Learn About Financing
Choosing a Lender
Home financing is available from mortgage companies, savings and loan associations, banks, credit unions and others. Each will have its own rules, rates and fees. When you compare financial institutions, be sure to look for variations in the way mortgages are offered -- distinctions that can mean dollars of difference to you. You will want to research the various lenders in your area to see which the best “fit” is.
The Loan Process
Application review
At the application, the lender will ask you some basic financial questions about your current income, debts and assets available for investment in your new home. The lender will review your credit report, along with any verification needed from your bank, landlord or employer. After the initial approval, the lender will order an appraisal of the property to make sure it’s worth the mortgage amount (since it will serve as collateral for the loan), and a title search to identify potential ownership questions.
When this documentation is complete, you'll receive notification of a loan decision, and, if approved, a date will be set for settlement.
Approval process
The days of the 45- or 90-day loan decision are gone. Now, processing your application is much faster. Generally, the information you submit will be joined electronically with a credit report and submitted through an automated underwriting system, which automatically determines whether your application meets the requirements for approval.
Loan denied
Lenders have 30 days from the application date to explain in writing why you were denied a loan. If you were denied because of credit, you are entitled to a free copy of your credit report. If there are any errors, you may challenge them. Some lenders have a second level of review. You also have the right to apply at another institution. This does not guarantee success; you may need to correct problem credit.
Types of Loans
While finding the financing package that best suits your needs can be a complicated process, find the financing method that works for you.
Remember that financing options are affected by local and regional real estate and banking practices and in some areas by state law.
We review some of the different types of loans below. You may also want to use our Mortgage Calculator to help determine the type of loan best suited for you.
Fixed-Rate Mortgages
A fixed-rate mortgage means the interest rate and principal payments remain the same for the entire life of the loan. (Taxes, of course, may change.)
Advantages include consistent principal and interest payments make this loan stable, your rate won't change, so you don't need to worry about market fluctuations. A good choice if you're likely to stay in this house for a long time.
Disadvantages include a possibly higher cost - these loans are usually priced higher than an adjustable-rate mortgage. Keep in mind that, on average, most people move or refinance within seven years. If rates in the current market are high, you're likely to get a better price with an adjustable-rate loan.
Conventional fixed-rate mortgages
This traditional, "tried and true" mortgage option is a loan with a constant interest rate and level, equal payments during a set period of time -- most commonly, 30 years. The biggest selling point of fixed-rate loans is predictability, and they are particularly suited to people with steady incomes.
If lower rates indicate the time is right to refinance, it's a good idea to compare the costs of incurring a new mortgage -- such as prepayment penalties and loan origination costs. You may want to refinance your loan or pay it off early to eliminate thousands of dollars in interest.
30 Year Fixed-Rate Mortgages offer consistent monthly payments for the entire 30 years you have the mortgage. So if the market is good, you can benefit from locking in a lower rate for the full term of the loan. The best choice if you're looking for a long-term, stable loan - for instance, if you're planning on staying in your house for some time.
20 Year Fixed-Rate Mortgages allow you to make a consistent monthly payment throughout the 20 years you have the mortgage. The shorter term means you pay the loan off more quickly, and therefore pay less interest. And you'll build equity faster than you would with a 30 year loan. (But remember the shorter term means higher payments, when compared to the 30 year fixed-rate mortgage.)
15 Year Fixed-Rate Mortgages mean consistent monthly payments for all 15 years you have the mortgage. By building equity even more quickly than with a 30 year or 20 year loan, and paying less interest, you'll save money in the long run. It's an ideal option if you can handle the higher payments and if you'd like to have the loan paid off in a shorter period of time - for instance, if you plan to retire.
Adjustable-rate mortgages (ARMs)
As the name implies, the interest rate on an adjustable-rate mortgage changes throughout the term to stay current with the present interest rates. ARMs are most popular when rates are relatively high and appear to be dropping and when the difference between the ARM and the fixed-rate is greater than two to three percent. Different lenders offer variations in the front end of their ARM plans, such as the points you pay or discounted initial rates.
To make a useful comparison of an ARM rate, consider the index upon which the rate is based, the margin or spread between that index and the rate paid, and the intervals at which the rate and payments are adjusted.
With ARMs:
The initial interest rate is usually lower than with a fixed-rate mortgage.
The monthly repayment would also be lower.
The interest rate may be adjusted (up or down) at predetermined times.
The monthly payments will then increase or decrease.
Most ARM programs do offer "rate cap" protection, which limits the amount the rate can be increased, both each year and over the life of the loan. All ARMs are amortized over 30 years.
Advantages include lower costs - ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If interest rates go down, you'll enjoy lower payments. Usually an ARM is the best choice for homeowners who plan to relocate (for example, with their company or the military), or for those who are purchasing their first home and plan to be in the property only for three to five years. Remember that, on average, most people move or refinance within seven years.
Disadvantages include the possibility of increasing monthly payments if interest rates go up. Keep in mind that ARMs are best for homeowners who aren't planning on staying with a property for a long period. If you're on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.
10/1 Adjustable-Rate Mortgages provide a fixed initial rate of the loan for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years, so you'll enjoy the stability of a 30 year mortgage at a lower price than a fixed-rate mortgage of the same term. But an ARM is likely not the best choice if you're planning on owning the same property for more than 10 years.
7/1 Adjustable-Rate Mortgages offer an initial rate that is fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.
5/1 Adjustable-Rate Mortgages mean the initial rate remains fixed for the first five years of repayment, and then adjusts every year thereafter. Remember that your rate and monthly payments may go up after only five years, so this choice is best if you're expecting to sell or refinance the property within that period.
3/1 Adjustable-Rate Mortgages provide three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. A good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.
Jumbo loans
Mortgages are called jumbo when they exceed the maximum limit set by the Federal National Mortgage Association (FNMA, or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC, or “Freddie Mac”), the largest national investors in mortgages. Currently, this limit is $300,700.
Because of the greater risk to the lender by the higher-than-average loan amount, some lenders charge slightly higher interest rates for loans in the jumbo category.
Balloon mortgages
Balloon mortgages are fixed-rate loans. Although based on a longer term, the mortgage must be paid in full with a balloon payment, usually in five to seven years. The advantage is that interest rates are generally set well below current market rates. Many borrowers of balloon mortgages refinance their loan before the balloon payment is due.
Two-step loans
Two-steps are adjustable rate mortgages that have only one adjustment during the loan term. They let you take advantage of the reduced start rate of an ARM while still enjoying the security of a fixed rate for some time.
Because the adjustment does not usually occur until several years into the loan term, two-step loans are particularly attractive to buyers who do not plan to stay in their new home more than a few years.
Federal Government Programs
Federal Housing Administration (FHA) insured loans
Lenders offer FHA mortgages on a new or existing single-family home for as little as three percent down. FHA mortgages are also assumable. Sometimes a premium is required when the mortgage is assumed, then refunded when the note is paid off. Down payments are usually low.
Veterans Administration (VA) guaranteed loans
The Veterans Administration guarantees lenders against loss if a property is foreclosed due to default. These assumable loans are available to eligible veterans and may be used to buy, refinance, construct or repair a house. If the VA property appraisal is less than the sale price, the borrower pays the difference as a down payment.
Farmers Home Administration (FmHA) loans
The government makes these loans available to persons of moderate to very low income in rural or non-metropolitan areas.
Alternative financing
Lease/purchase agreements
Borrowers can lock in the price of a house today and postpone financing for 12 to 18 months with these agreements. The borrower gives the seller a deposit which is applied to the purchase and makes monthly rental payments. Lease/purchase agreements are used by sellers who want to keep a home occupied and receive rental money after they've moved out, and by buyers who are not in a position to commit to a property at a particular time.
Installment contract
Buyers and sellers work out a contract which states a down payment, interest rate and term. Some contracts have long terms; others are short-term with balloon payments. Regulations about title transfer in a contract sale vary from state to state.
First mortgages from relatives or others
Sometimes relatives or private investors will purchase a home outright then offer a borrower a first mortgage. The terms are worked out to the mutual satisfaction of both parties.
Second mortgages
These are used when a borrower needs additional financing to buy a home. This mortgage may be financed by the seller, another lender, relative or investor, and terms are negotiated between buyer and lender. Often, second mortgages are used when a borrower assumes a guaranteed first mortgage with a lower interest rate and needs to make up the difference between the loan and the sale price.
Equity financing
An equity plan allows buyers to buy new homes by borrowing against a portion of the equity in their present home. A six-month "bridge" is secured on which no monthly payments are required and that money is used to purchase the new home. When the present home sells, the loan is paid off with the proceeds of the sale. If the home doesn't sell within six months, the owner may renew the loan or choose from other "backup" options.
Application Information
Your lender will need a complete picture of your financial situation to help determine how much home you can afford. You and the loan officer will fill out the Uniform Residential Loan Application, a four-page document that asks in-depth questions about you, your income, your assets and liabilities and your credit as well as a description of the property you wish to buy. The process will go much smoother if you have everything with you when first meeting with the loan officer.
What you will need for the application:
- Agreement or contract of sale
- Employment history
- Income information
- Source of down payment and closing costs
- Credit information
- Real estate owned
- Application fee
There are special situations regarding self-employment, rental income and the like which require additional information. Your loan officer can tell you what else you will need.
Determining your down payment
As part of the application process, you must state how much of a down payment you can make. Obviously, the bigger the down payment is the smaller the mortgage. As little as three percent down may be possible. Qualified veterans may be able to obtain a loan with no down payment at all through the VA home loan program. On loans with less than 20 percent down, you may be required to purchase private mortgage insurance (PMI) which protects lenders against losses. The cost of PMI will be reflected in slightly higher monthly payments and, possibly, an additional fee at settlement. Application fees
Typically, lenders charge an application fee which covers the cost of a credit report, an appraisal of the property, and possibly, determining if the property is located on a floodplain.
Some lenders may not charge an application fee, but may increase the loan rate or other costs to cover these charges. It's important to have a clear understanding of the services covered by the fee and how they may be paid.
Application legal requirements
Within three days of your loan application, your lender is required to furnish you with a copy of Settlement Costs, a booklet prepared by the Department of Housing and Urban Development. It describes the settlement process and the typical costs that buyers and sellers often must pay at settlement. You may even want to ask for a copy before applying because the information is valuable.
You'll also receive a Good Faith Estimate of settlement charges, based on your lender's past experience in the area where the property is located.
Financing Your First Home
Determine what you can afford
Each buyer is unique - and we'll help you find out just what you can afford. Your income and your debts will typically play the biggest roles in determining your price range. It's simple to make an estimate, just run the numbers for yourself using our Affordability Calculator.
Figure out your funding
A range of mortgage options are available, and we'll help you determine which can work for you - some loans require little money down. You'll also need to consider closing costs and the escrow account for taxes and insurance. But don't get overwhelmed: it's a snap to figure out how much money you'll need using the Affordability Calculator.
Less-than-perfect credit report?
Don't worry, there are options that are ideal for those who have a few "dings" on their credit report. Work with your lender to develop an individual mortgage program based on your unique credit worthiness.
Loan Programs
Finding the best loan program for your needs depends on a number of factors, including:
How long you'll stay in the home;
How much money you'll put down;
How you'll finance the closing costs.
For information on the loan programs and rates available just visit Loan Programs.
Tax Benefits
You may be able to deduct the interest you pay on the mortgage loan and some of the financing costs of the home, such as points. And your property taxes could be deductible. You should consult your tax advisor for more information.
Financing Your Next Home
Determine What You Can Afford
Each buyer is unique - and we'll help you find out just what you can afford. You already know that monthly income and financial obligations are most important in determining your price range. It's simple to make an estimate: just run the numbers for yourself using our Affordability Calculator.
Buying a Second Home
You'll need to identify sources for your down payment, since you're not selling your current house and using the proceeds, and you'll need to expect a larger monthly obligation for housing expenses. Work with your lender to create a customized loan program with the best combination of rate, points, and closing costs for your needs.
Less-than-perfect credit report?
Don't worry, there are options that are ideal for those who have a few "dings" on their credit report. Work with your lender to develop an individual mortgage program based on your unique credit worthiness.
New Home Appraisals
Some situations may qualify for a more streamlined loan process. Your credit history will help determine if your loan application can be completed without an appraisal.
Private Mortgage Insurance (PMI)
Loan programs for down payments of 20% or less require you to purchase Private Mortgage Insurance (PMI).
Selling Your Current Home
You may qualify for a new loan without even selling your current home. It's simple to run the numbers for yourself on our Affordability Calculator. You may also want to discuss a bridge loan with your mortgage company.
New Construction
If you are working with a builder within a sub-division or development and just making carpeting, lighting and appliance selections for a brand-new home, you can probably obtain a standard mortgage loan. But if you're hiring contractors, electricians, plumbers, and painters, you probably need a construction loan, which provides funds to pay subcontractors as work progresses. For more information on construction loans, contact your lending institution or mortgage company.
When to Refinance
Each homeowner is unique - and we'll help you determine if it's the right time for you to refinance. Effective refinancing typically means lowering your current mortgage loan rate by at least one percent. You might also want to consider changing the length of your loan or receiving cash from the equity in your house. It's simple to see what will work for you, just run the numbers for yourself using our Refinance Calculator.
Benefits of Refinancing
If you want to increase cash flow, refinancing to lower your monthly payment could help. To get a good idea of what your new monthly payment would be, use our Refinance Calculator. Refinancing could also allow you to shorten your loan term if you qualify.
Using Home Equity
Many people borrow against the equity in their homes and use the cash to make improvements. Up to 90 percent of the appraised value of your home can be used to make home improvements. The equity you can use is based on the value of the home and what you currently owe, subject to applicable state laws. You can still refinance if you don't have much equity -- up to 90 percent loan-to-value (LTV) if you want to refinance your house for a new rate and term. A reappraisal of your property may be required.
Refinancing Costs
You will have closing costs associated with refinancing your loan, including points and processing fees. You may have the option of rolling these costs into the loan amount to reduce your cash out of pocket. To evaluate your options, use our Refinance Calculator.
Q&A
What can I afford to buy?
Each buyer is unique – and we'll help you find out just what you can afford. Your income and your debts will typically play the biggest roles in determining your price range. It's simple to make an estimate, just run the numbers for yourself using our Affordability Calculator.
Do I have enough money to buy my first home?
There is a wide range of mortgage programs, and we'll help you determine which can work for you – some loans require little money down. You'll also need to consider closing costs and the escrow account for taxes and insurance. But don't get overwhelmed: it's a snap to figure out how much money you'll need, using our Affordability Calculator.
What about my less-than-perfect credit report?
Our special solutions program can help:
- We offer loan options ideal for those who have a few "dings" on their credit report.
- We try to work with every customer to develop an individual mortgage program - we call it your personalized rate, because no two are alike.
- So we try to develop a custom program based on your credit worthiness.
What's the best loan program for me?
That depends on a number of factors, including:
- How long you'll stay in the home;
- How much money you'll put down;
- How you'll finance the closing costs.
What are the tax benefits to owning a home?
You may be able to deduct the interest you pay on the mortgage loan and some of the financing costs of the home, such as points. And your property taxes could be deductible. You should consult your tax advisor for more information. If you're renting right now, you may want to take a look at our Rent vs. Buy Calculator. |
