Buying a home is much more than picking a neighborhood, viewing listings, or packing the moving van. The first question any home buyer needs to answer is how you’ll pay for your home. For the vast majority of buyers, you’re going to need a mortgage.
It’s good to know what mortgages are available to you so you can make the most well-informed decision and ask the right questions of your lender. Even if you don’t have 20 percent saved for a down payment, you may still be able to find a home loan.
If you have questions about specific mortgage types or how to qualify for a specific mortgage, make sure you talk to a loan officer who can give you detailed information and explain current requirements for each type of mortgage.
Mortgages come in two types: fixed rate and adjustable rate. A fixed rate loan means your interest rate stays the same for the life of your mortgage. Adjustable rate loans offer an introductory interest rate for a set amount of time like five years. After that your rate will adjust on a regular schedule, usually each year. This means your payments will fluctuate. It’s important to understand the difference when applying for a mortgage.
A conventional mortgage is the one you may be most familiar with. It is not insured by the government, although it must meet requirements set by Freddie Mac and Fannie Mae, two government-owned entities that buy and sell mortgage-backed securities. Every lender offers it’s own specific conventional loan products. Some allow as little as three or five percent down.
When you pay a low down payment, you will have to purchase private mortgage insurance (PMI) to protect the lender in case of you default on the loan. It can be removed once the loan-to-value ratio of your mortgage reaches 80 percent.
The majority of loans are known as “conforming” loans. This means that they meet requirements set by Fannie Mae and Freddie Mac. Both Fannie and Freddie set price limits on the mortgages they’ll accept. Not every property stays within those price guidelines. Loans that are bigger than conforming loans are called jumbo loans. To qualify for a jumbo loan, you’ll need excellent credit and a higher down payment. You’ll likely also pay a higher interest rate than you would with a conforming loan.
The Federal Housing Administration (FHA) offers a government-insured mortgage known as an FHA loan. These mortgages are common for first-time and low income buyers. They allow people to pay low down payments - 3.5 percent - but they also require mortgage insurance premiums to be paid for the life of the loan. These premiums help lenders recoup their loss if you default on your mortgage.
VA loans are offered through the U.S. Department of Veteran Affairs. This type of mortgage is available for active-duty military members, veterans, and their families. VA loans are backed by the government like FHA loans. The biggest benefit of this kind of loan is 100 percent financing is available, meaning no down payment is required.
Another government-backed loan, USDA mortgages are available for rural buyers. To qualify for this mortgage, you must meet specific income requirements. This mortgage is good for buyers with low or modest income who can’t qualify for a conventional loan. Be aware that not every area qualifies for UDSA financing. Every county has its own income requirement based on the adjusted area median income (AMI).
When you’re ready to learn more about your mortgage options and find out what you qualify for, consult a mortgage lender.
Ready to start looking for your perfect Naples home? Contact me today. Let’s talk!