new homebuyers. Below is a brief summary of your options to help give you an idea of what may be best for you.
- FHA Program - a great loan program for financing a primary home with a low down payment of 3.5% of the purchase price. Rates are low, and although you will pay a monthly mortgage insurance premium, this is the cheapest way for most people to get into a home.
- VA Loan - if you are an active service or retired veteran (or in some cases a widow of a veteran) you may be eligible for a loan guaranteed by the VA. This will allow you to purchase a home with no downpayment (100% financing). Although rates are generally a touch higher than FHA, there is no monthly mortgage insurance, making this a very attractive program. VA jumbo loans are also available although some downpayment will be required.
- Conventional Loan - best used if you have a good credit score and plan to make a larger down payment. You will pay monthly mortgage insurance if you put down less than 20%. If you can put down this much, it will reduce your monthly costs significantly.
- USDA Loan - available in rural areas - typically outside city limits - this allows for 100% financing (no down payment) and no monthly mortgage insurance. Although there is a maximum household income to be eligible, this is a great program if you qualify.
- Jumbo Loan - a conventional loan with a loan amount over $417,000.
- FHA rehabilitation loan - if you are looking at a home which needs some cosmetic updating, this loan will allow you to borrow up to an additional $35,000 to be held in escrow to pay for the work, whether it be new kitchen cabinets, paint or even new appliances. You will need a contractor and bids, making this program a little more in depth, but using it will help you start getting your new home up to your standards as soon as possible. This is especially useful if you are buying a foreclosure which needs some work.
Some other things to think about:
Term - a 30 year loan is most popular. You will pay more in interest over the term of the loan, but by breaking up repayment into 360 chunks, your monthly costs will be lower. 25, 20, 15 and 10 year mortgages are also available.
Fixed or adjustable? - with a fixed interest rate, your payments will not change over the course of your loan. This is by far the safest and most popular option. An adjustable rate mortgage (ARM) will be fixed for 3, 5 or 7 years, and then adjust annually, either up or down. This is riskier, but can help you save money if you have a particular plan for how long you expect to be in the home.
Your loan officer should be able to help you work through all the above options based on an understanding of your needs, your long term plans, and what you are comfortable with.
What do I need to get prequalified?
It is helpful to both you and your realtor to have a realistic idea of what financing you qualify for and how much you can afford to spend on a home. To this end, a good first step is to get pre-qualified by a loan officer. Given that these days lending is more difficult than a few years ago, a good loan officer will ask for the following documents to give an accurate pre-qualification - this is in your interests.
- Income documents - one month of paystubs and two years of W-2s.
- Asset documents - two months of bank statements and other documents related to savings, e.g. 401k statements.
- Identification documents - driver’s license and social security card
- Permission to pull your credit - you will need to pay the cost for this.
- If you are self-employed, you will need to provide two years tax returns for your business.