Which Loan Program is for Me?
Purchasing a home is one of life's major landmarks and for some, it is even a dream come true. We understand the magnitude of this decision and it is our goal to make your transition into home ownership as smooth as possible. Picking out a mortgage that is right for your needs can be confusing, especially if you qualify for more than one kind. That's why we want to explain the benefits, eligibility and different uses for each common loan type. Below is some general knowledge about loans and how they are defined. Within in the 'Loan Center' drop down menu you will find different types of loan programs. If you have any questions about the right mortgage for you, do not hesitate to contact us, we are here to answer any and all the questions you may have.
All mortgage programs can be divided into categories in two different ways. Firstly, conventional and government loans. Secondly, all the various mortgage programs may be classified as fixed rate loans, adjustable rate loans and their combinations.
Government loans include: FHA (Federal Housing Administration), VA (U.S. Dept. of Veterans Affairs) and USDA (United States Department of Agriculture)
Conventional loans are everything else including: Jumbo (loans up to $417,000 depending on the state) and Construction/ Rehab loans (loans typically used by investors for distressed properties).
Mortgage programs can also be classified into fixed rate loans, or adjustable rate loans. Fixed rate loans are more common because your interest rate stays the same during the loan period, so you know exactly how much your monthly payment will be.
For adjustable rate loans, the initial interest rate and monthly payments are low, but these may change during the life of the loan. FHA uses the 1-Year Constant Maturity Treasury Index (CMT) to calculate the changes in interest rates. An index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time. The maximum amount that the interest rate on your loan may increase or decrease in any one year is 1 or 2 percentage points, depending upon the type of ARM you choose. Over the life of the loan, the maximum interest rate change is 5 or 6 percentage points from the initial rate. The advantage of selecting an ARM is that you may be able to expand your house-hunting value range because your initial interest rate will be low, as will your payment.
Another way home loans are differentiated is by their GSE (government-sponsored enterprises) eligibility-meaning- do their meet the requirements set forth by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are insured, or 'backed' by the government- but they are NOT government loans. They do not directly offer loans, but rather they purchase loans from banks, credit unions, or other lending companies and sell them on the secondary mortgage markets in order for the banks and lending companies to turn around and lend more loans. In order for a mortgage to be 'bought' by these GSEs, they have to meet certain criteria such as: a FICO score of 620, Debt to Income Ratio (DTI) no more than 43%, and the loan amount.
Mortgage Insurance is another huge aspect to consider before buying a home. All loans that have less than a 20% downpayment require to protect the lender from default on payments. Some government loans, such as FHA loans (that only require a 3.5% downpayment) require two insurances: 1) insurance until 20% LTV is met and 2) and upfront mortgage insurance premium (MIP). Although an FHA loan is easier to qualify for than a conventional, an FHA tends to be more pricey and requires a high household income because of the multiple insurance policies. In contrast, conventional loans offer two options- Lender Paid MI (LPMI) or Borrower Paid Mortgage Insurance (BPMI). The main difference between these two is who is paying for the insurance- the lender or the borrower. If the lender pays for the MI, you will receive a slightly higher interest rate to cover the cost but the payment is rolled into your mortgage for the life of the loan. If the borrow pays for the MI, you will receive a slightly lower interest rate but you will have an additional payment to your mortgage insurance and your overall monthly payment will be slightly higher because of it. The benefit of having a BPMI is that the mortgage insurance can be requested to be removed after there is 20% of equity in the house or the borrower has enough equity in the house, refinances and meets the 20% quota. Often times the LPMI has a lower monthly payment but the mortgage insurance can never be dropped. This decision requires a meticulous calculation and ultimately comes down to the borrower.