Hi there, home-buying hopeful! We are covering the 10 Things Every Aspiring Homeowner Needs to Know. So far, we’ve discussed:
- Whether you should really be buying, or if you should stick with renting
- What your credit situation looks like to lenders
- How much house you can afford
- How to pick a realtor, or if you should do it yourself
- How to pick a lender, and whether you need to get pre-qualified
Next, you need to figure out what type of mortgage is right for you. We talked to two experts, Casey Fleming, Mortgage Advisor (NMLS 344375) and author of “The Loan Guide: How to Get the Best Possible Mortgage” and Tim Secor, Licensed Loan Officer (NMLS 793567), to help you navigate the wild world of mortgages.
Both Mr. Fleming and Mr. Secor cautioned that the below is general advice, and you should talk to your mortgage loan officer and assess your financial plan before taking out a mortgage.
There are generally three major types of mortgages: government-sponsored (like Veterans Affairs loans), fixed-rate, and adjustable-rate.
Government-sponsored programs are usually the most difficult to qualify for, but can also offer some attractive benefits.
If you are active military or retired military, you may qualify for a Veterans Affairs loan.
These are different from conventional loans. With a VA loan, you can finance 100% of the loan (although you would usually want to put 10 to 20% down). Additionally, you can get the VA funding fee waived if you are disabled.
The rates for this type of loan are usually lower than conventional loans, and there is no Private Mortgage Insurance (PMI). According to Mr. Secor, there is a ton of paperwork, and it takes longer to approve, but a VA loan could be a good fit for active or retired military. Mr. Secor recommends that you contact your local VA office to see if you qualify for VA benefits before applying for a VA loan.
Mr. Secor says another popular government-sponsored mortgage program, especially for first-time home buyers, are Federal Housing Administration (or FHA) loans.
There are several advantages that an FHA loan can offer:
- Easier to qualify for than conventional loans
- Lower minimum down payment (3.5%)
There are also some disadvantages to FHA loans:
- FHA Mortgage Insurance is higher than conventional loan Private Mortgage Insurance
- FHA Mortgage Insurance won’t drop off once you get to 80% equity, as it would for a conventional loan; it is for the life of the loan. You would have to refinance in order to get rid of the FHA Mortgage Insurance.
Fixed-rate loans come in many different varieties, with the most popular being the 30-year loan and the 15-year loan. You can also have loans through FHA (covered in the section above) or directly through a bank (conventional loan).
A fixed-rate loan is just as the name suggests — you will have the same rate throughout the life of the loan. Be sure to watch out for any loan that has a balloon payment, which is where you would have a fixed payment until the very end of the loan. At that time, you would have a large sum of money due all at once.
Mr. Fleming says the 30-year fixed loan is a good choice if you want to be conservative, and hope to keep your monthly payment as low as possible. So if you’re a first-time home-buyer, a dual-income couple with one spouse who plans to stop working, or someone that is going to buy and rent out part of the home, a 30-year fixed-rate mortgage could be a good fit for you.
Mr. Fleming explains that a 15-year fixed loan is good for a second- or third-time home-buyer, or a first-time home-buyer who has a more significant down payment. He cautions that you should make sure you can cover the higher payment while keeping your emergency fund intact. A 15-year fixed loan may be good for a couple with dual income, since it’s usually unlikely that both spouses would lose their jobs at the same time.
If you are debating between a 30-year mortgage and a 15-year mortgage, here are a few tips to keep in mind:
- With a 15-year mortgage, you will immediately see more of the payment go toward the paydown of principal. You can also usually get a lower interest rate on a 15-year mortgage.
- With a 30-year mortgage, you will have more flexibility because you have a lower payment. If you wanted to pay more toward the mortgage, you could always make extra principal payments.
If you want to compare your monthly payment and the principal payoff between the two loan terms, check out this calculator from Dinkytown.
An adjustable-rate mortgage is one where the rate can change over the life of the loan. Mr. Fleming says that you could consider an adjustable-rate mortgage if you have a short time horizon and can handle the risk.
“Do NOT use an adjustable-rate mortgage to qualify for a higher amount, because when it adjusts, you will not be able to afford the higher payment,” says Mr. Fleming. “Have a plan! Either pay more than the minimum, refinance before it starts adjusting, or have the funds to pay it off if needed.”
You can and should get more than one quote on a mortgage. Be sure to request a good faith estimate, which breaks down all the fees involved in the mortgage transaction.
Mr. Fleming suggests that you also ask for a good faith estimate worksheet. Not all lenders are required to provide it, but he says this is the best way to get an apples-to-apples comparison of the fees associated with each lender.
Mr. Fleming also advises, “If there is anything in your profile that someone might interpret differently than you do (like commissions,bonuses, or other variable income), then it is really wise to get a manual underwrite.”
A manual underwrite is pre-approval taken a step further, where a human underwriter looks over everything to make a determination.
The U.S. Department of Housing and Urban Development (HUD) has a good checklist to use for comparing lenders. Mr. Fleming’s website offers spreadsheets and calculators to address questions, such as “How Do Extra Payments Impact My Lifetime Loan Costs?”
“It may take longer than you think to get the loan. Keep in mind that you are asking someone to lend you more money than you’ve probably ever borrowed,” Mr. Fleming advises.
“Just keep in mind what you are trying to get to and what can you afford, and go from there,” says Mr. Secor.
Stay tuned for the final installment of 10 Things Every Aspiring Homeowner Needs to Know. You’ll learn what goes into an offer, what happens at closing, and whether you should pay for movers or do it yourself.