Basics of Home Loans 2015

by Teresa Larson,  Village Real Estate, Murray Utah
20+ years  real estate experience
(801) 750-5446
Jan. 13, 2015

 New year thinking of a new home? It is good to know the basics of home loans. Getting qualified for a home loan before looking is a good idea. What you can afford depends on your income, credit rating, current monthly expenses, down payment and the interest rate. There are different kinds of loans available when you purchase a home and each has different requirements.  The type of loan you get will be determined by your down payment amount and your credit score.  A good loan officer will help you determine which loan is best for you.

It is a good idea before you start looking for the right mortgage loan company and applying for the loan to request a copy of your credit report from one of the three major credit bureaus.  Review the report  for errors. If you find any there is a dispute resolution process. Some lenders will help you with this for free.  Do not pay anyone an upfront fee to fix problems this usually does not work.

What It Takes To Be a Home Buyer

Generally lenders like to see stability, they look at your income and your debts such as car payments, credit card, installment loans including student loans and child support  you might pay out, etc.   The lender likes to see you have approximately a two year work history or more in a related field. If you have been attending school and get a job in your area of study that can count also towards time on the job. Lenders look at each applicant on a case by case basis so sometimes they can tweak things a little. If you currently own a home and want to keep that home as a rental you will need to qualify for both payments.

Finding the Best Loan

No one understands all of this at first. My advice is to try understand the basics. You know how much you think you can afford monthly and you know how much you are working with cash wise to get into your new home. Knowing this will help you determine the type of loan you might be getting. When making loan comparisons if you are shopping lenders make sure they are quoting you the same lock in rates.  Ask them for the 45 day lock rate and today’s rate. Then compare the lenders rates.  Lenders not only charge different interest rates but different closing cost fees.  Be prepared to spend some time figuring out which lender is best for you. You have the RIGHT to ask for a Good Faith Estimate of all loan and settlement charges before you agree to the loan and pay any loan fees. You will likely have to pay for a credit report.  Lenders now really need your credit score before they are willing to give you an actual rate on a conventional loan. They should be able to give you an FHA quote. It could be a good idea to go with a lender you know has done a good job for someone else, one that is recommended by someone you know and trust. Use a bank or credit union you have done business with.  There have been some problems with online lenders.  If you insist on using online sources then make sure you do the home work involved to find someone with a good record. Use someone who will give you a credit letter stating you have gone through the underwriting process and can qualify for a specific loan type. This will help you when you find the perfect home.

Down Payments

Down Payments range as low as 3.5% for an FHA loan.  Conventional loans have different down payment options available. If you can put 20% down you do not have to pay mortgage insurance monthly on a conventional loan. Conventional loans usually offer better interest rates.

No Down Payment 

These kinds of loans are rare these days but they are starting to come out again. They were a main product of the credit crisis of the past. To get a no down loan you need to have golden credit and be willing to pay a higher rate for the loan because the lender is taking more of a risk not getting a down payment from you!  You really should look at these no down loans as loans with little out of pocket expense because you still have closing costs.  They are a bit harder to qualify for either through the higher underwriting standards or the paperwork and time process involved if you are getting a community grant. Even with no down loans you still have closing costs to pay. A seller can pay some to most of them for you depending on the type of loan, however most lenders put a limit on what they will let a seller pay for you.

Down Payment Assistance

Down Payment Grants become available in some Utah cities yearly on a limited basis. There are income guidelines and you usually have to stay in the home for a specified number of years otherwise you will have to pay the grant back either all or partially. WVC, Salt Lake City and  County within certain boundaries, Taylorsville, Magna usually have grants. The best thing to do is to call the city you want to live in and see if they have any down payment grants available. Better yet talk to your Realtor about grants and who has them. The grants are geared for low to moderate income people and have income and other limits.

Fixed Interest Rates VS. Adjustable Interest Rates

Fixed rate loans feature a constant interest rate for the life of the loan. Monthly payments remain constant. Adjustable rate mortgages are loans where the interest rate is recalculated on a yearly basis depending on market values. As interest rates are adjusted so is the borrower’s monthly payment. While interest rates on ARM loans are generally lower than fixed rate loans they can eventually become higher. An adjustable loan will have caps, yearly and life of the loan caps. Make sure that these are acceptable to you. The yearly cap may be that it can’t go up or down more than 2%, the life cap means for example it can’t go up more than 7% for the life of the loan. You should at least be aware of what those amounts might be.

Closing Costs

Closing costs are not part of your down payment they are on top of your down payment. They run about 3.5% of the sales price but sometimes higher.  In a good market where there is little inventory a buyer will need to plan on at least 7% for down payment and closing costs. On a $200,000 house that means you will need about $14,000. When you get a loan the lender charges an up front fee for the loan.  This is called the origination fee. There can be discount points charged for your interest rate, fees charged for processing, fees charged for lenders required title work on the home.  There are sometimes up front mortgage insurance fees.  The less you put down on your new home the more you will pay for mortgage insurance. Either monthly and or upfront . There are fees to set up an escrow account. Your closing costs

Buyers Sellers Closing Costs

Many buyers today still need the seller to pay their closing costs.  This has to be worked out between the parties. A good real estate agent can help you with this. Buyers and sellers both have closing costs in a transaction. Sellers typically have a title policy they pay for at closing insuring the home they are selling against leins. This is a different thing than the lenders policy.  The real estate agent fees that are paid usually come out of the sellers proceeds so this needs to be considered by buyers when they make offers.  Whether or not a seller is willing to pay closing costs is generally dictated by market conditions. Most of the time a seller doesn’t want to pay the buyers closing costs.  In our Greater Salt Lake market area  at the time of this article sellers have been paying some closing costs for the buyer,  two to three percent of the sales price is an average. They are doing this about 60% of the time.

Mortgage Insurance

This type of insurance is for the lender. It protects them from you the borrower in the case of default. In the event you stop making your payments the lender is protected after taking certain legal steps. They will get most of their money back from the mortgage insurance provider.

Mortgage Insurance Costs

The fee for mortgage insurance varies based on your loan type. The less money you put down the higher the premium. There will be some up front costs that can sometimes be added to the loan and there will be a monthly cost as well.  The monthly cost usually runs between .05 to 1 percent of the loan amount.   FHA mortgage insurance unlike private mortgage insurance, the mortgage insurance premium isn’t canceled when the homeowner’s equity reaches a target level. After your conventional loan meets certain guidelines and is at 20% equity your mortgage insurance fee can be requested to be dropped. FHA loans used to have this feature click here to see if it is available on your FHA loan.  You might even be owed a refund from a refinance you did.

Loan Types:

FHA- You need a 3.5% down payment.  These loans have easier qualifying standards as far as credit scores. They cost more in the long run and sometimes cost more monthly because of the mortgage insurance requirements are more costly.  FHA will allow the borrower to have 100 percent of the money needed to close on a home to be gifted to you from a relative, non profit organization or government agency. FHA loans are assumable if you decide to sell your house which could be attractive to some buyers down the road. The buyer has to qualify through FHA.   You can only have one FHA loan in your name so if you plan to keep your home that has an FHA loan on it as a rental then you need to get a conventional loan on your new home. There are fixed rate and adjustable rate mortgages available through FHA. Lenders set the interest rate on the FHA loans not the government so you need to shop rates. FHA loans usually have higher rates than the conventional loans.

Utah Housing– Utah Housing currently offers four different types of loans three of them require mortgage insurance.  First time buyers get the best interest rate.  Utah Housing also does loans for people who have previously owned homes. There are no downs available. If cash at closing is your challenge Utah Housing has a Down Payment Assistance program. It is a second Mortgage. When combined with the first mortgage, qualified borrowers can purchase a home with little or no cash investment. you are essentially borrowing the down at a slightly higher rate and have a first and a second mortgage through Utah Housing. You need a credit score at 660-700 for a Utah Housing loan. Lately Utah Housing has been at a better rate than FHA loans.  Utah Housing currently has a no down conventional loan with no mortgage insurance. The rate on that loan is slightly higher than their other loans. These loans have income limits you can’t earn more than $81,000 a year. They also have maximum sales price limits. Utah Housing offers fixed interest rate loans.

VA– You to have be a member of the military or have served as veteran during war-time to get a VA loan.  These  loans offer less stringent requirements than conventional loans. You will have been given a certificate of eligibility by the U.S. government as part of your benefits of serving the country.  VA loans can be originated with no down payment.

Conventional– A conventional mortgage refers to a loan that is not insured or guaranteed by the federal government. A conventional loan adheres to the guidelines set by Fannie Mae and Freddie Mac. These are institutions governed by federal government rules but the loans are privately insured. They may have either a fixed or adjustable rate.
Underwriting

You will hear the term underwriting when you are in the loan process. It is good to have an understanding about what this is. A loan officer and his processor/staff put together your loan package and when they have your package completed with all the documentation such as employment verification, down payment verification and more they send it to the investor who has a team of underwriters who scrutinize the package/file.  Files are usually assigned to one underwriter.  It is their job to find things wrong or let’s just say verify the accuracy of all your information you provided.  They make sure that your file conforms to all the guidelines required by whatever kind of loan you are receiving.  Your loan is actually approved by an underwriter. It is common for underwriters to ask for additional items. It can be frustrating for buyers but it happens. A good loan officer knows how to package loans to please underwriters. Most underwriters look very closely and try to find things wrong! It is their job.

Automated Underwriting

Sometimes when you call a lender or fill out an application online authorizing them to pull your credit they give you an approval based on automated underwriting. This is available on most loans and what this means is that initially you get an approval based on the information provided at the loan application including your credit being provided for the loan officer or online application.  Your file still needs to be confirmed and go through a final underwriting which includes the appraisal of the home passing the underwriters review.  On rare occasions an underwriter may find things wrong with the appraisals and these have to be corrected.  Other things come up too that an automated system doesn’t know about and you forget to mention.  If you pay out on a student loan or child support be sure to include these at the loan application because they will impact the amount that the lender will approve you for.

Do Not Stress Out!

Just take the time to find a mortgage loan company and loan officer who you feel is right for you. If you need a little help in this area Realtor’s can give you suggestions of good local people but the decision is yours.  You might want to ask your Realtor for names of three different local recommendations. Don’t forget when you are ready to start looking for the home get your own Realtor to help you in the process.

 

Resources:

www.utahhousingcorp.org http://portal.hud.gov/hudportal/HUD

www.davewing.com

http://www.bankrate.com/finance/money-guides/differences-between-fha-and-conventional-mortgages.aspx#ixzz3OfoZeRUj

©Teresa O Larson PC, 2015