Financing Options
There are numerous financing options available for purchasing a home. 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 are as well. 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.
Interest Only - With this type of loan you are only paying the interest, no
principle. Great for
getting started with a low payment. You want to make sure you have a plan to refinance within 3-5 years so
you can get into a loan that will actually start reducing the overall amount owed (principle). The risk with
this loan is if the housing market does not appreciate you can end of "stuck" and unable to refinance until it
does appreciate.
Pick A Payment - This type of loan gives you the option, each month to decide how much payment you
want to make. Options are:
- Minimum - less than full interest, so unpaid interest is added to the overall loan balance, causing your loan balance to increase.
- Interest Only - You pay only the interest for the month, no principle so your loan balance does not decrease
- 30 Year Payment - Pays interest and
principle on a plan to pay off the loan in 30 years.
- 15 Year Payment - Pays interest and
principle on a plan to pay off the loan in 15 years.
The big risk with this loan is it's easy to get "caught" into only paying the minimum payment, causing your
loan balance to increase. If your home isn't appreciating faster than the balance is increasing you could be in
lots of trouble when you want to sell or refinance. On the other hand, you can see this loan gives you lots of
flexibility.
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 97% of the purchase price,
leaving only a 3% downpayment requirement. Using downpayment assistance programs allows someone other than the buyer
to pay the 3% downpayment, making it much easier for first time buyers to get into a home. Right now there is a lot
of turmoil in the industry over downpayment assistance programs. HUD tried to ban all but the one they support, but
a federal judge put a hold on the ban until it can be decided in court.
Jumbo Loan - A loan with a value over $417,000. These loans typically carry a higher interest rate.
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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