Saturday, May 3, 2008

Decisions, Decisions….

Which Mortgage Is Right for You?

There are thousands of mortgage products available to consumers. When you’re in the market for a home loan, how do you decide what’s best for your needs?

So, you need a mortgage. Maybe you’re buying a home, maybe you’re refinancing an existing home. When you go on the internet and do a search for “mortgages”, you can get confused pretty quick. Interest rates start popping up, you can become inundated with strange terminology that’s Greek as far as you’re concerned, and you discover a plethora of lenders ready to close your loan tomorrow. How do you know what loan type best suits your needs?

The most common loan type you may have heard of is a conventional loan. Conventional loans adhere to underwriting guidelines set forth by Freddie Mac and Fannie Mae. Each agency’s guidelines are similar with a few exceptions, and are designed to allow for the pooling of large amounts of loans with similar characteristics for sale on the secondary market. Typically, a conventional loan for a primary home requires a minimum 5% down payment, good credit, job stability and an average debt to income ratio. The average loan limit is $417,000 for our area. If you are coming up with at least 20% of purchase price to put down at closing, most likely, a lender will recommend you consider conventional financing. The interest rate and cost to do the loan will vary depending on loan size, credit score and loan to value. But it’s always a safe place to start. As well, conventional financing will apply to second homes and investment properties. You can get a little bit more creative and look at adjustable rate conventional financing or interest only conventional financing if there is a market condition (fixed rates are high) or a personal motivation (interest only for better cash flow) to consider. A good mortgage lender can talk to you about your goals and analyze other options for you to compare and decide.

If you are buying a primary home, you may want to consider other loan programs. In particular, the FHA loan (it stands for Federal Housing Administration) is very popular these days. FHA requires a minimum 3% cash investment on the part of the buyer, but will finance up to 97.75% of the purchase price (the buyer would have to pay the additional .75% in closing costs). FHA is a great product for people with more challenging credit scores and less cash to invest in the property. It also allows for down payment assistance to cover the 3% minimum investment, and the seller can pay up to 6% in closing costs. You can also use this product to refinance your home up to 95% LTV, and it can be rate term or cash out. You don’t have to be a first time home buyer to qualify, either. The loan limit is capped, and is lower than conventional limits. So you should check with your lender to see if it’s an option for you.

If you’re a qualifying veteran or the spouse of a deceased qualifying veteran, you’ll want to look into a VA loan. It allows for 100% financing and no monthly mortgage insurance. It also will let the seller pay up to 4% of closing costs. And if you want to refinance your property, its cap is 90% LTV. There’s no income limit and the loan amount limits are very generous – in line with or above conventional financing.

Rural Development (RD) loans are another good bet, but your property has to be in a “defined” area as allowed by RD. It is not necessary to be a to first time homeowner, but you must be purchasing your primary residence with this program. There is an income limitation as it is designed for low to moderate income families. As well, there is guarantee fee that applies which can be rolled into the loan amount if the appraisal of the property warrants it. But this program does allow 100% financing and no monthly mortgage insurance. So, if your property and your pay stub are within the guidelines, and you have little or no down payment, it may be an excellent resource for you.

Finally, any of the above mentioned loans can be financed through the Tennessee Housing Development Agency (THDA). To qualify for a THDA loan, you must meet both the income eligibility requirements and the county acquisition limit set forth. So you could get a THDA conventional loan, but you couldn’t get a $417,000 home with it. What’s most attractive about THDA is its very competitive rate on a 30 year fixed loan at or below the normal conventional market rate. THDA has grant programs available to its borrowers to assist with down payments if necessary. There are some guidelines that THDA is more stringent on, but usually they don’t pose a problem for a borrower who is considering this product.

So, when you call your mortgage lender, you can now at least have some idea of what type of loan you are interested in hearing more about. And trust me, your lender will probably be able to give you further customized choices once you decide which loan will best suit your needs.

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