Property purchases usually include some kind of institutional (bank or savings and loan) financing. There are many types of financing to consider depending on your long-term financial goals.
Mortgage brokers are popular because they have relationships with multiple lenders. Mortgage brokers will search for the best loan programs with several lenders, and provide options for you, saving you time and energy.
Direct lenders (such as Wells Fargo or Bank of America) may be the right fit for you if you already have a relationship with a lending institution or credit union, or if the specifics of your situation call for it. Direct lenders will usually have fewer programs available to them than a mortgage broker, so you’ll be doing your own due diligence to make sure you have the program right for you.
On-line mortgage brokers are available, but I have found that often times these brokerages are not local, nor familiar with our real estate market.
My recommendation will always be to work with a local broker or direct lender that you can meet in person. If you need a few referrals, let me know.
Brokers and lenders will look at various financial information to get the best snap shot they can of your financial picture. This will help them establish you as a credit risk and how much of a risk (the amount they will loan you) they will take. They will look at such things as:
- income, including documentation about additional income such as alimony, child support, or pension
- late payments
- bankruptcies or foreclosures
- your work situation, length of employment, and job changes
- two years tax returns
- bank statements
- source of your down payment (will this be your own money, proceeds from a stock or retirement account sale, or a gift from family)
- reserves and retirement plans
- credit report and FICO score
Types of Financing
Adjustable Rate Mortgage (ARM)-have a mortgage interest rate that changes over the life of the loan, usually tied to an index and can adjust as often as once a month or as little as once a year. The type of loan carries more risk to the borrower, as the interest can go up frequently over the life of the loan.
3, 5, 7, or 10-year fixed rate loans-have a fixed interest rate for a period of time usually three, five, seven or ten years, then turn into an ARM which adjusts once a year. Once the loan changes to an ARM the payments fluctuate and the loan is amortized-meaning set to pay off for the remaining duration of the loan. This type of mortgage gives borrowers a steady payment for a period of time, usually with an interest rate lower than a 30 year fixed rate mortgage. This is a good option for borrowers who plan to sell or refinance their home within 5-8 years who want some stability in their payments. Some of these loans also offer an interest only option, meaning that no principal is paid on the loan for a period of time.
Fixed Rate Mortgage-has a fixed mortgage payment for the loan’s entire duration-usually 30 years. A portion of the mortgage payment goes to interest and the other to principal (the amount borrowed). Payment to principal is smaller in the earlier years, and increases over time.
You’ll hear the term ‘loan limits’ as you talk more and more about financing. There are three types of loan limits: conforming, super-conforming and jumbo. This is important, because the government buys loans in the secondary market, which puts more money back into lenders’ pockets to lend out even more money. The government has limits on the size loans they will buy, so they will only buy conforming and super-conforming loans. The loans that fall outside these categories are jumbo loans.
The conforming loan limit is a permanent limit (subject to change by the government) and the super-conforming limit is temporary, based on median income in a region. Interest rate pricing for the conforming loan limit is generally the lowest of the three.
Jumbo loans are financed through private investors, and not eligible to be purchased in the secondary market. When financing tightens, it’s generally in this category, as there may be fewer investors willing to risk their money to people borrowing money at this level. Pricing for this financing is generally higher than it is with conforming.
Questions to Ask Your Lender or Mortgage Broker
- What loan programs and options are available to me?
- Will my loan be Conforming, Super-conforming, or Jumbo?
- What type of loan is available to me? Adjustable, Fixed, or a hybrid?
- What loan program would be best for my situation?
- So I qualify for any special programs such as Below Market Rate Units, Mortgage Credit Certificate Programs, Mayor’s Office of Housing Programs, or FHA programs?
- Will private mortgage insurance be required in my loan? How much will it cost?
- How long is the approval process?
- What information is necessary to get my approval?
- What documents are necessary from me to approve my loan?
- How much will be closing costs be? What will they include?
- How much are your fees, and who pays them?
- How much is a loan lock, and how long is it good for?
- If rates go down during the escrow period, will I be able lower my rate?
- How long will it take to close my loan?
- Is there are prepayment penalty on my loan?
- How long?
- How much will the penalty cost if I pay my loan off early?
- Who will service my loan?
Finding the right financing for you does not have one answer; there are many different options which may work for your situation. The above is broad in scope, and may not cover your specific situation; please consult a mortgage broker and/or accountant to help you in your financing goals.