As the weather heats up, so does our local housing market! Houses are flying and as buyers look for homes, they need to be sure their finances are in order to purchase these fast-moving houses. Financing can be a scary thing to think about, especially for first-time home buyers; but with some planning and smart conversations, you can feel more comfortable in purchasing a home! We have broken out for you the type of loan products available as well as other useful information about financing for a house.
1. First and foremost: Mortgage loan rates.
What are current market rates? What rate can you expect to be locked in at?
When looking at what type of loan product you want, the first thing you need to know is the difference between a fixed rate loan and an adjustable rate loan (ARM, adjustable rate mortgage.) A Fixed rate loan will carry the same interest across the entire repayment term. Monthly principal and interest payments will stay the same with no adjustments (property taxes and homeowners insurance are adjusted yearly, more on that below). Adjustable-rate loans have an adjustable interest rate, meaning that the interest rate can change every year. In other words, your payment will vary according to what current interest rates are. If interest rates are high your payment will be higher, if lower, your payment lower, etc. For many buyers, ARM loans are not a good option, however it depends on your local housing market and how long you plan to stay in the home/ how quickly you plan to sell it.
2. Type of loan products available to you.
There are two categories of loans, government backed loans and conventional loans. Government backed loans are insured by the government and are aimed at making home buying accessible to anyone who qualifies. These loans insure the lender against losses that might result from borrower default. Below is a list of government-backed loans:
FHA loans - Federal Housing Administration. Down payment = 3.5%
These loans are managed by the Department of Housing and Urban Development. These loans are available for anyone. This loan allows you to have a low down payment (as low as 3.5%). But the downside to the low down payment is the monthly mortgage insurance (MI) you’ll have to pay (don’t worry, ANY borrower with less than a 20% down payment has MI). With an FHA loan however, you will have MI for the life of the loan. This is important to note, as many FHA buyers obtain a 30-year loan term – this means that you’ll be paying for 30 years of MI, unless you refinance the loan to conventional or sell the house.
VA Loans - U.S. Department of Veterans Affairs. Down payment = 0%
These loans are available to military service members and their families. The big advantage to this loan is that borrowers can receive 100% of their financing, meaning 0% down payment! However, this does not mean that you should NOT consider having a down payment. A down payment, no mater how small, is still equity in your home and it’s that much less money that you need to borrow and pay interest on!
USDA Loans - United States Department of Agriculture. Down payment = 0%
This loan product is for rural borrowers with specific income requirements. This loan is for those in rural areas who have “a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing." Their income cannot be higher than 115% of the adjusted area median income. The home to be purchased must also be in a rural development area, typically based on population. The city of Marshalltown does not qualify for USDA loans, but cities like Melbourne, do qualify.
IFA loans – Iowa Finance Authority. Down payment = 3%
This loan program is an affordable housing program offered by Iowa Finance Authority, which includes mortgages and down payment assistance. There are income restrictions on this loan type, but if you qualify you can apply for $2,500 in grant money to assist you with your down payment.
Conventional loans. Down payment = 5% or more
These loans are not insured or guaranteed by the federal government. Conventional loans (depending on market conditions) typically have lower interest rates than government-backed loans. Furthermore, with a conventional loan, you will only have MI payments until you have reached 20 - 22% equity in your home. This is the major difference between a conventional loan and an FHA loan. (Remember, an FHA loan has MI payments for the life of the loan, regardless of the equity in the home. But with a conventional loan, your MI payment automatically drops off after you’ve reached 22% equity in your home, though you can apply for it to be dropped off after 20%).
If you can provide a 20% down payment, you’ll totally avoid MI payments, you’ll have that much instant equity in your home, and you’ll owe less! That being said, 20% is a significant amount and many buyers don’t have quite that much saved up, but if you do – bravo!!
3. Other helpful details:
What exactly is Mortgage Insurance (MI)? Why do I need it?
MI is required of ANY borrower if they are putting anything less than 20% down towards the loan. This insurance protects the lender from loan default and costs about .5-1% of the loan. MI does not increase your equity; it protects the lender against you defaulting on your house, I.E. foreclosure. MI will be rolled into your monthly mortgage payments. Be sure to know if your loan product has full term MI or if it falls off after you’ve reached enough equity.
What all is paid for in my monthly payment?
1. Principal (the amount of money borrowed)
3. Mortgage insurance (if required)
4. Homeowner’s insurance
5. Property taxes
You can opt to pay the insurance and property taxes outside of the loan, but only if you have 20% or more down. Remember that your taxes and insurance will be adjusted yearly to reflect any changes – taxes went up? So will your payment.
What are closing costs?
Closing costs are a collection of fees charged by those involved with the home sale (such as your lender for processing the loan, the title company for handling the paperwork, appraisal fees, local government offices for recording the deed, etc.). Ask your lender what you can expect your closing costs to be. Also discuss with your lender if you have the funds available to cover all of your closing costs. If not, how much can you ask the seller to chip in?
I’m feeling informed! How do I calculate what I can afford?
To calculate closing cost, mortgage payments, etc. here’s a nifty calculator for you: http://www.myfico.com/loancenter/mortgage/calculators/default.aspx
As always, it’s best to discuss these items with your lender and your real estate agent. But before you begin looking at houses, talk with your loan officer and look at to what you can realistically afford and then discuss your housing needs with your Realtor (believe it or not, we do need to know your price range and loan product). There are combinations of the loans above, but this is basic for you to know when starting the loan pre approval process.
And finally, we’ve said it before and we’ll say it again; we ALWAYS recommend using a local lender! A home is easily the largest financial and largest emotional purchase of your life, why leave it to someone behind a 1-800 number you saw on TV? Trust us when we say you WILL have questions and you will feel so much more at ease if you can sit down, face to face, with your lender to talk about your questions!
What type of loan did you get? What advice do you have? We’d love to hear your comments below.