Home Buyer Tips for Getting the Right Mortgage Loan

Home Buyer Tips for Getting the Right Mortgage Loan

Part of the home buying process is selecting a lender and determining which loan is right for you.  There are many, many choices in today’s marketplace.  Choose the type of mortgage loan based on your own personal situation.

First, you will need to consider the type of lender you want.  Direct lenders are major banks who make mortgage loans.  They are typically protective of the bank and normally only offer their own loan products.  Mortgage brokers offer access to a number of wholesale lending sources.  Because they normally do not hold the loan in-house, they look for the type of program to suit the individual borrower. 

Most borrowers are better off working with a lender recommended by their agent.  Rest assured, the agent does not get any kick-backs for the referral.  Instead, the agent is assured the lender will take extra good care of their buyers to earn the next referral.  The relationship benefits everyone involved in the transaction.

FHA and VA Loans

These government programs were designed to attract first-time borrowers.  The Department of Veterans Affairs (VA) guarantees home loans for veterans and promises to repay the lender some of the loan if the loan defaults.  Qualified veterans can get a loan with no down payment.

The Federal Housing Administration (FHA) insures home loans for borrowers and pays when those homeowners fail to pay.  Many changes have been made in recent years for FHA loans require a minimum 3.5 percent down payment.  One reason why someone may choose an FHA loan is because the program allows for gifts to be used for the down payment.

Conventional Fixed Rate

This type of loan is, by far, the most common type of mortgage loan.  The average home buyer chooses a conventional fixed rate loan for many reasons.  The most important reason is a guaranteed payment for principal and interest the live of the loan.  The only payments subject to increases are for taxes and insurance.

While the loans carry no guarantees for the lender if the borrower fails to repay the loan, generally they are more readily available to everyone.  When the buyer makes the home purchase with a 20% down payment, the lender is able to make all the decisions about approval.

With less than 20% down, borrowers must pay for private mortgage insurance (PMI).  The PMI company is a secondary lender who reduces the risk to the company who takes the larger risk.  Conventional mortgage loans must follow guidelines set out by the Federal National Mortgage Association (Fannie Mae) and/or the Home Loan Mortgage Corporation (Freddie Mac)

Adjustable Rates (ARM)

Although a buyer can save a lot of money at the beginning of the mortgage, only about 10 percent of borrowers choose this type of loan.  Part of the reason is the complexity and lack of mortgage payment stability.  Beware of lenders who push an adjustable mortgage.  It is perfect for some and disastrous for others.

An ARM starts with a much lower introductory interest rate.  However, it is likely to change at designated intervals outlined in the mortgage documents.  The low introductory rate will be fixed for a period of one to ten years.  The most popular loan product offers five years at the low rate, so it is chosen by those who are likely to be transferred to another area.