When purchasing a home, a mortgage is the most important step in the process. Finding the right loan should also be the first step in the process. Unfortunately, it is also commonly the least understood step in the process. Like any other service or product, you should be shopping around for your mortgage. This ensures a better chance of receiving a loan that benefits you and you are receiving the best terms that you can possibly qualify for.
But how can you shop around if your not even sure what your shopping for? With so much information out there now-a-days, even a simple Google search can be overwhelming and unhelpful. That is why I took the time to consolidate a lot of information found on the internet to make it simpler to understand and easier for you to shop for the best loan on your soon to be home.
Types of Mortgage Loans:
–> Conventional Loans – Fixed & Adjustable Rate
Conventional loans are known as “conforming” loans because they meet the guidelines of Fannie Mae and Freddie Mac. These loans are offered by private lenders and are not insured by the Federal Government. They do require mortgage insurance; however, the PMI (private mortgage insurance) fee is usually lower than FHA loans, around 0.50% in most cases. Conventional loan requirements are more strict than Government loans. They require a 620-640 credit score and down payment between 5% and 20%. One of the benefits of conventional loans is that mortgage insurance is not required if at least 20% is put down. PMI cancels once the LTV reaches 78%.
* 30 Year Fixed Rate Mortgage
The most common loan option for buyers.
This loan option is so popular among buyers because of the low monthly payments and the fixed interest rate, meaning it will never change. The payments stay low because the principle and interest of the loan is combined and stretched over a 30 year period. This also ensures the loan is fully amortized, or paid off, after 30 years.
If you put down lass than 20% as a down payment you will also need to pay PMI (private mortgage insurance). Another downfall is that since you are paying this loan off in 30 years, that means you will paying interest for 30 years as well and often times will end up paying more in interest than you initially borrowed.
[If you were to receive a 15 year fixed rate mortgage, your monthly payments would be higher however you would pay off your loan in half the time and save a ton in interest.]
* 5/1 Adjustable Rate Mortgage
Adjustable rate mortgages have a bad reputation because of what happened in 2008, however if you don’t plan on staying in your home for more than 5 years, this could be a good option for you.
An adjustable rate is beneficial because the starting rates are usually 1-1.5% lower than a fixed. The 5/1 means that the rate is locked in for the first 5 years of the loan and then after those 5 years the interest rate will steadily increase year after year. So if you plan on moving after a couple years, this may be a good option for you since you will be paying more principal and less interest.
Other Adjustable Rate options:
- 5/5 Adjustable Rate – locked rate for first 5 years and can only increase every 5 years.
- 10/1 Adjustable Rate – locked in for first 10 years and increases year after year
- 7/1 Adjustable Rate – locked in for first 7 years and increases year after year
- 3/1 Adjustable Rate – locked in for first 3 years and increases year after year
As mentioned, an adjustable mortgage is really only beneficial when staying in a home for less than locked in rate time frame. If you are looking for a loan on a long term property purchase – you should not look into adjustable rate mortgages.
–> Government Insured Loans: FHA & VA
Government insured loan were originated after the Great Depression in the 1930’s in order to make it easier to be approved for a home loan. The government does not specifically lend money, however they insure the loan in the case that you default on your mortgage. This allows the lenders to lower loan requirements.
*FHA (Federal Housing Authority) Loans
FHA loans are one of the most popular loan options for first-time home buyers because of their low credit requirements and low down payment options.
If you have a 500 FICO credit score, you can qualify for an FHA loan with 10% down. If you have a 580 or above FICO credit score, you may be able to qualify for an FHA loan with only 3.5% down. They also allow you to receive the down payment as a gift from family or friends where as a traditional loan wants to see you have the down payment in your own savings.
FHA loans are great in the sense of easy qualifying and low down payments, however your monthly payments may be high because of their MIP (mortgage insurance premium – similar to PMI) which is usually .85% of the loan amount. They also have strict requirements on property condition which may cause issues in negotiations with the seller. The lenders will send an inspector to the property a few weeks before closing to ensure all conditions are met on the loan (for example; chipping paint fixed/replaced, railings and doorknobs in place, and other minor details).
* VA (Veteran Affairs) Loan
A VA loan is only available to Veterans offering substantial benefits.
In order to qualify for a VA loans you must receive a Certificate of Eligibility.
Veteran loans offer huge benefits such as $0 down payment (100% financing) and no PMI saving borrows thousands per year in their monthly payments.
* FHA 203k Loan (Rehab Loan)
This is a renovation loan for home owners who want to take on a “fixer-upper”. This loan funds the purchase price of the property along with the renovations needed.
203k loans have similar down payment requirements for borrows at around 3.5% however they do require a higher credit score than an FHA loan, usually around 640 or higher.
–> MA Specific Loans: Mass Housing
For MA residents, there is a new mortgage program available to first time home buyers.
* MHP1 Loan
This loan requires only 3% down for condos, single-family and two-family residents. For 3 family property, 5% is required.
You will receive a 30-year fixed mortgage rate with no points charged to the borrower.
No PMI payments required.
Some income eligible buyers will qualify for an additional monthly savings during the first seven years of ownership. Designed to reduce a borrower’s monthly mortgage payment in the early years of home ownership, MHP Interest Subsidy is automatically applied to those who qualify. This lowers your monthly payment by deducting some interest.
Mortgage Talk Glossary:
PMI (Private Mortgage Insurance) – if you put down less than 20% as a down payment for your mortgage, most loan programs will require you to pay an insurance premium on your loan. This is in case you default (stop paying) on your loan. Not to be confused with home insurance, PMI is strictly insuring your lender on the money you are borrowing. This rate varies between .3% and 1.2% of the loan amount and is paid annually.
Amortization – the gradual reduction of a debt by regular scheduled payments of interest and principal (Amortized = paid in full)
Principal – the total amount borrowed
Fannie Mae – The Federal National Mortgage Association (FNMA), usually known as Fannie Mae, is a government-sponsored enterprise that buys loans from mortgage lenders, packages them together, and sells them as a mortgage-backed security to investors on the open market.
Freddie Mac – Federal Home Loan Mortgage Corp (FHLMC) is a stockholder-owned, government-sponsored enterprise (GSE) chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing for middle income Americans.
LTV (Loan to Value Ratio) – how much money you are borrowing to how much the home is worth. For example if your home is worth $200,000 and you are borrowing $180,000 your LTV would be 90%.
Points – Charges from a lender when receiving a loan. 1 point = 1% of purchase price.
Interest Subsidy – Some interest may be deducted from one’s taxable income, depending on the type of loan or how it was borrowed. Common examples of interest subsidies include the deduction on home mortgage interest and student loan interest.