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HOME PURCHASE

LOAN TYPES

For many, homeownership means investing in the future. The equity you build is yours to keep and while it may be more challenging to buy a home early in life, owning a home offers the potential to help build a healthy financial future and peace of mind.

The first stage in applying for a mortgage is typically prequalifying for one. Your credit score determines your interest rate, loan choices and your minimum down payment. Ultimately, the maximum size of your loan amount will be determined by your debt-to‐income ratio (DTI), which is the percentage of monthly gross income that goes towards paying debts. In general terms, the lower your DTI, the more you may be eligible to borrow and the more financing options may be available to you.

If you are self-employed, optimizing your savings, credit score, down payment; minimizing your debts; and maintaining an up-to-date profit‐and-loss statement is a good strategy. Your income will generally be computed using your past two tax returns.

FIXED RATE MORTGAGE

With a fixed-rate mortgage, your interest rate stays, well, fixed for the life of the loan.

That means your principal and interest payments will also stay the same for all the years on your mortgage. Keep in mind, however, there could be slight adjustments to the total monthly mortgage payment if your property taxes or homeowners insurance change during your loan term.

A fixed-rate mortgage is a favorite among borrowers. You can typically lock in a competitive interest rate. Even if rates in the market increase, your rate won’t change unless you decide to refinance to a different one. With a fixed-rate mortgage, there’s also the benefit of lower payments that can be spread out over many, many years, which could help borrowers qualify for a larger loan amount.

 

ADJUSTABLE RATE MORTGAGE

An adjustable rate mortgage (ARM), is a loan in which the interest rate varies according to a predetermined schedule. The initial interest rate will be fixed for an allotted period of time, after which it is reset periodically. For example, a 5/1 ARM locks in the current interest rate for five years. After that, however, the rate for that particular product will change based on a predetermined index + margin with a cap. ARMs could start with better interest rates than fixed-rate mortgages, in order to compensate the borrower for the risk of future interest rate fluctuation. If you only plan to live in your new home for a few years, this could be a helpful option.

Benefits of an Adjustable Rate Mortgage:

  • Potential to lock in a low interest rate and, if needed, sell your home before it rises
  • Could offer lower interest rates than fixed-rate loans
  • Rate adjustments could have caps to keep them from going too high
  • Rates could possibly go down, saving you money

FHA LOANS

 

The popularity of FHA loans has skyrocketed in recent years. The federal government backs FHA loans so they have relatively competitive interest rates, less stringent underwriting standards and require smaller down payments. They’re particularly appealing to young, first-time homebuyers who lack substantial credit histories and cash reserves, especially since loan underwriters permit non-traditional lines of credit, like car payments and utility bills.

Down payments may be as low as 3.5 percent, gifted, and buyers don’t need financial reserves beyond immediate closing costs. Also, an applicant may co-sign with a non-occupant co‐borrower like a parent to offset many issues.

These loans are relatively easy to refinance and are relatively forgiving of bankruptcies and foreclosures. They simply require a two-year wait time following a discharge. However, be prepared for stricter appraisals, strict accounting of income, and lower loan limits. Also, FHA loans don’t work for investment and vacation homes and a spouse’s debts can work against you, even if the spouse doesn’t co‐sign.

 

VA LOANS

VA loans are a key benefit for U.S. veterans, offering competitive interest rates, no down-payment loans, no required mortgage insurance and less rigorous underwriting standards.

Benefits of VA Loan:

  • Easy to refinance
  • No down payment necessary
  • No required mortgage insurance
  • Competitive interest rates
  • Less rigorous underwriting standards