Mortgage 101 – The Basics

March 13th, 2019

Steve Hollander – The Keyes Company
Maria Furtado

Financing a home has changed over the past couple decades. Gone are the days when potential home buyers could simply “promise” to pay and have lenders bend over backwards to offer a home loan. After the mortgage meltdown of a decade ago, guidelines were created to ensure that the borrower can actually afford to buy the home. While these changes were for the protection of borrowers as much as lenders, home buyers, especially first time home buyers, might find the process confusing. Understanding the types of loans programs available and their respective approval process can take some of the mystery out of obtaining a home loan and help you prepare to buy your new home.

Pre-Approval vs. Pre-Qualification

The first step in buying a home is to speak with a lender who can help you determine how large of a home loan you can qualify for and what type of loan program meets your needs. Once they have reviewed your information and determined your eligibility, they will issue you a letter you can use to prove to the seller that you are financial capable of buying the home.

These letters fall into two different categories and have some real differences:

1. Pre-Qualification Letter – This letter is issued after a basic look at your information. The lender will ask about your income, job history, debt and savings and then pull your credit report. Based on all the information, they determine your eligibility.

2. Pre-Approval Letter – A pre-approval letter is stronger, in this case the borrower’s information is submitted through an underwriting system where the buyer is actually approved, pending the identification of the home and appraisal.

Mortgage Options

Loan programs, interest rates, length, and structure can vary slightly from lender to lender. The most common types of mortgage loans are conventional, FHA, VA and Jumbo – each with its own advantages and disadvantages.

 · Conventional – A conventional loan is still the most common mortgage. Typically these loans last for 30 years and have equal monthly payments. While there are some programs with lower down payment requirements, a 20% down payment is still the most common and eliminates the PMI (Private Mortgage Insurance) requirement of loans with less than 80% loan-to-value.

 · FHA – An FHA loan is guaranteed by the Federal Housing Administration and is designed to help first time home buyers enter the housing market. The down payment can be as low as 3.5% and can even be a gift from a family member. While borrowers will pay a PMI premium, FHA loans have less stringent credit, income and savings requirements which make them easier to obtain.

 · VA – Veterans Affairs offers a special loan program for military members and their qualifying spouses. These loans require no down payment and the borrower does not need to be a first time buyer. Closing costs are also strictly regulated by the program to help the buyer obtain their loan.

 · Jumbo Loans – Jumbo loans are very similar to conventional loans and are used when the loan amount is higher than the conforming value set by Freddie Mac and Fannie Mae. These loans tend to have higher interest rates and stricter guidelines.

Your lender will discuss your options based on your personal situation. Understanding the basics of home loans will help you be better prepared as you compare lender options and put you in the best position to find the right home loan program for your personal needs.