Where Should I Start?
When it comes time to apply for a home loan, it is hard to know where to begin! Finding the right type of home loan can be confusing because there are a number of different options to consider. Start by contacting your A and N Mortgage Consultant for an evaluation of your plans and to see if you prequalify for a home loan. Some questions you should ask yourself before you begin the loan process include:
- How much can I afford to pay each month for my mortgage?
- How long do I plan to live at the new house?
- Is lowering my monthly payment more important than paying the loan down quickly?
- Am I able to make a down payment on the property?
- Over how many years do I want to pay a mortgage?
- Do I need a new residential mortgage or am I refinancing an existing mortgage?
The answers to these questions will help you and your mortgage broker determine the best plan for your future. Since there are a number of loan options available for home buyers, it is important to familiarize yourself with some of the basics. In general:
- The larger the down payment, the better your loan options will be in terms of payment amount, interest rates, and length of loan.
- A fixed-interest rate will tend to be higher than an adjustable rate.
- The longer the term of payback for your loan, the smaller the monthly mortgage payment.
- The smaller your mortgage payment, the larger the amount that is going toward your interest.
- Paying more to interest results in equity being built up more slowly.
Three Basic Types of Loans
It is also useful to understand the essential differences in types of loans available from a mortgage company. There are really only three basic types of loans:
- Fixed Interest Mortgages (FRM)
- Adjustable Rate Mortgages (ARM)
- Hybrid Mortgages (a combination of FRM and ARM)
Loans are also classified as either government loans or conventional loans.
Conforming vs. Non-Conforming Loans
Conventional loans are further broken down into either conforming or non-conforming loans. To qualify as a conforming loan, also known as an “A-paper loan,” it must fall under guidelines established by Fannie Mae and Freddie Mac. These corporations have set industry standards and guidelines that govern credit requirements, down payment amounts, and maximum loan amounts.
Borrowers with flawed credit who do not meet the above requirements can often still qualify for what is known as a non-conforming loan (B-, C-, or D-paper loans).
While these are the general types of mortgages available for homebuyers, it is still important to look with your mortgage company at the specific loans you qualify for in order to determine the right one for your unique needs.
How Your Credit Score Factors In
Your loan options are based on your credit score, which can be limited by poor credit. Your credit score is calculated using a system of points earned based on your credit history. This three-digit number (ranging from 300 to 900) is influenced by a range of factors, including:
- Late bill payments
- Your debt-to-credit ratio
- Your total debt amount
- The age of your accounts (the older the better)
There are three major credit bureaus (Experian, Equifax, and TransUnion) that produce comparable credit scores using some version of FICO, the industry standard that was developed originally by Fair Isaac and Company. Most mortgage brokers use this credit score to determine your qualifications for a loan, so you should look into how to increase your credit score before you apply for a mortgage.
The bottom line is that you should start with your credit score and end with the specific loan type that is most appropriate to your needs. Once your loan closes you will also need to consider a few other hidden costs of buying a home that can affect your monthly payment. Contact us directly for assistance throughout the process.