Financing a home purchase can be a confusing and ...
Financing a home purchase can be a confusing and overwhelming experience. There are literally hundreds of banks and mortgage companies offering all sorts of funding alternatives. Determining which is best for you requires making an honest assessment of your financial situation, your plans for the new home, and present economic conditions.
Shopping for the best deal is almost certainly worth the effort. Though you are unlikely to find major differences in the terms offered by various companies, every 1/8 or 1/4 of a point in savings increases the loan amount you can afford and adds up to hundreds (or thousands) of dollars over time.
INTEREST AND POINTS
Understanding interest rates and points is essential to determining which loan is right for you. While interest is charged over the life of the mortgage, points are a one-time fee, generally paid at the closing out of loan proceeds. Each point equals one percent of the loan amount.
Generally, when more points are paid, the interest rate on the loan is reduced. As a rule, if you expect to stay in your new home for five years or more, it may make sense to pay additional points to secure a lower rate loan. Conversely, if you think you may move in a couple years you will probably be best served by a low or no points loan.
CONVENTIONAL LOANS
There are many types of mortgage products available in today's market, but the primary choice is between fixed and variable rate loans.
NOTE: It is always a good idea to get pre-qualified for a loan before you begin shopping seriously for a home. In addition to confirming your affordability level, you will be positioning yourself well for dealing with sellers. Pre-qualification is a tremendous plus when dealing with sellers.
← Fixed Rate
A fixed rate mortgage has an interest rate that does not change for the life of the loan, which is usually, but not always, 30 years. A fixed rate loan is the classic, old style mortgage and is probably the best idea when interest rates are at least moderately low by historical standards. With a fixed rate loan you know that your payment will not rise at some future point.
← Variable Rate
Variable rate loans come in many forms, but the primary feature is that at some point during the life of the loan the interest rate can change in response to market conditions. Loans may allow an increase after 1, 2, 3, 5, or even 10 years - mortgage terms vary enormously, so shop around. Variable rate loans make the most sense when interest rates are high by historical standards. Many people select variable rate loans during these periods, intending to refinance to a fixed loan when rates decline. When choosing a variable rate loan always be prepared for the fact that your payment may rise.
The choice between fixed and variable rate mortgage is influenced by price, affordability, market conditions, and risk tolerance.
UNCONVENTIONAL LOANS
For various reasons, many borrowers require special loan programs to fund their home purchases. These situations include:
← Borrowers with Credit Problems
Once borrowers in this category would have had a very difficult time finding any kind of mortgage, but today there are many lenders specializing in this growing segment of the market. Borrowers should expect higher down payments, interest rates, and fees, but they have a good chance of getting the loan they need.
← Low Down Payments
Many lenders offer mortgages for greater than the standard 80% of value. As with poor credit loans, these mortgages are likely to carry higher rates and fees and borrowers will have to pay for private mortgage insurance as well.
← Low Down Payments
This is a special type of loan that is disbursed in stages as construction progresses, allowing the borrower to make progress payments to builders, contractors, and suppliers.
Borrowers with special needs can often find the loans they require if they realistically assess their requirements and seek out the right lenders.
BE PREPARED
Lenders love paperwork, and you'll need to provide a fair amount before you get the loan. Assembling these documents right from the beginning is a smart way to start your loan search. Lenders have various requirements, but our loan application checklist can give you a strong start.
← Signed purchase contracts, if available.
← Proof of down payment.
← Gift letter if someone else is providing part of the down payment.
← Proof of salary and income (W-2, paychecks, etc.).
← Two year’s tax returns if self-employed.
← Schedule of assets and liabilities (most applications will require this information).
← Past address if at current one less than two years.
← Letter explaining any credit problems.
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