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Understanding the Different Types of Mortgage Loans

July 12, 2018 By JMcHood

Applying for a mortgage loan can be overwhelming. As lenders throw different terms at you, it’s easy for you to get confused. Before you even shop for a mortgage, you should know the type of loans available so that you can make the right choice for you before you even shop for a home.

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Below we discuss the various options available for you to learn the options that may be available to you.

Conventional Loans, Government-Backed Loans, and Subprime Loans

First, let’s consider the type of mortgage you should consider. The most common options are conventional and government-backed loans. If you don’t meet the requirements of either type of these loans, you can opt for a subprime loan.

Conventional loans are loans sold to Fannie Mae and Freddie Mac. They are your ‘general loans,’ that most lenders offer. Typically, you have to have good credit, low debt ratios, and a decent down payment to qualify for this program. In other words, the requirements are the toughest for these programs.

You’ll need at least a 5% down payment for these loans. If you do opt to put down less than 20% on the home, expect to pay Private Mortgage Insurance until you owe less than 80% of the home’s value. If you do put less than 20% down on the home, lenders tend to be a little more cautious about your credit scores and debt ratios, as you pose a higher risk with a higher LTV.

Government-backed loans are those backed by a government agency. The options include FHA, VA, and USDA loans.

  • FHA loans – FHA loans are backed by the Federal Housing Authority. With a 580 credit score, 31% housing ratio, 43% total debt ratio, and 3.5% down on the home, you may be a good candidate for this program. You don’t have to be a first-time homebuyer to secure this loan program, as many people believe. Note that you will pay an upfront mortgage insurance premium plus mortgage insurance for the life of the loan, no matter your LTV.
  • VA loans – Veterans that served at least 90 days during wartime and 181 days during peacetime may be eligible for a VA loan as long as they had an honorable discharge. This loan program doesn’t require a down payment. It also has flexible underwriting guidelines, allowing credit scores as low as 620 and debt ratios as high as 43%. The largest qualifying factor is the need to meet the VA’s disposable income requirements based on your location and family size. You will not pay any mortgage insurance for this loan.
  • USDA loans – Low to moderate-income families that don’t qualify for any other mortgage program may qualify for the USDA loan. The catch is that you have to buy a home in a rural area. The USDA is liberal with their rural boundaries, though. The USDA requires a 640 credit score; 29% housing ratio, and 41% total debt ratio. You will pay an upfront mortgage insurance fee as well as annual insurance for the life of the USDA loan.

Subprime loans are those that don’t fit in the conventional or government-backed loan programs. These loans are provided and held by private lenders. They don’t sell them on the secondary market. This allows the lender to set their own requirements, which may provide you with more options for qualifying. For example, some lenders allow the use of bank statements rather than tax returns for self-employed borrowers. This gives self-employed borrowers a greater chance of qualifying for the loan. Subprime lenders may also allow lower credit scores, higher debt ratios, or make other exceptions that conventional and government-backed lenders cannot provide.

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Jumbo Loans

Finally, if you need a loan amount that exceeds the standard conforming limit, you will need a jumbo loan. This year, these loans exceed $453,100. These loans usually have stricter guidelines than even conventional loans require because of the higher risk of the high loan amount.

You should expect to need a great credit score, low debt ratio, and a large down payment. The requirements will vary by lender, though, so make sure you shop around.

Fixed Rate and Adjustable Rate Loans

Once you determine the type of loan you need/want, you’ll need to look at the type of interest rate you can choose. You’ll hear lenders talk about fixed interest rates and adjustable interest rates.

Fixed interest rates are fixed for the life of the loan. The rate you get at the closing is the rate you keep as long as you keep the loan. It doesn’t matter what happens in the market – your rate never changes. You can usually opt for a fixed rate between 15 and 30 years, but the exact term depends on your qualifying factors and what the lender offers.

Fixed interest rates offer predictability. They never change, so you can always budget for your payment. The downside, though, is if you take the mortgage during a period of higher interest rates, you are stuck with that rate for the life of the loan.

Adjustable rate loans are fixed for a short period and then they adjust, usually on an annual basis. You can usually lock in the ‘introductory rate’ for 3 to 10 years. After that point, the rate is based on the chosen market index of the lender plus the predetermined margin.

The benefit of the ARM loan is the lower interest rate you get for the first few years. This rate is usually lower than the fixed interest rates at the time, allowing you to save money on interest for a few years. The downside is that you cannot predict what interest rates will do in the future, so you don’t know what your payment will be in the future.

Choosing the right loan program is important as it will determine your ability to qualify for the loan as well as afford the payments. Make sure you exhaust all of your loan options and compare them side-by-side so that you can determine the best option for you.

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How to Get a Bigger Mortgage Even If Your Income Is Low

May 3, 2018 By JMcHood

Do you have what you consider ‘low income?’ Are you concerned that you won’t be able to secure the size loan you need to buy your dream home? Before you let go of those dreams, learn how you can get a bigger mortgage than you thought even if you have low income.

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Lenders look at the big picture when determining your eligibility for a home loan. They don’t focus just on your credit score or just on your income, for example. Instead, they take every piece of the puzzle and put it together. They look and see if any of your negative factors are outweighed by positive factors. Then they make a decision on your loan application.

So how do you get that bigger mortgage that you wanted? Keep reading to learn the secrets.

Watch Your Credit Score

If you are worried about what a lender will think of your mortgage application, spruce up your credit now, before you apply. This is their first impression of you. They look at your score before they evaluate anything else. They do this because the credit score tells them a lot about you. A great credit score means you are financially responsible and worth taking the time to evaluate. A bad credit score means you aren’t financially responsible and may not be worth the risk.

If you know you have low income, it’s time to work on that credit. Bring all of your accounts current and minimize the amount of outstanding credit card debt. Avoid applying for any new credit during the first few months leading up to your mortgage application, and don’t close any revolving credit accounts during that time either.

These habits will help your credit score improve, hopefully in time for you to apply for the mortgage you need.

Watch Your Debt Ratio

This is a big one if you have low income. The lender will pay close attention to your debt ratio because they need to make sure you can afford the loan payments. The lender will focus on your housing ratio (the amount of your gross monthly income that the housing payment would take). They will also focus on your total debt ratio too, though. The total debt ratio is the combination of all of your monthly debts including the new mortgage payment compared to your gross monthly income.

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It’s safe to say that the lower your debt ratio, the greater your likelihood of getting the bigger mortgage. Of course, you can only secure a mortgage that fits within the housing ratio a lender allows. But different programs have different debt ratio requirements. If your DTI is high, you may want to consider the FHA loan. They have the most forgiving debt ratios.

FHA loans allow a front-end ratio of 31% and a back-end ratio of 43%. This is as about as forgiving as it gets, unless you are a veteran and are eligible for VA financing. Because the FHA has the most flexible guidelines, many borrowers turn to this program, and not just first-time homebuyers.

Apply for a Guaranteed Loan

The US government has several mortgage programs that are ‘guaranteed.’ The FHA loan is one, as is the VA loan and the USDA loan.

The FHA loan, as we discussed above, has the most flexible guidelines. It also has the guarantee of the FHA. They will pay the lender back a portion of the funds the lender loses should you default on your loan. This allows lenders to accept riskier qualifying factors, including a higher debt ratio from an applicant with low income.

The VA loan is for veterans that served enough time in the military. If you are eligible for the program, the VA gives the lender their guarantee should you default. The VA guarantees 25% of the loan amount the lender is stuck with if you default on your loan. This is how VA lenders are able to provide you with 100% financing and flexible qualifying guidelines.

The USDA loan is for borrowers that live in a rural area and whose total household income doesn’t exceed 115% of the median income for the area. The USDA guarantees these loans for lenders as well, giving lenders a little flexibility when providing you with a loan even if you have low income.

Your best bet when applying for a mortgage if you have low income is to make sure you have good qualifying factors first. Then you can start shopping for a loan, outside of the conventional guidelines. Conventional loans have the strictest requirements and are harder for borrowers with low income. Instead, sticking to government-backed loans can provide you with the greatest results.

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Any mortgage product that a lender may offer you will carry fees or costs including closing costs, origination points, and/or refinancing fees. In many instances, fees or costs can amount to several thousand dollars and can be due upon the origination of the mortgage credit product.

When applying for a mortgage credit product, lenders will commonly require you to provide a valid social security number and submit to a credit check . Consumers who do not have the minimum acceptable credit required by the lender are unlikely to be approved for mortgage refinancing.

Minimum credit ratings may vary according to lender and mortgage product. In the event that you do not qualify for a credit rating based on the required minimum credit rating, a lender may or may not introduce you to a credit counseling service or credit improvement company who may or may not be able to assist you with improving your credit for a fee.

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