Mortgages for Homebuyers
Below are some of the many loan options available when buying a home. Please review this information and give us a call to discuss which option best meets your needs.
Fixed Rate Mortgage
This, the most common type of mortgage program, has two distinct features. First, the interest rate remains fixed for the life of the loan. Second, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15-year and 30-year mortgages, but other terms are available.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30-year fixed rate mortgage takes over 20 years of level payments to pay half of the principal balance.
The main advantage of fixed rates mortgages is the rate is fixed, so you are protected if rates go up. The disadvantages are they typically have a higher interest rate, and the rate does not drop if rates go down.
Adjustable Rate Mortgage (ARM)
An ARM has the characteristic that its interest rate adjusts periodically based on a specified index. The index moves up or down based on the conditions of the financial markets. If the index moves up, your monthly payment will increase. Likewise, if the index drops, your monthly payment will decrease.
ARM's generally begin with an interest rate that is 2 to 3 percent below the comparable fixed rate mortgage. This start rate usually is fixed for a period of time ranging from 1 month to as long as 10 years. As a rule, the lower the start rate the shorter the time before the loan makes its first adjustment.
An advantage of ARM's is that the lower interest rate may allow you to buy a more expensive home. An obvious disadvantage is that the interest rate, and thus your mortgage payment, may increase over the life of the loan.
An FHA loan is a low-down payment loan insured by the Federal Housing Administration (FHA). The loan program helps low- and moderate-income families become homeowners by lowering some of the barriers to homeownership. Borrowers need only a 3.5% down payment to qualify, and the money can come from a family member, employer, or charitable organization as a gift. Credit guidelines are more lenient than for conventional loans. In fact, even if you have had credit problems, such as a bankruptcy, you may be able to qualify for an FHA loan. FHA loans have competitive interest rates because the federal government insures the loans against default. FHA loans are available as fixed rate and adjustable rate mortgages and may be used to purchase a new or existing one-to-four family home or condominium.
In order to cover the risk of default, the FHA requires borrowers pay mortgage insurance. This includes an upfront premium at the time of purchase, which may be financed, as well as monthly premiums that are included in the mortgage payment.
To make sure that its programs serve low- and moderate-income people, FHA limits the maximum size of FHA loans. The limits vary by location and may change each year.
A VA loan is a low- or no-down payment loan guaranteed by the Department of Veterans Affairs. It is restricted to individuals qualified by military service or other entitlements. The main purpose of the VA home loan program is to help veterans and service-members finance the purchase of homes with favorable loan terms and at a competitive interst rate. The program has less restrictive qualifying terms than conventional programs, and VA loans are available as fixed rate and adjustable rate mortgages.
Texas Veterans Land Board (TVLB) Loan
The Veterans Housing Assistance Program (VHAP) provides financing up to the conforming loan limit toward the purchase of a home to qualified Texas veterans. VHAP loans generally have favorable interest rates with terms from 15 to 30 years. There is no maximum sales price with the VHAP; however, the TVLB can only loan up to the conforming loan limit towards the purchase.
VHAP loans typically require an escrow account be set up for taxes and insurance. Cosigners and guarantors may be accepted on the veteran's behalf if the veteran has sufficient income to qualify for at least 60 percent of the monthly payments on the mortgage loan, including taxes and insurance.
All new-construction homes financed through the Texas Veterans Housing Assistance Program (VHAP) must meet the U.S. Environmental Protection Agency's (EPA) new guidelines for ENERGY STARŪ qualified homes or must receive a Home Energy Rating Systems (HERS) rating of 75 or less.
USDA Rural Development (RD) Loan
A USDA Rural Development (RD) loan is a no down payment loan available for the purchase of new or existing homes in rural America. Rural does not mean country. The home may be located inside the city limits of selected communities of generally less than 10,000 population. In some cases, communities up to 25,000 population are eligible for RD financing.
RD loans are fixed rate, 30 year mortgages. While there are no loan limits, the program does have income limits. The income limit generally is based on 115% of the median county income adjusted to family size.
Even though RD is a nothing down loan, there are closing costs. However, the seller can pay all or a portion of the closing costs, and any remaining closing costs may be added to the loan up to the appraised value of the property. If any cash is required of the borrower it can be 100% gifted.
First Time Homebuyer Mortgage
First Time Homebuyer (FTHB) loan programs typically offer lower down payment requirements and relaxed underwriting to help families purchase their first home. These programs go by various names, including Home Ready and Home Possible. The programs allow minimal down payments and allow borrowers to use gifted funds for closing. Some blemishes on the borrower's credit history may be acceptable, and programs are available for borrowers with non-traditional credit (those who don't use credit cards and don't borrow money). Additional features may be available for teachers, police officers, firefighters, health care workers, and military personnel that make the programs even more attractive.
While many of these programs target individuals who never have owned a home, past home ownership does not always disqualify a borrower. Most programs consider individuals "first time homebuyers" if they haven't owned a home for 3 years. All programs require you to live in the property being purchased.
When purchasing a home that is not exactly what you want or that needs renovation, a rehab loan lets you finance the purchase and the desired repairs or renovations into one loan.
A rehab loan is a fixed rate, fully-amortizing loan. The program makes no restrictions on the types of repairs, has no required improvements, and has no minimum amount of repairs. Loan amounts are based on the "as completed" value of the property, and the rehabilitation costs can represent up to 75% of the "as completed" value. You also can finance certain construction-related costs, such as inspection, architectural, and engineering fees. The maximum loan amount is based on the lesser of:
- The sum of the purchase price plus the cost of rehabilitation and allowable construction-related costs; and
- The "as completed" value of the property.
A construction loan is a short term, interim loan to pay for the construction of a home. Usually it is designed to provide periodic disbursements to the builder during the construction period. Once construction is complete, the loan must be refinanced into a permanent mortgage, called the "take-out" loan. Some lenders offer a "one-time close" option, meaning the construction loan automatically is replaced by a permanent mortgage at the end of the construction period. This may reduce your total closing costs.
Lot and Land Loans
A lot loan is usually a short term loan for the purchase of land used for home construction. A land loan can be short or long term with rate and term dependent on the intended purpose for the land.
An interest-only mortgage is one that allows you to pay only the interest portion of the loan for a specified period of time. During this period you are not required to make any payments towards the loan principal. Once the period ends, the loan amortizes over the remainder of the term.
Interest-only loans are very attractive when:
- You expect your property to gain value quickly;
- You put a large down payment on the property;
- You intend to keep the property for a short period of time;
- You expect to make significantly more money in the future and want to qualify for more home now.
Despite their attractiveness, interest-only loans have some dangers.
- If you carry the loan past the interest-only period, you may find yourself unable to afford the increased loan payment. We call this payment shock.
- During the interest only period you are not required to make any payments towards the loan principal. You may not be able to afford to sell your property if property values are not increasing because you have limited equity.