Once you find a new home you love, you’ll want to sign on the dotted line and make it yours right away. Wouldn’t it be nice if it were this simple?
Unless you pay cash for your home, you will need to secure financing through a mortgage company. Every mortgage company, or lender, offers different types of financing with different rates and terms. Understanding all the options may seem daunting, but it does not have to be.
Mortgage companies or your mortgage broker should help educate you on the various mortgage options available to you. However, reading the below will give you a leg up to go into those conversations with some general understanding.
In this article, you’ll find more information about many mortgage options. Find the loan types that look interesting to you and then allow us to point you in the right direction. While many programs are available, not all lenders are created equal.
Many people think these types of loans disappeared after the 2008 recession. However, there are still a number of mortgage options available that allow 100% financing.
For our customers looking for 100% financing with a $0 down payment, Homes by Taber professionals can point them in the right direction. Certain lenders offer fixed-rate loans of up to $350,000 for a term of 30 years without PMI, which makes your monthly mortgage payments affordable. Mortgage insurance is typically required on a mortgage when the down payment is less than 20% of the purchase price.
Qualifications include a maximum debt-to-income ratio of 45% and a maximum applicant total gross income (not combined household income) of $85,300. Best yet, they are willing to lend to applicants with a credit score as low as 600. While it sounds too good to be true to some, it is a loan program that we have seen may take advantage of while snagging a lower monthly payment and saving money they would have spent out of pocket.
Let us know if you’re interested in more information and we will help you out. 100% financing is an attractive option, even for those with the money to cover a down payment. Why use the cash if you do not have to?!
An Adjustable Rate Mortgage (ARM) loan is a home loan where the initial interest rate is fixed for a specific period of time. After that, the interest rate applied on the outstanding balance resets periodically, at yearly or monthly intervals.
Adjustable Rate Mortgages become popular when interest rates are on the higher end of the spectrum because they allow buyers to have a lower interest rate at the beginning of the loan, which in turn provides them with a lower monthly payment towards the beginning of their loan too.
An example of an ARM loan would be a 7/6 ARM with a lower fixed interest rate for seven years, with rate adjustments every six months after for the remaining 30-year term. Since most people do not live in their house longer than seven years, the home typically resells before the rate is adjusted. However, if the homeowners expect to live in the house longer than seven years, most will elect to refinance at that time when rates go lower. This is a perfect example of marrying the home and dating the rate so that buyers do not miss out on their opportunity to purchase.
An Example Scenario* of an Adjustable Rate Mortgage:
A $400,000 Sales Price with a 10% Down Payment would equal a Loan Amount of $360,000
If the current interest rate is at 7.50%, a borrower may have an interest rate of 5.375% on the first seven years of their loan, saving them an estimated $500 a month during the first seven years of their ARM loan.
*Scenario above is for explanation purposes only and is not a guarantee of exact rates or savings. Credit scores, current rates, and lender programs will vary.
VA loans are obtained through private lenders, but the government guarantees payment for a portion of the mortgage. Because of this, lenders typically offer more favorable terms and rates for VA loans. For example, many lenders provide VA loans with no down payment.
To qualify for a VA loan, you will need a Certificate of Eligibility from the VA, which you can apply for online. The VA generally does not consider credit history in its eligibility requirements. However, to receive the loan, you will have to meet the private lender’s requirements.
VA loans are similar to conventional mortgages in that they are typically available for either 15- or 30-year terms. Lenders offer both fixed- and adjustable-rate VA loans.
VA loans also have several differences beyond what we’ve already covered. If you have a VA loan, you don’t have to purchase mortgage insurance. Mortgage insurance is typically required on a mortgage when the down payment is less than 20% of the purchase price. In addition, VA loans charge a funding fee that you can add to your loan principal so that you don’t have to pay it right away. With a VA loan, you won’t have to worry about a prepayment penalty if you pay off your mortgage early.
If you have low credit, you may be tempted to look into a credit repair program. These programs promise improvements to your credit in exchange for a fee. Before you buy into these, we recommend you seek out a credit counselor. Credit counseling agencies are typically non-profit organizations that offer free resources and education. These counselors should help you understand your credit situation and what you need to do to improve it. Some of the lenders we work with also provide these services free of charge.
According to the Federal Trade Commission, the credit repair industry is full of scams. Do your research before working with any company. These companies will request copies of your credit reports and will negotiate with creditors or dispute errors in an effort to improve your credit.
Reputable mortgage companies also offer credit repair programs to help you get on track. Many lenders can run credit repair simulator programs so they may tell you exactly what issues you need to focus on to get your credit score where it needs to be.
Some lenders offer loans for a slightly higher interest rate in exchange for covering closing costs and other fees. With this type of loan, you would not have to pay these costs upfront, but you would owe a higher monthly payment.
Some lenders may also offer lender credits to use towards closing costs that do not affect the interest rates or fees. Home builders often have relationships with lenders that will give these lender credits exclusively to the home builder’s customers so it’s important to ask if lender credits are available to help with closing costs.
You may sometimes see advertisements for home builders offering a loan at a specific rate but it is important to note that you may be paying for that lower rate in your monthly payment. As with all loans, make sure you get all of the details before committing.
Homebuyers typically qualify for the best interest rates with credit scores in the mid-700s or higher. If you have a lower credit score, you will likely still qualify for a mortgage, but this may come at a higher interest rate. With a credit score below 580, it may be more difficult finding a lender who will approve you, even at higher rates.
With a low credit score, you may qualify for an FHA loan. An FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration (FHA). Designed for low-to-moderate-income borrowers, FHA loans require a lower minimum down payment and credit scores than many conventional loans.
Some lenders will offer subprime mortgages to people with very low credit. This type of loan, which became infamous during the 2008 mortgage crisis, has very high rates.
Are you part of the gig economy? If you are self-employed, you might consider a bank statement loan, also known as a self-employed mortgage or alternative documentation loan. These loans allow you to obtain a mortgage without the normal documentation used to verify income, such as W-2s and tax returns.
To obtain a bank statement loan, you can use your bank accounts as evidence of cash flow and income. The exact requirements vary by lender, but typically, you’ll need 1 to 2 years of bank statements, 2 years’ history as self-employed, and enough savings to cover the first few months of mortgage payments.
These loans are typically riskier for lenders, so it’s possible you might face a larger down payment or higher interest rate than with a traditional mortgage. However, having a good credit history can help ease concerns from the lender.
Many buyers just don’t have that huge chunk of cash necessary for a down payment. Luckily, there are plenty of state and local payment assistance programs that offer help.
If you need assistance, don’t hesitate to apply for one of these programs. Many of these organizations provide funds as a gift or a loan they will later forgive. You may be leaving money on the table if you don’t investigate these options.
A home equity loan is not a mortgage product, but it is commonly confused as one. With a home equity loan, a homeowner borrows a fixed amount of money using their home as collateral. The amount of money you can borrow depends on your income and credit history. It is usually no more than 85% of the value of your home.
As with most loans, the homeowner must make monthly payments over a fixed term to repay it. If the homeowner fails to meet their loan obligations, the lender can foreclose on the home.
A home equity line of credit (also known as a HELOC) is a line of credit allowing you to borrow as needed. With a HELOC, you can actually write checks or use a credit card connected to your account.
To take a home equity line of credit, you have to pay the same expenses as when you originally financed your mortgage. These can include an application fee, appraisal, title search, legal costs, and others. Some of these plans include variable interest rates that could increase the amount you pay in interest during the loan. As with any loan, make sure you understand the terms before moving forward.
It’s important to ask if lender credits are available to help with closing costs. Some lenders may offer lender credits to use towards closing costs that do not affect the interest rates or fees. Another option if you can’t quite cover all of the upfront costs of a new home is a lender credit. This is money provided by your lender to help with closing costs. The lender then applies that amount to your mortgage.
Mortgage options with lender credits typically have slightly higher interest rates. However, the extra amount you will pay monthly will be very small. A lender credit can actually be a great option if you think you will refinance later, or if you do not plan to stay in your new home for the full mortgage term.
Most of the options we discussed previously relate to long-term lending. A bridge loan is a short-term loan and usually has six- to twelve-month terms. They typically require 20% equity in your current home and can come with higher interest rates and fees.
Bridge loans are used in real estate in several ways. They essentially give you access to your home equity before you have actually sold your home. You can use your bridge loan to pay off your current mortgage and apply what is left to a down payment on your new home. Alternatively, you can use your bridge loan as a second mortgage that essentially becomes the down payment on the new house.
When your first house sells, you can use that money to pay off the bridge loan and interest. Bridge loans can be problematic if your first home takes a long time to sell. In this scenario, you would need to make payments on both your new home and the bridge loan until the first home sells.
Now that you know a bit more about your financing options, it’s time to find a lender to serve you. Contact us to discuss your options and we can point you in the right direction. The lenders we work with finance many of our customers’ new homes, and we have seen first-hand how well they treat our customers.
Of course, you are welcome to choose whichever lender you like. Please let us know if you are interested in any of the specific financing options discussed above, such as lender credits, VA loans, or credit repair. We are here to help!