All Mortgages Are Not Created Equal

Home buying is a process that consists of several steps, the first of which is to get pre-qualified for a mortgage.  After picking a lending institution, you will meet with a mortgage officer that represents the lender.  When you do that, you should have an idea of about how much you can or want to spend in total per month. Even if your mortgage officer tells you you’re qualified for $300,000, that doesn’t mean you should spend that much. You need to think about what your monthly payment will be, what your utilities will be, and all your other related expenses.

Although there are many different types of mortgages and creative forms of financing out there, (and I can only hope that I get to cover them all eventually), there are a few commonly used mortgages that you should be familiar with.

The FHA mortgage – is a mortgage insured by the Federal Housing Administration. It is a perfect choice for homebuyers with a low credit score. Where most conventional mortgages require a score of 620 or higher, an FHA mortgage only requires you to have a score of 580. Because FHA mortgages are federally insured, you don’t need to pay for private mortgage insurance, so this makes it a great choice for people who cannot afford to purchase private mortgage insurance.

The VA , or Veteran’s Administration loan – is available to all veteran’s of the US military and their surviving spouses. Because VA loans are backed by the Federal government and therefore very secure, a homebuyer is able to obtain 100% financing without any down payment. This is a great help, considering that most conventional loans can require anywhere from 5 – 20% of money down. Also, your mortgage payment will remain low, because VA loan are backed by the federal government and therefore don’t require private mortgage insurance. PMI is required if the mortgage company finances more that 80% of the home’s value. Lastly, the interest rate for VA loans are typically 0.5 – 1% lower than for conventional mortgages.

Conventional loans – are those that are not guaranteed or backed by the federal government. Most of them follow the guidelines set forth by government sponsored agencies, such as Fannie Mae and Freddie Mac. To get pre-approved for a conventional mortgage, you need to have a debt to income ratio of 28/36 (28 refers to the maximum amount that you can owe pertaining to your housing costs – mortgage, insurance, property taxes. 36 refers to the maximum debt you can have consisting of your housing expenses and any other reoccurring debt, such as credit cards and student loans.) In other words, the more debt you have, the less of a mortgage you’ll qualify for. You also need a credit score of at least 620 and a good overall pattern in your financial history. In addition, you need to be prepared to pay 5 – 20% of the home’s purchase price as a down payment, as well as 3% (usually) for the closing costs – though this is often subject to negotiation with the seller. Conventional loans can be applied to any type of home, from a single family residence to investment properties. The maximum loan amount you can get varies from 80 – 95%, depending on the state.

Fixed rate mortgage – as one would guess from the name – FRM’s have fixed interest rate over the life of the mortgage (typically 15 or 30 years). The great thing about it is that you know exactly what your interest payment will be during the entire life span of the loan.

Variable rate mortgage – Though these are more flexible and easier to obtain that fixed rate mortgages, always use common sense. VRM’s change with economic times, and the interested rates are reviewed periodically. When the interest rates go down, your interest payment goes down as well. When the rates go up, you’re likely to experience “payment shock.” Before the recession, a lot of people thought of VRM’s as a way of affording bigger and “nicer” homes that they would have with a FRM and got themselves into a lot of financial trouble. Though I realize that VRM can be a great choice for certain home buyers, I, myself am not a fan. I think if you are going to sign your name off on a 15 or 30 year mortgage, you should know exactly what you’re getting – hence FRM would be a safer way to go. As they say: “Better safe than sorry.”