What can I do if I only have a small down payment or none at all?
Some loans will allow you to secure just a 5% down payment plus closing costs. Another similar loan option is called a piggy-back loan where you get approved for the first and second mortgage at the same time to avoid PMI. You could also apply for a FHA loan which only requires you to put down 3.5% down. Your interest rate will probably be higher, and you will be required to buy private mortgage insurance (PMI).
What is private mortgage insurance (PMI) and do I need it?
If the bank or mortgage company determines that your loan is a risk, they may require private mortgage insurance. This insurance serves to insulate the lender in the event that you default on your loan. It is possible that the fair market value of your house will not cover the full amount of money owed to the bank or mortgage company if you default. In such cases, private mortgage insurance reimburses the lender for the difference. Private mortgage insurance is usually required for borrowers that make a down payment of less than 20% or with poor credit scores.
Can I get a loan from the government?
The U.S. Department of Housing and Urban Development, also known as HUD, has a number of programs for qualified buyers. HUD oversees the FHA and has options that include 203(K) loans for fixer-uppers, financing for homes that are FHA insured and obtained via foreclosure, and more. Their goal is to increase ownership for minorities and low-income Americans.
FHA loans are the most popular option. The FHA requires only 3% for a down payment and guarantees the loan, which results in credit policies that are less strict for potential borrowers.
Veteran’s Administration, or VA, loans are intended for qualified veterans or their unmarried surviving spouses that are looking to buy or refinance a home.
Do I qualify for a government loan?
The two primary federal government financing programs for mortgages are VA loans and FHA loans. VA loans are not actually loans, but a guarantee from the federal government that should you default, the U.S. Department of Veterans Affairs will pay the lender a certain amount of the defaulted loan. These loans are available to current members of the military and veterans with honorable discharges. FHA loans are available through the U.S. Department of Housing and Urban Development (HUD). These loans, like VA loans, guarantee that the Federal Housing Authority will pay the lender 100% of the insured amount of your mortgage should you default. You must meet certain criteria to qualify for an FHA loan.
What are fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs)?
The interest rate for a fixed-rate mortgage is set in place over the life of the loan. On the other hand, an adjustable-rate mortgage can have its interest rate rise or fall during specified adjustment periods.
Is a fixed-rate or adjustable-rate mortgage better?
Fixed-rate mortgages make sense for buyers when the current mortgage rate is low. This allows you to lock in the current rate and be protected from increases that are likely to take place over the next 30 years. If the current rate is high, an adjustable-rate mortgage may be better because rates can drop. It is good to remember that you will have the option to refinance in the future to take advantage of rate changes as well.
What goes into closing costs?
The closing costs you pay when securing a mortgage will be about 3% to 6% of the total loan and include:
Generally paid with your application:
- A non-refundable application fee to process your information
- An appraisal fee for the property, which is required by the lender
- A fee for the lender to check your credit report (i.e. credit score and history) to help determine qualifications as well as loan limits
Generally paid at closing:
- A survey fee may be required in order to verify property boundaries
- A flood certification fee may be required to ensure the property is not in a flood zone
- The title search fee is used to check the property’s history to ensure there are no legal claims on it
- Title insurance from the lender is used to make sure the loan is repaid
- Attorney costs associated with closing the loan
- Recording and transfer costs—a small fee applied to recording the purchase of your home
- Loan preparation fees, which are a percentage of the overall loan amount
- Discount points (an optional percentage-of-the-loan amount) paid to get a lower interest rate
- Escrow accounts, including private mortgage insurance (PMI), homeowner’s insurance, property taxes, and possibly, interest
Can I speed up the approval process?
Yes, it may be possible to speed up the process. Consider these tips below:
- Become pre-qualified or pre-approved for a loan to help the process move faster. A pre-qualification is a better indication that you are a solid buyer, but only a loan commitment from the lender is a guarantee that you will be approved.
- Obtain a loan commitment, which is guaranteed under pre-set conditions.
- Prepare your paperwork ahead of time.
- Check your credit history and resolve any issues. Be able to explain any other questions about your credit that arise.
- Make sure you have all the documents you need before applying, including personal identification, income verification and tax returns, employment history, and insurance commitments.
- Respond promptly to any requests from the loan officer to eliminate unnecessary delays.
What are mortgage brokers, lenders, and loan officers?
Mortgage Broker – Helps buyers find mortgage lenders and assists with loan processing.
Mortgage Lender – The company or organization that actually makes the loan.
Loan Officer – An employee of the lender or broker that is directly involved in the loan process from start to finish.
What documents do I need when closing a loan?
Each lender requires slightly different financial records—this will depend on the type and amount of the loan you are applying for. However, there are some basic records all lenders will request. These include income records (i.e. pay stubs for the previous 30 days, the last two years of tax returns, 2 to 3 months of bank records for each of your bank accounts, and any other additional documents that prove your income). You will also need to furnish information about your current debts such as account numbers and monthly payment information.
Is renting or owning a home more expensive?
Many consider owning a home better for you in the long run. However, it is important to keep in mind the following:
- It can take years before your home begins to build equity and many buyers move before that happens.
- Your costs associated with owning a home often increase due to interest rate adjustments, larger payments, property tax increases, maintenance, and insurance.
- Tax benefits for being a homeowner can only be claimed once deductible expenses surpass the standard deduction level.
There are benefits to renting to consider, including:
- Maintenance costs are assumed by the landlord.
- Relocating for a job is easier without having to sell your home.
- Convenient access to public transportation, employment, entertainment, retail, and more.
Should I check my credit before applying?
Since your mortgage lender will get your credit report before deciding to approve your application it is smart to check it on your own ahead of time. Doing so allows you to clean up any issues and improve your credit before applying for a loan.
What are conforming and non-conforming loans?
Conforming loans meet specific national standards, most often referred to as Fannie Mae/Freddie Mac requirements. These loans follow uniform standards set for document specs, maximum loan amounts, interest rates, and debt-to-income ratios.
Non-conforming loans do not meet these standards due to either the borrower’s financial status or the property not falling within set guidelines. These are funded by private lenders and often come with higher interest rates.
Why are they called “Fannie Mae” and “Freddie Mac”?
Fannie Mae was created in 1938 by President Franklin D. Roosevelt’s administration to help boost the economy through home buying. In 1968, Freddie Mac was formed as a competing entity. These organizations are not funded by the government, but they are sponsored in order to develop national standards and ensure a healthy housing market.
Both organizations borrow low-interest money from foreign sources in order to give to local banks for affordable housing loans. Fannie Mae and Freddie Mac account for around 90% of the secondary mortgage market.
The names Fannie Mae and Freddie Mac come from the acronyms formed by their official titles:
- Federal National Mortgage Association (FNMA): Fannie Mae
- Federal Home Loan Mortgage Corporation (FHLMC): Freddie Mac
What are points?
The term “points” refers to fees that are shown as a percentage of the overall loan amount. For example, one point equals 1%. Origination points are fees paid that are related to the processing of a loan, while discount points are paid in order to reduce the interest rate on a loan.