Financing Options
There are several financing options available for purchasing a home, although not near as many as there used to be. Typically there are more options available for buyers who have W2 income jobs (you get a regular paycheck and your employer gives you a W2 form for taxes). But there are options for the self employed buyers as well. In either case, the higher your credit score the broader your options. Typically a mortgage broker will have more options available than a mortgage banker, but the mortgage bankers fees are usually less. If your credit score is under 600 your only option may be a mortgage broker.
ARMs - Adjustable Rate Mortgages are a great way to get in with a lower payment and get started. Depending on the ARM, they typically have a new interest rate each year, usually the first 5 years, which causes the payment to go up at each of these points. The mistake people make with these loans is not understanding the payment increases and worse yet, not planning for them. ARMs have been one of the big "blames" for many people losing their houses.
Fixed Rate Mortgage - A loan in which the interest rate does not change over the course of the loan. This is the most common and "understood" loan on the market. You usually hear it referred to as a 30-year fixed rate loan. This means the payments are based on a repayment schedule of 30 years. 15-year fixed rate loans are probably the next most common. Some places will do a 20-year and now there are places starting to offer 40-year fixed rate loans.
FHA - A loan guaranteed by the Federal Housing Authority. A great loan for first time buyers. This loan does not look at your credit score like other loans, but at your credit worthiness. Things like paying your utilities, phone bill and rent can all be used to show credit worthiness. An FHA loan can be taken to 96.5% of the purchase price, leaving only a 3.5% downpayment requirement.
Down Payment Assistance - There are still some down payment assistance programs around, although in most cases you will be required to pay the assitance money back. Various Citys and Counties have programs, as well as a more national program called CHFA. These programs tend to run out of funding, often, so can be hard to come by. But for first time buyer, with limited funds on hand, they can be a good option to get you out of being locked into the Rental Market.
Conforming - A loan that conforms to federal lending standards. Since it conforms to lending standards the interest rate is typically lower than other loans. The borrower in this case has good credit, good documentation of income and a low debt to income ratio.
Non-Conforming - A loan that does not conform to federal lending standards. Since it does not conform to lending standards, which means it is a riskier loan, they typically have a higher interest rate than other loans. The borrower in this case has something that does not conform to the federal lending standards, such as low credit score, maybe self employed without good tax records, etc.
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