Financing A Home

If you’re thinking about buying an existing home or a new home, chances are you’ll need to borrow money from a lender to buy the home. Finding a lender takes work, but it’s not impossible. On average, 13,205 houses sell every day and lenders approve 9,640 borrowers every single day. That’s a lot of loans being approved! Most loans fall into one of three categories: Conventional loans, FHA (Federal Housing Administration) loans, and VA (Veterans Administration) loans. Conventional loans account for account for 76.6 percent of all loans with 92 percent of those loans having a fixed interest rate and 8 percent of those loans having an adjustable interest rate. FHA loans comprise 13.3 percent of all loans and VA loans make up the remaining 10.1 percent of all loans.

If you’re a military veteran, chances are your best bet for a loan is a VA loan through the Veterans Administration. VA loans offer advantages to veterans that other loans can’t offer, such as options for no down payment, negotiable interest rates, and no mortgage insurance payment requirement. If you’re not a military veteran, the best loan for you is based on your income and credit worthiness. FHA loans are particularly useful for first-time homebuyers and other buyers who don’t have perfect credit or a lot of money to put down. FHA loans are also used by borrowers who want to finance one-to-four unit structures or approved condominiums. FHA loans require a lower down payment, typically between 3.5 percent and 4 percent of the purchase price. FHA loans also allow you to accept a “gift” of money as a down payment.

Because FHA loans are backed by the federal government, lenders are willing to loan money to borrowers than have credit scores as low as 620. Usually a borrower with a credit score below 620 doesn’t qualify for an FHA loan. In addition, you can qualify for an FHA loan one year after Chapter 13 bankruptcy, two years after Chapter 7 bankruptcy and three years after a foreclosure. The downside to FHA loans is that they require the payment of mortgage insurance, if you put down less than 20 percent of the cost of the home. Mortgage insurance helps the lender recoup some of its loss if you default on the loan. FHA mortgage insurance is charged both as a fee at closing, which is built into the loan amount, as well as each month as part of your regular loan payment. Also, FHA sets the limits on how much you can borrow. Those limits are set by the county in which the home is located.

Conventional loans are not backed by any federal agency, and you can obtain a loan from just about any lender, including local banks and credit unions and mortgage bankers or mortgage brokers, who typically represent other lenders in a correspondent relationship. Conventional loans are for people with higher incomes and better credit scores. They require a higher down payment usually from 5-to-20 percent of the cost of the home, but the interest rate of these loans is much better. In most cases, they don’t require the payment of mortgage insurance. Conventional mortgage lenders offer more flexibility in the type of loan you can obtain. For instance, a conventional lender will likely offer long-term fixed interest rate mortgage but may also be able to offer you an adjustable-rate mortgage, in which your interest rates is lower for a set period at the beginning of the loan period and then gradually increases as rates rise over time.

On adjustable-rate loans the terms vary. You can have a 3/1 ARM, a 5/1 ARM, a 7/1 ARM or a 10/1 ARM where the first number is the total length of the loan and the second number is the length of time between lender rate adjustments.

Besides these three primary loan types, there are specialized loan programs for people in certain situations. If you live in a rural community, you may qualify for a USDA Rural Loan. If you’re a first-time homebuyer, you may qualify for a State Housing Loan. If you need a loan that exceeds $417,000 and are a high-income wage earner, you may qualify for a Jumbo Loan.

A good mortgage broker can help you find the right lender that suits your financial situation. Usually, their fees are paid by the lender who allows them to earn a commission on the loan by allowing them to mark up the interest rate from a wholesale price at which it’s offered to them to a retail price at which it’s offered to you. This information should help you get started down the right path to obtaining a home loan without wasting a lot of valuable time.