Mortgage Financing

Background on Financing
Probably one of the reasons that buying a home is such an emotional experience is because of the fact that not only do you have the actual house buying to deal with, but for most home buyers you also have the mortgage process to encounter.  This can be a smooth and almost uneventful process, or an unnerving one.  A great deal depends on the preparation of the buyer as well as the selection of an efficient mortgage company.

General Mortgage Information
What a Mortgage Payment Consists of

1) Principal: The repayment of the original amount borrowed on a monthly basis.
2) Interest: The cost of borrowing the principal amount, repaid on a monthly basis.
3) Taxes: Real Estate taxes paid to a local government agency.
4) Insurance: Homeowners insurance on the home. Also any mortgage insurance, which is paid to protect the mortgage company.

NOTE: The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.

Types of Mortgages
Fixed: A fixed term (for example, 15 or 30 years) as well as a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of the principal and interest will not change during the term of the mortgage.

Adjustable: Often referred to as an ARM (Adjustable Rate Mortgage). The interest rate on your mortgage will be adjusted up or down according to current interest rate levels.  The monthly amount for your principal and interest payment will go up or down with these rate changes.

Different Loan Types
A. Conventional Loans

Conforming or Jumbo - This refers to the amount of the loan. The secondary market periodically sets the upper limit for conforming loans (currently $417,000). Loans above this amount are jumbo loans and will typically have a slightly higher rate.

Fixed-rate or Adjustable rate - Somewhat self explanatory, a fixed-rate loan has the same interest rate for the life of the loan, typically 15 or 30 years. An adjustable rate mortgage (ARM) will adjust based on predetermined intervals and indices. There many ARM options, the most common being a one-year (the lowest initial rate, but has adjustments every year) or a three-year adjustable. Other popular ARM's will be fixed for the first 3 or 5 years and then adjust annually for the life of the loan. By law, ARM's have a limits or "caps" on how much the interest rate may change in one year and over the life of the loan. Most ARM's have a 30 year amortization.

Advantages and Disadvantages of Fixed and ARM Mortgages
Advantages--Fixed                                 Advantages--ARM
Since you know what your                      Lower initial interest rate
payment will be for the life of                  and therefore lower
the loan, you can budget                        monthly payment.
more easily.

No possibility of an interest                     If interest rate declines,
rate change making your                        your payment will also decline.
mortgage payment suddenly
unaffordable.

No anxiety over interest rate                   Easier to qualify for due to
fluctuations.                                          lower initial interest rate 
                                                           and payment amount.     

Disadvantages--Fixed                             Disadvantages--ARM
More income needed to                          If interest rate increases,  
qualify because of higher                        your payment will also increase. 
initial mortgage rate.

If interest rates decrease                        A large increase in interest                  
appreciably, it will be                             rates--and payment--could
necessary to refinance to                        make your house  
get a lower payment.                             unaffordable.

Insured or Uninsured - This refers to the amount of down payment, specifically the ratio of mortgage amount to purchase price ("loan to value" or LTV). If a buyer has less than 20% down payment (loan is more than 80% LTV), the lender will require private mortgage insurance (PMI) which will be reflected in a higher interest rate and more closing costs. An uninsured loan has a loan to value of 80% or less. In some instances, homes may be purchased with no money down (100% financing).

B. FHA and VA Loans
FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD), and designed for, in general, low- and middle-income borrowers and many first time buyers. There are, however, limits (which vary from county to county) to the maximum loan amount.  FHA loans have somewhat more relaxed qualifying standards and ratios than conventional loans and have the availability of both 15 and 30 year fixed as well as 1 year adjustable mortgages.

VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements (as low as 0 down) and somewhat more lenient qualifying ratios.

C. Interest Only Loans
As the name implies, these are loans for which the borrower only pays monthly interest (as opposed to principle and interest). The monthly payment is lower, but the loan balance never goes down. These are typically used for shorter terms or when keeping the payment lower is a necessity.

D. Seller Financing
When the seller acts as the lender in the transaction. Seller financing is fairly rare in the current market since other financing is so readily available.

E. No-Document ("No-doc) Loans: No-doc mortgages are generally a wise choice for self-employed people, those who do not wish to verify their income, and those with a brief or blemished credit history, or no credit. The benefits of a nodoc mortgage include a shorter application process since you are not required to provide income, employment or asset documentation, as well as a streamlined approval process because there is little subsequent verification. However, no doc mortgages generally will be at slightly higher interest rates and are offered by fewer lenders.

How Much Down Payment
One of the first questions that home buyers ask is "how much down payment are we going to need?" Unfortunately, there is no standard answer. Down payments will vary from 0% (with a VA--Veteran's Administration loan) to upwards of 25% (with certain "non-conforming" loans). As an average, most home buyers make down payments in the 5%-15% range, although your own personal situation may dictate more or less down payment. When you are factoring money for a downpayment, don't forget about closing costs, which will total in the 2-5% range, payable in cash at the time of closing.

Prequalification – What is it?
Prequalification is the initial step in securing a mortgage. A lender will analyze your current income, debt and basic credit history situation in order to qualify you for a maximum loan amount. This gives you a clear picture of your financial parameters and a maximum housing price (the mortgage amount plus your down payment). With pre-approval, the lender verifies your income, debt and financial picture, approving the loan subject to a favorable appraisal of the property you select.

Why Should I get Pre-Qualified?
3 People Benefit from your pre-approval
You: The only sure way to know “how much house you can afford” is through prequalification. It is a simple but important step., and gives you a clear sense of the direction you should be headed.

Your Agent: Second, by knowing what your financial parameters are, your Agent can spend more time looking for houses that "fit" and less time pursuing dead ends. No matter how much you might want a 4000 square foot home for $275,000, if your qualifications say $125,000, your qualifications say $125,000.

The Seller: Lastly, if you want to strengthen your bargaining position and make your offer stand out in case of multiple offers....get pre-qualified! If you were the seller and had 2 offers on the table for your house, one from a fully prequalified buyer and the other from an "I'll get around to that soon" buyer--to which offer would you devote the most attention to? Exactly!

I hope this was helpful and please call me with any questions you may have. Also, if you know anyone who is thinking about buying or selling a home, please call me with their name and number and I will provide them with the same level of service you have come to expect from me.
Doug