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HOW TO PICK THE BEST MORTGAGE FOR YOU
A home is probably one of the most significant purchases you’ll ever make. How you choose to finance this investment is an important decision. Many types of mortgages are available, and they’re made up of different components — from the interest rate to the loan length to the lender. This guide covers the basics, such as options, features, and home loan costs. Please reach out if you have any questions; I am always here to help! Angela Mangus 843·994·3609 Angela@tmg-charleston.com TMG-Charleston.com The Matthews Group | Coldwell Banker Realty
BASIC LENDER GUIDELINES
The monthly mortgage payment should not exceed 28% of the buyer’s gross income.
The buyer’s total debt payments should not exceed 36% of the buyer’s gross income.
MORTGAGE TERMS
CLOSING COSTS Also known as settlement costs. These expenses (estimate about 3% of the loan) are in addition to the down payment. These fees vary based on the type of loan and your lender and closing attorney fees.
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POINTS When you buy points, you’re paying more upfront in exchange for a lower interest rate, which means you pay less over time. Each point equals 1% of the mortgage.
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ADJUSTABLE-RATE MORTGAGE (ARM)
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DEBT-TO-INCOME RATIO the ratio of monthly liabilities and housing expenses divided by the monthly gross income of the borrower.
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A mortgage with a variable interest rate, which can go up or down with the federal funds rate. There are three different kind of interest rate caps – initial, subsequent, or lifetime.
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WHAT IS A CONVENTIONAL LOAN?
Conventional loans are the most common, accounting for over 75% of all home loans. These are not insured or guaranteed by the government. Instead, they are backed by private lenders such as banks and credit unions. These are broken down into conforming and nonconforming loans, depending on whether or not they conform to guidelines set by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac),
Lenders look for a credit score of 660 but may accept scores as low as 620. ome lenders offer up to 100% financing, but with anything lower than a 20% downpayment, buyers are required to pay private mortgage insurance (PMI).
Repayment terms are usually 30 years but can also be 15 or 20.
Interest rates can be fixed or adjustable. Higher credit scores result in lower interest rates.
KELLI HIGGINS
785-817-9255 WWW ELEVATEDAGENT CO TMG-CHARLESTON.COM
CONVENTIONAL LOAN BENEFITS
FAST LOAN PROCESSING
REDUCED PMI
VARIOUS TERM LENGTHS
LOW INTEREST RATES
DOWN PAYMENT OPTIONS
Conventional mortgage borrowers typically make larger down payments than FHA borrowers, and they tend to have a more secure financial standing and are less likely to default. A larger down payment means lower monthly payments. Plus, with the ever-increasing mortgage insurance premiums on FHA loans, payments for conventional loans that don’t require private mortgage insurance can be much more manageable. In addition, with a conventional loan, you can cancel your mortgage insurance when the principal loan balance drops to 78% of the home’s value. FHA loans charge mortgage insurance premiums for the life of the loan.
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WHAT IS A FHA LOAN? An FHA loan is a type of loan from the Federal Housing Association for first-time buyers and folks who might have difficulty getting approved for a conventional mortgage when buying a home. Allowing down payments as low as 3.5% with a 580 FICO, FHA loans are helpful for buyers with limited savings or lower credit scores.
To get an FHA loan, you’d have to work with an FHA-approved lender, which could be a bank, credit union, or mortgage company. Then, the FHA guarantees the loan, so your lender doesn’t lose money. To qualify for an FHA loan, you must satisfy several requirements, and lenders may have additional stipulations. Simply put, we don’t recommend FHA loans because they’re one of the most expensive types of mortgages. You might not realize this if you only look at how much money the FHA "saves" you on the front end. But if you want to win with money, consider total cost.
The problem is that an FHA loan can ultimately cost thousands more.
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Credit score The minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can still qualify for an FHA loan, but you'll need to make a larger down payment.
Down payment funds If you've got a credit score of 580 or higher, your FHA down payment can be as low as 3.5%. A credit score between 500 and 579 means you must plunk down 10% of the purchase price.The good news? It doesn't all have to come from savings. You can use gift money for your FHA down payment, so long as the donor provides a letter with their contact information, their relationship to you, the amount of the gift, and a statement that no repayment is expected.
Debt-to-income ratio (DTI) The FHA requires a DTI of less than 50, meaning your total monthly debt payments can't exceed 50% of your pretax income. This includes debts that you aren't actively paying. For student loans in deferment, your FHA loan underwriter will include 1% of the loan's total as the monthly payment amount. For other types of loans you aren't currently repaying, underwriters will use 5% of the total to calculate your DTI.
FHA LOAN BENEFITS
LOW CREDIT SCORE
HELP IN AVOIDING FORECLOSURE
VARIOUS TERM LENGTHS
CLOSING COSTS
DOWN PAYMENTS AS LOW AS 3.5%
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WHAT IS A VA LOAN? A VA loan is a mortgage loan issued by private lenders and backed by the U.S. Department of Veterans Affairs. It helps U.S. veterans, active duty members, and widowed military spouses buy homes. This type of loan is an attractive option because it doesn’t require a down payment.
VA LOAN REQUIREMENTS
Military personnel must meet the VA's specific service requirements to get this loan when you're looking to buy a home.
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You’re an active duty service member or an honorably discharged veteran with 90 consecutive days of active service during wartime or 181 days during peacetime. You have served over six years in the National Guard or the Selected Reserve. You’re the spouse of a service member who died in the line of duty.
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If you were to go through the application process, you would need a Certificate of Eligibility (COE) to show mortgage lenders that you qualify for a VA loan. You can apply for a COE through the VA website, by mail, or through your lender.
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VA LOAN BENEFITS
NO PREPAYMENT PENALTY
MINIMUM CREDIT SCORE
NO PMI
NO BORROW LIMITS
NO DOWN PAYMENT
While a VA mortgage's qualifying requirements are more relaxed than a conventional loan, an applicant still needs decent credit and sufficient income to buy a home. And the home being financed must serve as the primary residence. Credit score requirements The VA doesn’t set a minimum credit score to qualify for a loan. Instead, it requires a lender “to review the entire loan profile to make a lending decision,” according to the VA. VA loan debt-to-income ratio The VA also doesn't specify a maximum debt-to-income ratio. But if the total debt-to-income ratio is over 41%, lenders must provide proof of an applicant’s ability to repay the loan. Down payment requirements Under most circumstances, you don't need to make a down payment. However, if the home's purchase price is greater than its appraised value, you may have to make up at least a portion of the difference.
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ADDITIONAL LOAN TYPES
HOME EQUITY CONVERSION LOAN Homeowners 62 and older who are buying a primary residence may qualify for this loan. Specific requirements must be met. While there are no monthly payments, the loan balance increases each month. The homeowner or heirs must pay back the loan, usually with the sale of the home. JUMBO LOANS A jumbo loan is a mortgage used to finance properties that exceed the maximum conventional conforming loan for the area. The Federal Housing Finance Agency (FHFA) determines the maximum amounts. HELOC A home equity line of credit, or HELOC, is a second mortgage that gives you access to cash based on home equity. Equity is the difference between the appraised value and what is owed on the property. This loan can be used to purchase a new property before selling.
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LENDERS
Chip Parker, Parker Lending 843-352-7915 | mobile: 843-906-1982 chip@parker-lending.com parker-lending.com | charlestonhomeloansolutions.com
Elizabeth Curry, Guaranteed Rate Affinity 843-942-6458 | mobile: 843-906-6458
Elizabeth.curry@grarate.com grarate.com/elizabethcurry
Todd Stillwagon, Guaranteed Rate Affinity mobile: 813-810-7812
todd.stillwagon@grarate.com grarate.com/toddstillwagon
Scott Fischer, NFM Lending mobile: 843-708-5539 sfischer@nfmlending.com nfmlending.com/sfischer
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ADDITIONAL RESOURCE Consumer Financial Protection Bureau Buying a house: Tools and resources for homebuyers
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