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Home Mortgage Loans Basics
So, you've decided to buy a home.
I always suggest that the first step, after you have hired me, is to talk to a mortgage loan originator (MLO).
But, what if you don't have any idea of what he is talking about?
Mortgages, terms, conforming, non-conforming, DTI...it all seems daunting. Don't let it scare you.
I will give you the basics...
There are two general types of mortgages:
1 - Fixed-Rate Mortgages:
These mortgages have the same monthly payment for the life of the loan. But, that is for principal and interest. Your taxes or insurance premiums change, then your payment amount would change.
30-year fixed-rate mortgage – lower monthly payments – most popular
15-year fixed-rate mortgage – offers lower interest rate but higher monthly payment – you pay much less of the life of the loan
2 – Adjustable-Rate Mortgages:
ARMs, as they are referred to, offer a lower interest rate for the first years, usually five or seven, sometime referred to as the “introductory period”. After that the interest rate can fluctuate, making it difficults to budget. The good news is that there are caps for how high the rates can go.
ARMS are a good option for a buyer that plans to live in a home for a short time.
Cons? They have a reputation for being complicated. Buyers need to shop rate caps as lender terms vary.
There are two general types of loans:
1 - Conventional Loans:
Usually offers better interest rates
Takes less time to process than a government loan because there is less paperwork
Who qualifies? Buyers with at least a 620 credit score and a 5% down payment, and a maximum debt-to-income/DTI ratio of 43%
Cons? If less than 20% down payment, buyers are required to pay private mortgage insurance/PMI. Think of it as insurance on the loan for the lender if buyer defaults. The lender has to cancel PMI when equity reaches 22%, and buyers can request to have it canceled once equity hits 20%. Rates range from .3% - 1.15% of the loan amount.
2 - Government Loans:
-- Federal Housing Adminstration/FHA
-- Department of Veterans Affairs/VA
-- U.S. Department of Agriculture Rural Development/USDA
For buyers who may not be able to qualify for a conventional loan
Who qualifies? Depends on which loan type.
For FHA loans, buyers can put down as little as 3.5% and have a minimum credit score of 580. Please note that not all lenders offer this program, and interest rates will be higher than for buyers with a 620 or higher credit score. Cons? FHA loans have an upfront mortgage insurance premium/MIP and an annual premium of .85%. Currently, the MIP is 1.75% of the loan amount. The premium can be paid upfront as part of the closing costs (“prepaids”), or it can be rolled into the loan and paid as part of the monthly payment. In order to get out of paying the MIP, buyers must refinance into a conventional loan after they have 20% equity.
VA loans offer 0% down payment loans to active or retired military (or a veteran’s surviving spouse). Buyers need a minimum 620 credit score, but DTI requirements are more lenient. And, there is no mortgage insurance premiums. Cons? There is an upfront funding fee of 2.15%.
USDA loans are only offered in towns with populations of 10,000 or less – rural areas. Interest rates are typically lower, 0% down payment may be available, and credit score requirements are more lenient. Cons? Income limits, property must be considered a “modest home” for the area, and and upfront mortgage insurance fee of 1% of the loan amount and an annual premium of .35% is figured into the monthly payment.
Sherry Hamm obtained her Texas Real Estate License in 1999. Sherry is a devoted full time residential Real Estate Professional focusing primarily on Houston's Westside, Katy, Northwest/Southwest Harri....