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The Loan Process and Types of Loans

Important information for those looking to qualify

Before starting a loan application, it is wise to familiarize yourself with the scene. Below you will find the most crucial information to know about the mortgage system, the loan application process. and the kinds of loans that you may have at your disposal. If you still have questions, please check the FAQ page, or feel free to contact me.

 

Where should I start?

The loan application processs:

It is hard to know where to begin! There are so many options that it can be very confusing to find the right type of loan. You must first ask yourself many questions. Some of these are:

  • How much can I afford to pay each month?

  • Do I plan on keeping this house for only a few years or for a long period of time?

  • Is a small payment a higher priority than paying the loan down quickly?

  • Am I able to make a down payment?

  • Over how many years do I want to pay a mortgage?

  • Am I trying to purchase or refinance an existing mortgage?

The answer to these questions will help you know which loan will be best for you. There are a wide variety of loan options, so it will be useful to know some of the basic tendencies. In general:

  • The larger the down payment, the better your options are for payment size, interest rate, and length of time to pay back the loan.

  • A fixed-interest rate will tend to be higher than an adjustable rate.

  • The longer the term of payback, the smaller the payment.

  • The smaller your payment, the larger the amount that is going to interest.

  • The more that you pay to interest, the slower that you are building equity.

It is also useful to understand the essential differences in types of loans. There are really only three basic types of loans:

  • Fixed Interest Mortgages (FRM)

  • Adjustable Rate Mortgages (ARM)

  • a Hybrid ( some combination of the other two)

Loans are also classified as either government loans or conventional loans.

Conventional loans are further broken down into either conforming or non-conforming loans. To qualify as a conforming loan (or an A paper loan), it must fall under the guidelines established by Fannie Mae and Freddie Mac, corporations that have established industry standards and guidelines that govern credit requirements, down payment amounts and maximum loan amounts.

Once you have these general types down, you will still have to look at the individual features of specific loan types to determine which one will best meet your needs.

Your loan options can be limited by poor credit. A credit score is a system of points earned based on your credit history. This three-digit number (ranging from 300 to 900) is influenced by such factors, among others, as:

  • late payments

  • debt to credit ratio

  • total debt amount

  • age of accounts (the older the better)

There are three major credit bureaus (Experian, Equifax and TransUnion) that produce comparable credit scores using some version of FICO, the industry standard developed originally by Fair Isaac and Company. Because this credit score is used by most lenders to determine your qualifications for a loan, you may want to see what you can do to increase your credit score before you apply for a mortgage.

So, the bottom line: Start with your credit score; end with the specific loan type that is most appropriate to your needs.

 

Types of Loans Available

Your Financing Options

When it comes to finding a mortgage, the possibilities are endless. However, being overwhelmed by choice doesn’t mean you should take whatever is offered to you first. Contact me for information about different types of mortgage loans and I’ll be happy to explain them and help you find one that suits your needs and preferences.

First Time Buyers

Pros:

  • Lower Down payment

  • Easier to qualify

  • Sometimes you may get lower rates

Cons:

  • May be subject to income and property value limitations

  • Some programs which have government subsidies may have a recapture tax if you sell the house too early

Young Couple

Fixed Rate Mortgage

Pros:

  • Monthly payments are fixed over the life of the loan

  • Interest rate does not change

  • protected if rates go up

  • can refinance if rates go down

Cons:

  • Higher interest rate

  • Higher mortgage payments

  • Rate does not drop if interest rates improve

Note: can only be a 15 or 30 year fixed rate

Calculator

Adjustable Rate Mortgages

Pros:

  • Lower initial monthly payment

  • Lower payment over a shorter period time

  • Rates and payments may go down if rates improve

  • May qualify for higher loan amounts

Cons:

  • More risk

  • Payments may change over time

  • Potential for high payments if rates go up

Note: can be any of the following

  • 10/1 ARM

  • 7/1 ARM

  • 3/1 ARM

  • 1 year ARM

  • 6 month ARM

  • 1 month  ARM

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Balloon Mortgages

Pros:

  • Lower initial monthly payment

  • Lower payment over a shorter period of time

  • Many balloon mortgages offer the option to convert a new loan after the initial term

Cons:

  • Risk of rates being higher at the end of the initial fixed period

  • Risk of foreclosure if you cannot make balloon payment or if you cannot refinance or if you cannot exercise the conversion option

Note: can either be a 5 or 7 year term

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Stated Income Programs

Pros:

  • Don’t need to verify income

  • Faster approval

Cons:

  • Higher rates

  • Higher payments

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Imperfect Credit Programs

Pros:

  • Potential for reestablishing credit if you pay your mortgage on time

  • When used for debt consolidation, you may be able to reduce your monthly debt payment

Cons:

  • Higher rates

  • Terms may not be as favorable

  • Harder to get long term fixed loans

  • Loans may have prepayment penalties

Credit Card

No point, No fee Programs

Pros:

  • No closing costs

  • Less money required to close

Cons:

  • Higher rates

  • Higher payments

Checking Text on a Document

Home EquityLine of Credit

Pros:

  • You only borrow what you need

  • Pay interest only on what you borrow

  • Flexible access to funds

  • Interest may be tax deductible

Cons:

  • Rates can change, max rates are normally high

  • Payments can change

  • Harder to refinance your first mortgage

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Home Equity Fixed Loan

Pros:

  • Fixed payments

  • Interest may be tax deductible

Cons:

  • Higher interest rates than on 1st mortgages

  • Harder to refinance 1st mortgage

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Not sure what type of loan is right for you and your financial needs? Feel free to call me for more information, or see below for a more simplified view of possible loans.

 
Country Style Home

Loans Simplified

How long do you plan to stay in the home?

How long you intend to stay in a home can guide the loan process and take much of the guesswork out. See the options below to find out which best suits your situation.

Keep in mind, this guide is best utilized if no other types of loans (listed above) fit your circumstances.

 

1-3 Years

3/1 ARM, 1 year ARM or 6 month ARM

3-5 Years

5/1 ARM

5-7 Years

7/1 ARM

7-10 Years

10/1 ARM, 30 year fixed or 15 year fixed

10+ Years

30 year fixed or 15 year fixed

Remember: ARM means adjustable rate mortgage (as opposed to a fixed rate mortgage)