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:
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
Lower Down payment
Easier to qualify
Sometimes you may get lower rates
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
Fixed Rate Mortgage
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
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
Adjustable Rate Mortgages
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
Payments may change over time
Potential for high payments if rates go up
Note: can be any of the following
1 year ARM
6 month ARM
1 month ARM
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
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
Stated Income Programs
Don’t need to verify income
Imperfect Credit Programs
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
Terms may not be as favorable
Harder to get long term fixed loans
Loans may have prepayment penalties
No point, No fee Programs
No closing costs
Less money required to close
Home EquityLine of Credit
You only borrow what you need
Pay interest only on what you borrow
Flexible access to funds
Interest may be tax deductible
Rates can change, max rates are normally high
Payments can change
Harder to refinance your first mortgage
Home Equity Fixed Loan
Interest may be tax deductible
Higher interest rates than on 1st mortgages
Harder to refinance 1st mortgage
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.
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.
3/1 ARM, 1 year ARM or 6 month ARM
10/1 ARM, 30 year fixed or 15 year fixed
30 year fixed or 15 year fixed
Remember: ARM means adjustable rate mortgage (as opposed to a fixed rate mortgage)