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What Types of Home Loans Are There?

Buying a new home can be the most exciting purchase you will ever make. Whether it’s your first home as a newlywed couple or the long-awaited dream home where you intend to enjoy retirement, understanding what types of home loans are available, will save you stress in the long run! 

Oftentimes factors such as credit score and income play a large part in what you can afford. Rest assured there is a loan out there for you, regardless of your circumstances! Let’s look at a few of the main types of home loans to help you better understand your options. Know what loans are available to you, and how they work. This will set you up for success in choosing which home loan you can afford. 

FHA Loans

FHA loans will be insured by the Federal Housing Administration. This acts as a back up in the case of nonpayment. This type of loan requires the homeowner to pay for private mortgage insurance. This insurance is paid as an initial premium payment at closing. Additionally, this acts as a monthly insurance payment on top of that. FHA loans are typically used with first time home buyers, due to its low rule of only 3.5 percent down payment. A need to have at least a FICO score of 580 to qualify for the 3.5 percent down. You can still receive an FHA loan with a FICO score below 580, but it will need a much larger 10% down payment. FHA loans generally have:

  • lower closing costs
  • less credit history
  • offer lower interest rates

This makes it a great option for many home-buyers.

Types of home loans

Conventional Fixed Loans

These loans are not backed by a government agency like the FHA. Because they are not guaranteed by the government. They are riskier by lenders and thus have tougher requirements. Conventional loans need at least a 20 percent down payment. But do not need private mortgage insurance. Requirements vary by lender. 620 is the typical smallest score required to qualify for a conventional fixed loan. These loans are available in 10, 15, 20, 30, and 40-year terms, although the most common are 15 and 30- year terms. If you have the means to put down 20 percent on your home loan, do so. Avoid having to pay for private mortgage insurance. You will save on your monthly payment. 

VA Loan

Guaranteed by the U.S. Department of Veterans Affairs. These home loans are available only to veterans of the U.S. armed forces. They are also available for service members, and now and then, their spouses. This type of loan was created by the U.S. government in 1944. The aim was to help to return service members to buy a home without needing a down payment or great credit. As mentioned, these loans need zero down payment. and private mortgage insurance is not required. Generally, VA loans have a more competitive interest rate compared to non-VA loans. Veterans would do well to take advantage of this type of loan when buying their home.

Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages, or variable-rate mortgages. These are loans in which the interest rate can vary over time. This rate is based on the economy and the cost of borrowing money at the time. There are different types of ARMs. One common type of ARM is a 5/1. As an example, with this type of loan, the interest will stay the same for the first 5 years. Then it will become adjustable for the following 25 years. The interest rate will reset every year following the initial 5 years. There are benefits of using an adjustable-rate mortgage. One is that you will receive a low initial interest rate. In general, ARM mortgage rates start out about 0.5 percent lower than fixed-rate loans.

Some homeowners chose to make their payments as if it were at a standard interest rate. Despite having lower monthly payments during the lower interest period. This allows a much larger part of the principal to pay off every month. This gains a large amount of home equity in a short period of time. ARM loans are particularly appealing when conventional interest rates are high. Lenders may set their own credit score standards. The FHA will guarantee loans for borrowers with scores as low as 500. This helps those with low credit scores. The ARM may also be a good option for someone planning to sell or refinance within a few years.

USDA Home Loan

The USDA home loan is a unique loan. The home you buy must be located in the eligible rural or suburban area. This is defined by the USDA, but if your home qualifies, you’re looking at zero down payment and a low-interest rate. These loans are guaranteed by the United States Department of Agriculture (USDA). Because of the USDA guarantee, eligibility requirements are lenient. Provided your home is in a qualifying location. The USDA’s definition of “rural” has expanded more recently. This includes many small towns, suburbs, and outlying areas of major U.S. cities. Mortgage rates are often lower than FHA or conventional loans. The least credit score needed to receive this loan is 640. Perfect if you don’t mind living away from the hustle and bustle of the city. A USDA loan may be the perfect fit for your lending needs. 

Interest Only Loans

Interest only loans allow the borrower to pay only on the interest of their loan for the first 5-10 years. After the initial period of paying interest only, the loan is paid off. It is the same as a conventional loan would be, with principal and interest included monthly. Interest only home loans need a higher credit score, with at least 720. These also need a higher income and down payment. Compare this to several of the loans mentioned before. This type of loan slows down repayment of principal, so equity in the home is not seen until much later on. First time home buyers who can only afford a low mortgage payment may consider this loan. But, be aware that your mortgage will go up a lot after the initial 5-10 years. This type of loan can also be helpful for someone looking to buy a fixer-upper. As long as the intention of selling it right away. This will free up more money to put towards renovating the home. 

Now that you have a better understanding of what types of home loans there are, you can be confident that you will make the right choice. Happy house hunting!
Additional reading on “Types of home loan”
On top of that, you may find our “Motrtgage Rates” page informative.

 

A Valued Partner

No Better Time To Buy

A friend of mine who is far smarter than I am – hold the snide comments – sent me a link to an article that was written about two weeks ago.  I’ll include a link to the article below if you really want to read it:

http://bit.ly/2020REoutlook

This article is one of those that point out the reasons we should all be happy and dancing in the streets relative to how well the real estate market is performing . . . and for those of us who are homeowners, new and veteran, we do have great reason to be happy (although I’d recommend you be careful about dancing in the streets for a whole host of reasons – traffic, public safety, lack of coordination, etc.).

Two of the points the article makes are the economy is strong with little to no signs of slowing down and house values continue to increase at a healthy rate.  And just as your overall sense of warmth and fuzziness is about to envelop your whole self like a cozy bubble, you near the end of the article when you read a line that pops that bubble by mentioning that there’s an influx of buyers looking to flood an already constrained market.  Why would that be a bubble popper?

While the market is ready to welcome more buyers to the market as the Millennials age into and is prepared for it, there’s no mention in this article (or a whole host of others) that there’s an increase in inventory in the foreseeable future.  Translation: there’s still only X number of homes to sell and buy in 2020, so what are we as agents and mortgage professionals doing to get a portion of that market?

This year, we’ll see smarter, more savvy buyers who will be ready to “battle” for that limited inventory, and that will help weed out the agents and lenders who aren’t smart and savvy, for sure.  However, if that’s your only plan – outlasting a battle of attrition – to grab market share in 2020, that attrition will get you, too.

We don’t need to be shouting from our electronic soapboxes on social media that there’s no better time to buy than now or any other OBVIOUS truths – today’s potential homebuyer already knows that and will probably tune us out if that’s all we have to preach.  We need to go on the offensive and show the potential homebuyers WHY we’re the person they should hire to guide them through possibly the biggest transaction of their lives up to this point.

Over the last six months, I’ve met with a lot of great realtors who have shared marketing ideas with me that, I believe, are very smart and attractive.  They’re getting far more than the family-and-friends referral – the same referral that got so many into the business in the first place because “it was easy” – and they’re taking no prisoners.

What’s your game plan to increase your market share in a limited-opportunity market?  Is this regarded as no better time to buy? Besides providing loan products to close those transactions others can’t or won’t, our value is in helping you fine-tune and execute that plan.  If your lender ISN’T helping with that, there’s no value.

Links to other relevant mortgage articles

Fix-and-Flip Loans Explained

Being a real estate investor (or a real estate agent working with one) is not for everyone, that’s for sure.  There is a reason people don’t dive into the real estate investing pool. They don’t understand how the deals are being financed.  Let me give you a quick breakdown of how some fix-and-flip deals are being financed.

6 important steps.

  1. You take the acquisition price – for example, $200,000; you’ll need to put down 10% – in this example: $20,000.
  2.  Determine how much will be needed in repair costs to get the home ready for appraisal and sale – for example, $35,000.
  3. The acquisition price was $200,000 with $20,000 down. So $180,000 for the home acquisition and $35,000 for the repairs.  Added together, that’s $215,000 needed from a lender.
  4. Determine the home’s After Repair Value (ARV) – example: $375,000.  The lender will lend up to 65% of the ARV – example: $375,000 X 65% = $243,750.  Because 65% of the ARV is higher than $215,000 (the acquisition and repair costs), all’s well.
  5. The “flipper” (borrower) needs to put together a precise list. Exactly what improvements required for the home calling out specific materials.  An appraiser will determine the current state of the home. Then compare it to the repair schedule to determine what the ARV will be.  If it comes back higher than thought, great.  If it comes back lower, it may need the buyer to bring more money to the table. Example: the home’s ARV is set at $320,000. 65% of that is $208,000, and $215,000 is a rule. The borrower would have to come up with an extra $7,000 over and above the $10,000 they brought in for the down payment.
  6. Establish ARV. The lender then moves forward with finalizing the loan and financing the project.  The terms will usually be 12 months with interest only charged.  Example: on a $215,000 loan at 9.5% interest only, that would be a monthly payment of $1702.08.  The lender is going to charge fees upfront that usually add up to about 4-5% of the loan amount.  That amount paid at closing along with any closing costs (about 2.5% of the loan amount).

So, let’s put this in real numbers and see how much a flipper would make:

$20,000 for the down payment

$15,050 for fees and closing costs (about 7% of the loan amount)

$20,425 (12 months of interest)

$55,475 TOTAL COSTS

 

$375,000 house sells for this amount

$215,000 amount financed

$160,000 TOTAL CLEARED FROM SALE

 

$160,000 total cleared from the sale

-$ 55,475 in total costs

$104,525 PROFIT

That number north of $100K isn’t the TRUE profit. Because you have short-term capital gains taxes to consider. But this gives you a general idea of how such a fix-and-flip project can get financed. Plus how all the numbers get calculated.
 

This is one of many different ways to finance a fix-and-flip. 

We also have other strategies that appeal to a “flipper” mentality. This allows the flipper to avoid those short-term capital gains taxes.  This is for those who are leaning more toward the buy-and-hold strategy. We have ways to help them get properties without the need for income verification.
 
As an agent, by having a passing knowledge of what your lending partner can do to help finance these types of deals. You become an asset to your existing customers who are in the investor pool. Those who are at the edge unsure of whether they should dip their toe in the water to see how it feels.  Give them a splash of your insights, and you’ll be surprised at who jumps in!

Here is a good article on “How to get a loan to flip a house”.

Additionally, have a look at our “Mortgage Terms”.

Creating v. Competing

In the not-too-distant past, marketing and advertising were costly and, quite often, labor-intensive (which means “costly”).  With social media being readily available and free to everyone, that significantly evened the score for everyone involved.  So, instead of having a handful of players who have the money and means to go after a target audience, we now have everybody and their dogs (and cats) going after that same target audience.  In other words, the lake remained the same size, but now we’re cheek by jowl full of people casting in their lines and nets to catch a fish.

That doesn’t mean that when Kyle posts “hey if you know someone who is looking to buy or sell a house, let me know” it’s equally effective and persuasive as when Karen creates a multi-media ad featuring pretty people and flashy graphics, but it does mean that both of them are waiting for someone to come to them.  In light of this, I recently taught a class to some real estate agents in different ways to create customers rather than marketing to buyers and hoping the buyer will call or email them.

I’m not going to go over the different items we covered (I’m not bitter) mainly because it was a lot of back-and-forth discussion and brainstorming.  What I will say, though, is that each and every idea we discussed boiled down to agents and lenders LITERALLY working together to CREATE customers.  This doesn’t mean Lender A buys a bunch of leads and sends them over to Realtor B to cull through them and see if any of them are any good.  Nor does it mean that Realtor A is going to send out a mailer with Lender B paying for half the costs.

Near the end of our discussion, one of the agents in the class asked that I create a very simple chart that outlined the P&I payment for a certain loan amount in relation to a particular interest rate.  For those of you who just rolled their eyes after reading that last sentence, I will agree that such a chart already exists, isn’t that hard to get, and isn’t all that sexy or persuasive.  But I will tell you this: it fits perfectly into a plan we had come up with together that will CREATE customers rather than market to people who are already on the hunt for a home (and who every other agent and their menagerie of pets are also trying to attract).

For grins and giggles, I’m including that non-sexy chart.  Give me a call if you want me to include your branding on that chart or if you want me to schedule a time to sit down with you and a handful of your fellow agents and go over this brainstorming session on how to create customers.  I’m here to help!

A VA Loan Myth Dispelled

 

Recently, I had the pleasure of meeting with a person who is new to being a real estate agent but not new to selling a house. Our conversation turned to the subject of her own home that she and her husband were about to put on the market. She wanted to know what mortgage options were available to potential buyers. That’s because her home would list for approximately $550,000. FHA, wouldn’t be an option because the loan amount caps out further south than $550,000 – she knew that. But what about the VA? She started to say that she knew the cap on a VA loan. While not as low as FHA, it was still not high enough to enable someone to buy her home using that option. Not true – not entirely.

VA USA Flag

One of the great benefits of a VA loan is the fact the buyer isn’t required to put any money down. But like many benefits, there’s a limit. In the case of a VA loan, that limit is $484,350 (unless the house is in a high-cost area). Let’s take patriotism aside. A difference of $65,650 between the limit and the asking price in my new agent friend’s case is a tad beyond negotiation. In this case, a VA loan is still a very viable option. So I urged my new friend that she should say in her listing that she accepts VA loan offers. Unlike unicorns and politicians who don’t have an ego, there IS such a thing as a VA Jumbo Loan – no myth!

Caps when dealing with VA Loans

While there’s a cap of $484,350. That cap applies to the amount up to which the borrower will not have to come in with a down payment. With a VA Jumbo Loan, the borrower is only required to bring in 25% of the DIFFERENCE. That’s between the loan limit and the buy price. In my friend’s case, that difference is $65,650. That means a VA borrower could buy her home with a down payment of ONLY $16,412.50. Yes, you read that exactly. For less than 3% of the sale price, a VA borrower could use their benefit and buy that house.

On my friend’s listing, it’s imperative that she states that VA loan offers work. The main reason is that more than the majority of agents are like she was before our meeting. And don’t believe it’s even an option. I didn’t get a finance degree from Harvard (although I did buy a t-shirt there once). But, I’m certain that increasing the number of potential buyers for your property is a good thing.

For more information feel free to contact Priority Lending LLC today.