Monday, August 5, 2013

Understanding the mortgage process

The U.S. housing market is in recovery. Home sales are rising and home prices are, too.
If you're among the many people planning to buy a home this year, be sure to understand the actual process of it all -- especially with respect to your mortgage.
Understanding the mortgage process can help you save money on your home purchase, and on your monthly payments.

First, Select Your Mortgage Amount

For today's home buyers, there are multiple types of home loans available. A mortgage lender can offer you guidance, but it will be your responsibility to choose the most suitable mortgage program for your long- and short-term needs.
The first area in which to focus is "loan size"; how much money you'll want to borrow.
Mortgage lenders use formulas to calculate how large of a mortgage you can afford to give. The formulas take into account your monthly expenses, your gross income, and your asset base, and other inputs.
It should be noted, though, that a lender's "maximum loan size formula" won't tell you how much you should borrow from the bank -- rather, it will just tell you how much you can borrow from the bank.
Know your financial situation, so you can choose a mortgage loan size that works best for you. Banks may opt to lend you more money than you deem sensible.

Next, Consider All Mortgage "Types"

The most common mortgage type is the conventional 30-year fixed rate mortgage. A "conventional mortgage" is one which is backed by Fannie Mae or Freddie Mac, and which is typically within the local jumbo loan limit for your area.
Conventional mortgage loan limits begin at $417,000 and range up to $625,500, depending on where the subject property is located. You can lookup your area's jumbo loan limits here.
However, conventional mortgages aren't one-size-fits-all and other mortgage types exist to meet home buyer needs. Among the most popular of the non-conventional mortgages is the FHA loan.
FHA loans are loans insured by the Federal Housing Administration, but offered by traditional mortgage lenders. FHA mortgages provide comparable mortgage rates and terms versus conventional financing, and have become popular as a result of lenient approval standards and low down payment requirements.
For example, the FHA requires just a 3.5% down payment on most purchases; and its pricing can be more aggressive for home buyers whose FICO scores are below 740.
Another non-conventional loan type is the VA loan, offered by the Department of Veterans Affairs. VA loans are available to military borrowers and require no down payment whatsoever.
There is also the Conventional 97 program -- a 3% down payment program available via Fannie Mae, and which allows for the use of gift funds from family or related persons.
Overall, there are more than half-dozen loan "types" from which a home buyer can choose. Understand your options and you'll make a better choice.

Then, Consider All Mortgage Loan Products

Mortgage products come in many varieties, and there is usually a "best fit" given your financial needs.
For example, adjustable-rate mortgages (ARM) typically offer lower rates for an initial set period, and then fluctuate to meet current market conditions. If you plan to live in your new home for a finite number of years, therefore, the designated low-introductory rate period offered by an ARM may be worthwhile.
ARM’s are offered with initial teaser rates lasting three, five, and seven years, typically. There are 10-year ARM’s, too.
By contrast, fixed-rate mortgages maintain the same interest rate for the life of the loan, which allows a homeowner to budget and plan payments along a very long time frame. Fixed-rate mortgages are offered in 10, 15, 20, 25 and 30 year terms, with the 15-year and 30-year terms most common among buyers.
This is because the 15-year fixed rate mortgage and 30-year fixed rate mortgage tend to offer the lowest rates relative to other fixed-rate products.
When choosing between an adjustable-rate mortgage and fixed-rate one, consider current market conditions, plus the length of time you plan to live in the home.

Lastly, Mind Your Credit Score

Your credit score will play a large role in determining which mortgage product best suits you, and the mortgage rate for which you'll ultimately qualify.
If you don't have perfect credit, you can work on improving your credit score prior to applying for a home loan. High credit scores will help you get access to additional mortgage options as compared to a person with low credit scores; and will often grant you more aggressive mortgage rates.
Two quick ways to improve your credit score? One, spend responsibly; and, two, pay bills on time. These two factors account for 65% of your credit score.
In addition, be sure to receive a free copy of your credit report in order to check for errors or inaccuracies. If you find any, have them fixed immediately.

Know How Much Home You Can Afford

When you're planning out your mortgage, there's a lot of good research online. Mortgage calculators, expert insight and plug-and-play formulas can help you do your legwork.
Then, when you're ready to get real interest rates, you can do that for free online, too -- just ask for one. 

To receive personalized rates please email me at with your available times to discuss your options.