A mortgage is a term thatis used when a lender gives a borrower money, and places a lien against thehouse as collateral. Like almost everything in our world, it gets morecomplex from there, as there are many types of loans. This is meant tohelp you understand some of the most common types of mortgages andthe terms used to describe them.
1. Conventional loan: This loan generally requires20% down, or a 5% downpayment, and a private insurance policy that the borrowerpurchases, to provide the bank with additional funds, should theborrower default on the loan. The closing costs are typically less on a conventional loan, highercredit scores are sometimes required. Also, sometimes credit unions and bankshave specials where they are willing pay part of the closing costs for theborrower. They often look at the buyers instead of numbers, whendetermining the credit worthiness.
2. FHA loans: These loans are insured by thegovernment, however, the borrower must pay for mortgage insurance. Borrowers can get by with less cash out of pocket, and the minimum down paymentis 3.5%. The owner can contribute up to 6% of the sales amounttoward the buyer’s closing costs and pre-paids as long as the house appraisesfor the added value. Thecurrent min. credit score for an FHA with 3.5% down is 580. The lender does notwant more than 31% of yourincome going toward the housing payment including taxes and insurance, or to seeyour total household debt with revolving payments like car payments andcredit card payments and mortgage payments with escrow to exceed 43%of your income. The interest rate is generally comparable with conventionalmortgages.
3. VA loans: These loans are available toqualified veterans, current and retired, including members of the NationalGuard. The biggest advantage is that they require no money down, and the closingcosts can be rolled into the mortgage: seller concessions can go towardclosing costs and pre-paids. There is no private mortgage insurance,however, there is a VA funding fee that can be rolled into the mortgage. The minimum credit score is generally around 620. The loan isreusable as long as the previous loan has been paid off. It is alsoavailable to surviving widows of qualified Veterans.
4. Adjustable rate mortgages: The mortgage ratechanges but is typically locked in for a specific period of time: the rate on a five year adjustable rate will change after fiveyears. These are notas popular today as they once were since the interest rates are historically low.
5. Balloon payments: This is a due date for themortgage. Often this is used on private mortgages: The owner willhold a mortgage, amortized over a longer period of time so the paymentsare affordable, but he doesn’t want to wait thirty years for his money. The note may contain a balloon, which means that the borrower agrees topay off the remaining balance in full when the balloon is due.
6. Land contract: This is not a mortgage, it is anagreement where the buyer agrees to purchase a property, but the deed isnot placed in the buyer’s name and the property is not transferred over to thebuyer until all the terms of the land contract have been fulfilled. With amortgage, the house belongs to the buyers, and the bank has a lien on it. With a land contract, the previous owners legally hold the title tothe property. The advantage is to the seller: should the buyerdefault, he doesn’t have to go through the foreclosure process. The buyeris venerable.
7. Escrow: Considerthis to be a savings account whereas you deposit 1/12 of the annual taxes and1/12 of the annual insurance payment each month. When the taxes andhazard insurance are due, they are paid from the account. Atclosing, you will be expected to have a one year insurance policy in place, andone years taxes as you will be reimbursing the seller for the amount of taxeshe has paid in advance for the time you will be living in the house. Thebalance will go into the escrow account so there will be sufficient funds topay the bills when they become due.
8. Seller financing: The seller will hold a mortgageinstead of a bank. As the rates paid on bonds and savings accountsdecline, more sellers are agreeing to hold mortgages. The closing costsare much lower, and the interest rate is negotiable, although sellers typicallywant enough money down to protect their investment and cover theirclosing costs.
9. SONY MA mortgages and USDA mortgages, These aremortgages that offer benefits to buyers new to homeownership as well asborrowers with lower incomes as restrictions are placed on the amountof income a borrower can have as well as limits on the price of a home. USDA mortgages require no money down, SONY MA mortgages require verylittle down, and there are assistance programs.
10. Bi-Weekly mortgage: Instead of paying themortgage once a month, 1/2 of the mortgage is paid every 2 weeks. Sincethere are 52 weeks in a year, this amounts to two extra payments that godirectly toward reducing the principle. This will significantly reducethe length of the loan and you can build equity faster. You can also accomplishthis by simply adding extra payments.
If you wish to discuss any ofthese programs, give me a call or send a text. Also, lenders have different guidelines. Because you are turned down at one bank does not necessarily mean thatyou can’t get financing elsewhere. Call ortext me: 607-351-1273 email@example.com