Your mortgage and home financing options will depend in great part upon your specific financial situation, your personal credit history, and the type of loan you are eligible. A good idea when embarking on the home purchasing process is to speak with a qualified mortgage broker beforehand and/or throughout the home hunting process. This will inform you as to your potential loan options and give you a better idea as to the kinds of properties you should be looking for. There are many different types of loans, but you should recognize that most residential mortgages will fall into two main loan categories:
Fixed Rate Mortgages
Fixed rate mortgages (FRMs) have an interest rate that is stable throughout the term of the loan (unless you refinance) and are fully Amortizing. This means the loan is designed to be completely repaid by the end of the loan term. Your monthly mortgage payments are the same every month for as long as your loan lasts (usually 15, 25, or 35 years). Fixed rate mortgages are preferred by homeowners who expect to remain in their homes for a long time. FRMs are also considered the most stable loan option, though the interest rate is somewhat higher compared to other loans.
Adjustable Rate Mortgages
Adjustable rate mortgages (ARMs) have an interest rate that is adjustable by your lender depending on a market index. Typically, this allows the lender to offer an introductory rate (often called a teaser rate) that is substantially lower than the rate on other traditional loans. After a pre-determined period of time (3, 5, or 7 years on average) the rate will become subject to fluctuation. While this means the loan has less stability compared with other loan options, it is useful for homebuyers who plan on moving after a few years or who have specific short-term goals.
How Do Lenders Determine Your Home Financing Options?
There are Jumbo loans, FHA loans, RHA loans, USDA loans, VA loans, reverse mortgages, and more. Each loan option offers different incentives, and comes with varying restrictions, qualifiers, or criteria. When applying for a loan for a specific house, your lender will first evaluate your credit history and financial situation, including your debt to income ratio. This is how much money you make in a month compared to how much you must spend paying off your debts every month. In other words, your loan options will depend on the percentage of your income you must spend on your debts (including the mortgage payments on a new home). Usually, this ratio cannot exceed 36%, but this figure may vary according to location and loan type (VA loans and FHA loans are less stringent about such ratios).
Another ratio you need to know about is the loan to value ratio. This is how much your home is worth compared to how much your loan amount is for, expressed as a percent. For example, if you take out an $80,000 loan for a $100,000 home, your loan to value ratio would be 80% (80,000/100,000). Most lenders will not approve a loan with an LTV ratio over 80%. However, there are exceptions for veterans and other qualified applicants.
This is a List of Things Your Lender Will be Looking at:
- Your finances/credit history
- The LTV ratio
- Your DTI ratio
- Your employment history
- If you are a veteran
- If you are a first-time homebuyer
- If you are a senior
- If you have declared bankruptcy
- If you have been foreclosed on in the past
- Amount of the down payment (if any)
- If you have outstanding judgments against you
- Home appraisal
- Home location
Other factors may be considered depending upon your lender and individual circumstances. The rate and loan that works best for you will depend upon personal factors that need to be discussed confidentially. We recommend you speak with a mortgage specialist you can trust to discuss your home financing options in further detail.