Shopping For a Loan
The task of obtaining a loan is never an easy one. It may be further complicated if you have a limited credit or employment history, or rely on public benefits as income. It is still possible for you to obtain the financing to buy a house. By now, you and your planning team have probably done some work in this area. If you requested a credit report or gathered documentation regarding your nontraditional credit history, you can be even more confident as you begin to shop for a mortgage.
You may have already been pre-qualified for a loan. If you haven’t done this, now is the time to take care of this step in the process. As we discussed in Chapter One, pre-qualification involves sitting down with a lender and discussing how much you can afford to pay for a mortgage based on all of your income and expenses.
If you have not done so, now is the time to find out which lenders in your area are offering flexible mortgages. For assistance, contact Fannie Mae HomePath Services at 1-800-7FANNIE (or 1-800-732-6643), a Home of Your Own coalition in your area, or the National Home of Your Own Alliance at 1-800-220-8770.
There are various sources for obtaining mortgages:
As you begin to search for a mortgage, you may want to check with the bank where you have a checking or savings account. Ask if they offer home mortgages. If they do, would they be willing to consider a mortgage adapted to your needs, such as a twice-monthly payment schedule? If you are a member of a federal credit union, determine whether it offers home mortgages. As we discussed earlier, because you may not have a traditional credit, borrowing, or employment history, you may find that your options are limited to only one or two lenders.
Your real estate agent may be aware of the lenders in your area that offer the best terms. If friends, family members, or co-workers have recently purchased homes, ask them where they obtained their mortgages. Talk with the members of your planning team to see if anyone has a contact that may be helpful. Another option is to seek the services of a mortgage broker. The broker’s job is to take your application and shop for the best loan terms available from various lenders around the country. Be aware, however, there will probably be a fee involved with this type of arrangement.
The real estate section in your local newspaper may list a weekly comparison of mortgage rates. In addition, there may be a mortgage rate hotline available in your area. Check the Yellow Pages under "Mortgages."
Understanding the language
Terminology
Lenders and others in the industry use a variety of loan terms that may be unfamiliar to many people. The following brief review may be helpful to you and your planning group. A complete glossary of terms can be found as an appendix in the back of the book.
Adjustable Rate Mortgage (ARM). A mortgage that permits the lender to adjust its interest rate periodically on the basis of changes in a specified index.
Annual Percentage Rate (APR). The total cost of a mortgage stated as a yearly rate; includes such items as the base interest rate, loan origination fee (points), commitment fees, prepaid interest, and other credit costs that may be paid by the borrower.
Closing. A meeting to finalize the sale of property by delivery of a deed from seller to buyer. The buyer signs the mortgage documents and pays the closing costs. This meeting is also called a "settlement."
Convertible ARM. An adjustable-rate mortgage that can be converted to a fixed-rate mortgage under specified conditions.
Escrow. The holding of documents and money by a neutral third party prior to closing; also an account held by the lender into which a homeowner deposits money for taxes and insurance.
Fixed-rate mortgage (15, 20, 25, or 30 years). The interest rate on the mortgage loan remains the same for the entire term of the mortgage - 15, 20, 25, or 30 years. Your mortgage payment could increase or decrease, however, if your property taxes or insurance rates increase or decrease.
Graduated payment mortgage. A mortgage that starts with low monthly payments and increases at a predetermined rate for a specified time.
Interest. The fee charged for borrowing money. Interest rates can change from day to day and can vary between different lenders and different type of loans.
Interest rate cap. A provision of an ARM limiting how much interest rates may increase per adjustment period or over the life of a mortgage.
Lease-Purchase Mortgage Loan. A mortgage product that allows low- and moderate-income home buyers to lease a home from a non-profit organization, or private seller, with an option to buy. Each month's rent payment consists of an amount sufficient to cover the PITI payments on the first mortgage, plus an extra amount earmarked for deposit to a savings account where money for a down payment accumulates.
Lifetime cap. A provision of an ARM that limits how high the interest rate on the loan may be at any point over the life of the loan.
Loan term. The length of time you have to pay back the loan. Most mortgages are paid back over 15 to 30 years. First-time home buyers usually request the longest possible mortgage term in order to have the lowest monthly payment.
Loan-to-value percentage (LTV). The relationship between the unpaid principal balance of the mortgage and the appraised value (or sales price if it is lower) of the property. Typically, the difference is expressed as a percentage of the amount the lender is willing to lend. For example, a 95 percent loan-to-value ratio means that the lender will not lend more than 95 percent of an appraiser’s estimate of the value of the house, or the sale price, whichever is lower.
Mortgage. A legal document that pledges a property to the lender as security for repayment of a loan.
Mortgage broker. An individual or company that, for a fee, acts as intermediary between borrowers and lenders.
Owner financing. A property purchase transaction in which the property seller provides all or part of the financing.
PITI. Stands for principal, interest, taxes, and insurance--the components of a monthly mortgage payment.
PMI (Private mortgage insurance). Insurance paid for by borrowers that protects the lender against loss if a borrower fails to repay the loan.
Points. A one-time fee charged by the lender to increase the amount of yield for the lender on the loan; a point is 1 percent of the amount of the mortgage. Some lenders will charge one point to originate or start your loan. Paying extra points at closing can reduce your interest rate for the life of your loan. Points are also tax-deductible.
Prepayment penalty. A fee that may be charged to a borrower who pays off a loan before it is due to be paid off.
Rate lock-in. A written agreement guaranteeing the home buyer a specified interest rate provided the loan is closed within a set period of time. The lock-in also usually specifies the number of points to be paid at closing.
Loan types
In addition to the loan terms discussed, lenders may also refer to different loan types that may be helpful to review:
Housing Finance Agency loan programs. In addition to mortgage programs that have been designed specifically for people with disabilities, there are mortgages that are geared toward first-time home buyers that could offer you the terms you need.
Fannie 97. A Fannie Mae mortgage product that requires only a 3 percent down payment from the borrower. Family members, non-profit groups, or government agencies are eligible to pay the closing costs. Two options are available--a 30-year, fixed-rate mortgage with debt-to-income ratios of 28/36, and a 25-year fixed-rate mortgage with ratios of 33/36.
State and local loan programs. Many states and communities sponsor programs to help first-time home buyers qualify for mortgages. In addition, there are programs designed to help buyers who purchase homes in "targeted areas." These areas include neighborhoods designated for improvement or revitalization. Along with local housing agencies, states offer loans that include low down payments or low interest rates to buyers who meet certain guidelines.
Rural Housing Service (RHS) loans. The Rural Housing Service offers low interest rate mortgage loans to very low- and low-income families, and market interest rate loans to moderate-income families, without requiring a down payment, in rural areas. "Rural areas" can include small towns. Check with your local USDA Rural Development office (previously known as Farmers Home Administration) or a local lender for eligibility requirements.
HUD’s Federal Housing Administration loans (FHA). With FHA insurance, you can purchase a home with a very low down payment (from 3 to 5 percent of the FHA appraisal value or of the purchase price, whichever is lower). FHA mortgages have a maximum loan limit that varies depending on the average cost of housing in a given area.
Department of Veterans Affairs loans (VA). The VA guarantee allows qualified veterans to buy a house costing up to $203,000 with no down payment. The qualification guidelines for VA loans are more relaxed than for some other types of loans. If you are a qualified veteran, this can be an attractive mortgage program. To determine whether you are eligible, check with your nearest VA regional office.