By Sean C. Hamilton
The road to home ownership is exciting yet can seem daunting. For many in pursuit of the American dream they are often overwhelmed by the process and knowing where to begin. I tell perspective clients the best place to begin is to first know your credit worthiness and buying power. To gain a better understanding of exactly where you stand, it’s critical for you to first find a reputable lender. Lenders can provide invaluable insight into understanding your credit score, the type(s) of loan you qualify for, first time home buyer programs, and even assisting you in developing a plan of credit repair if there are barriers to you qualifying for a mortgage. There is no shortage of mortgage brokers, banks and lenders who are waiting to take your loan application.
While there are many paths to home ownership, I want to briefly explore the most widely known and accessed options. In a real estate transaction, there is a perception that cash is always king in securing the winning bid on a home. While this is often the case, that perception isn’t always accurate. There are other reason’s a seller may choose a noncash offer from a buyer with another type of financing. Getting a cash transaction to the closing table is typically a quick, easy, and pretty simple process. It requires little more than verification of the buyers’ funds to cover the cost of the transaction to close the deal; and the closing attorney clearing title and processing all required documents. Barring any unforeseen obstacles these transactions can typically close in about two weeks. However, when an all-cash purchase is outside the buyers grasp, there are other options at the consumers disposal. These options are in the form of mortgages. Consumers may qualify for Conventional Loans, Jumbo Loans, Government Insured Loans (FHA, VA, and USDA); a Fixed-Rate or Adjustable-Rate Mortgage. A Fixed-Rate Mortgage is a home loan option with a specific interest rate for the entire term of the loan; while an Adjustable-Rate Mortgage does not have a fixed interest rate and changes during the life of the loan.I’d like us to briefly explore some of the more common home loan types which are Conventional, FHA-Insured, VA-Guaranteed, and USDA Loans.
Conventional Loans are considered the most secure loans because there LTV (loan to value ratio) are often lowest. Simply explained the LTV is the property’s appraisal amount versus loan amount. The lower the ratio of debt to value, the higher the down payment required by the borrower. A conventional loan is not government insure or guaranteed, unlike FHA and VA loans. Conventional loans are a great option for buyers who have a strong credit score, little debt, and who can come up with a larger down payment. The minimum credit score required to be considered for a conventional loan is 620 or higher, and buyers will need a minimum down payment of about 3%. A down payment of 20% is typically required to avoid paying Private Mortgage Insurance (PMI). When considering offers from buyers, sellers might perceive conventional loans as a stronger finance option, and that these buyers are in a stronger financial position.
The Federal Housing Administration – FHA (Insured Loans) operates under the U.S. Department of Housing and Urban Development (HUD). FHA loans refer to loans that are insured by the agency and are made by an FHA approved lender. These loans also provide additional security to the lender. FHA also insures lenders against loss if the borrower defaults. FHA programs cover fixed rate loans for 10 – 30 years. Though FHA does not set interest rates, it does limit lender fees and determines how closing costs and down payments may be paid. Types of FHA insured loans include adjustable-rate mortgages, home improvement and rehabilitation loans, and loans to purchase condominiums. Borrows can obtain an FHA insured loan with a minimum FICO score of 580, and with a down payment as low as 3.5% of the purchase price. Some closing costs can be included in the loan amount. Lower down payments might also be an option under some special programs.
The U.S. Department of Veterans Affairs (VA) is authorized to guarantee loans used to purchase or construct homes for eligible veterans and their spouses. This includes unmarried spouses of veterans whose deaths were service related. The VA assists veterans in financing the purchase of homes with little to no down payment at market interest rates. The VA sets the criteria for qualification, limitations, and conditions under which a VA loan can be guaranteed. A requirement is that the veteran must apply for and have a CEO “certificate of eligibility.” Minimum active-duty service requirements for service members and veterans also apply. There is no VA dollar limit on the amount of the loan a veteran can obtain; this limit is determined by the lender and the qualification of the buyer. However, the VA limits the amount of the loan it will guarantee.
Finally, the United States Department of Agricultures – USDA Home Loan helps borrowers who meet certain criteria buy homes in rural, USDA eligible areas. Some USDA loans do not require a down payment for eligible borrowers, but there may be other nominal fees associated with this loan type. There are also eligibility requirements that include citizenship, credit score, income limits and location of the property being purchased.
While I’ve given you a broad overview of home mortgage loan options, the best place to begin your journey towards home ownership is to first speak with someone who is a highly qualified reputable lending expert. There is no one path to home ownership, but being connected with a knowledgeable lender will quickly help get you on the right path and avoid many pitfalls. I suggest doing more research and your own due diligence on the basics of mortgage lending and the different types of mortgage lenders available to you. Mortgages vary greatly, so you need to have some working knowledge of how they work and how they differ from one another to determine the lender and loan that offer’s what’s best for your situation.
If you need more information on how to find and speak with a mortgage loan expert, I’d love to speak with you and point you in the right direction. Give me call today and allow me to get you started down the right path to home ownership.
Sean C. Hamilton is a REALTOR with Keller Williams Realty Atlanta Partners. He services Metropolitan Atlanta and the state of Georgia; and can assist with your real estate questions or needs no matter where you are in the world. Call or text Sean at 202-651-0309 or email him at email@example.com