How you finance your home may be the largest determinate of how good your investment will be. Many people needlessly pay far too much in interest, points and other fees to their lenders. Other people don’t go to the right lenders and may not even get a home at all. The purpose of this page is to explain some mortgage basics to you such as how to qualify for a mortgage; and even allow you to do so if you wish; It will also explain the differences between FHA, VA and Conventional Mortgages. I’ll also share with you how to buy your residence with Little or No Money Down and explain the differences between fixed and adjustable rate mortgages.

Conventional loans are popular loans for most people. Most programs require that you put at least 5% down. If you put less than 20% down you will be required to pay a private mortgage insurance premium to insure against default. Generally speaking, Conventional loans are more difficult to qualify for than FHA loans.

FHA loans are insured by the Federal Government. You pay a mortgage insurance premium like on a conventional loan, but the FHA program allows for a little more flexibility than most conventional plans. There are maximum loan limits established depending on where you live. FHA loans start with a 3% down payment and go up depending on the purchase price of the residence. FHA also has rehabilitation loans available for owner occupants and investors as well as lower down payment plans for veterans.

VA loans are available only to eligible veterans and on a very limited basis to the veteran’s unmarried surviving spouse. The primary advantage of VA loans is that they offer no down payment financing to the veteran. VA loans are almost always the best way for a veteran to buy a home. VA loans may be reused and are covered in detail on my Veteran’s Page.

Mortgage Qualifying Basics: Generally to qualify for a home mortgage you need to have the following: Reasonably good credit, stable income, enough money for the down payment and closing costs, and not too much debt in relationship to your income.

Credit Qualifying: Underwriters are looking for current stability. Your last 2 years of credit history will have the greatest impact on whether you qualify for a loan or not. For most loans, you should not have any payments more than 30 days late on rent or a previous mortgage for the one year period preceding your mortgage application. Late payments (over 30 days late) on rent or previous mortgages during the last two years will make it very difficult to qualify. For other bills there should not be any late payments for the last 6 months and there should not be many late payments on your entire history. Most credit problems that are more than 3 years old will probably be ignored if you haven’t had any problems recently.

A Chapter 7 Bankruptcy must be over 2 years old. If you are in Chapter 13, you may qualify for a loan while still in the Chapter 13, provided that you have been in it for at least one year. Any foreclosure or deed in lieu of foreclosure must be completed 3 years prior to you getting another home loan. Any outstanding judgments and collections will normally have to be satisfied. Tax liens can sometimes be worked around. We can usually help you if you have had problems in the past, if your current credit is good. Never prejudge your credit unless you have had a history of problems and you are experiencing problems right now.

Income - Debts - Stability: Generally speaking your house payment shouldn’t exceed 28% of your monthly income. In other words, the maximum mortgage amount you are likely to qualify for is roughly 2.5 times your annual income before taxes. These figures assume you have little in consumer debt. The total of your monthly payments on consumer debt and your projected house payment should not exceed 36% - 41% of your monthly income. If you pay child support or alimony, it will be considered a monthly debt. If you receive child support or alimony, and have received it for one year or more and will receive it for at least 5 more years, you may count it with your income.

Employment stability will be evaluated by how long you have been working in your job field. Generally, two years are required in your job field. Some exceptions include having education in the field you are working in, being active duty military or changing job fields for an increase in pay. Income from part time, overtime, bonus income, commissions and self employment require a two year history to be used.

Down Payment: Different loan programs have different requirements. Eligible veterans can get loans with no down payment. Veterans should check our Veteran’s Page. Some loans in certain areas require no down payment. Typical conventional loan products require 5% or more down. FHA loans are available with as little as 3% down including closing costs.

Closing Costs: Closing costs are the necessary evils people have to pay to buy a home. They include the following fees: Credit report; Appraisal; Closing Company; Origination; Tax Service; Document Preparation; Survey; Title Insurance; Flood Certification; Hazard Insurance; Mortgage Insurance, Tax Escrow; Discount Points and more! The costs vary depending on the property, your lender and the arrangements you have made with the seller. There are also programs available where the buyer pays reduced or no closing costs! I’ll be happy to share these with you and tell you if you qualify for these programs.

Fixed rate mortgages: If you get a fixed rate mortgage, the interest rate of your mortgage will not change over the life of the loan. Fixed rate mortgages are generally best for people who will live for over 3 or 4 years in their home or cannot afford the potential increases an adjustable mortgage may have.

Adjustable rate mortgages: These mortgages have interest rates that adjust at regular intervals as stipulated in your note and mortgage. Typical adjustable rate mortgages adjust up or down one time a year. However, there are products where the rate changes every six months. Other products have a rate that is fixed for the first few years of the mortgage and adjusts after the 3rd to 5th year. An adjustable rate mortgage has two components. The first is the index; the second is the margin. The index is the amount that changes every year on your mortgage’s change date. An index might be the 30 year treasury bond, the federal cost of funds index or any other number of things. The margin is a fixed percentage that is added to your index each year on the change date to determine your new interest rate. The annual rate change is limited by caps. Caps are the maximum amount the loan can change each year and over the life of the loan. FHA loans have caps of 1 and 5. This means the rate cannot change more than 1% each year and it cannot go above or below the start rate by more than 5% over the life of the loan. Conventional loans typically have annual caps of 2% and lifetime caps of 6%. VA no longer has adjustable rate mortgages.

The main advantage to adjustable rate loans is that they start at a lower rate than fixed rate mortgages. This generally allows people to qualify for a more expensive house than normal. Additionally, if you are going to live somewhere for a short period of time an adjustable rate mortgage may save you money.

Be Sure to check the pages on First Time Buyer, and Buying a Home

These other pages may prove interesting as well: Selling Your Home, Relocation and Listings

Getting the right financing can save you thousands of dollars. We can help you make an informed decision! Please contact us via E-mail or call us at 931-473-6010.