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There are several factors to consider when choosing the best mortgage for your situation, such as:
- How long you will live in the house
- How much you have to put toward the down payment Finding answers will help steer you toward your best choice.
You are paying for the:
- Principal - the actual amount of money you're borrowing
- Interest - the amount paid for use of the money you're borrowing
The other two elements are taxes and insurance. The length of the loan and interest rate levels affect how much you actually pay over the life of your loan. The longer the length of the loan, the more interest you pay. And yet longer loans provide benefits. It's just a matter of finding the best one for you.
If you do not already have one, seek the services of a competent mortgage professional. The process of selecting the mortgage best structured and priced for your unique circumstances and needs is most effective when you work with a mortgage specialist. Terms and rates vary widely among loan products, lenders, borrower scenarios and periods of time. A mortgage professional can guide you to the loan that best fits your needs, at the best price available at the appropriate time to commit (lock-in) and fund.
You have to know what you're looking for in a home to know what kind of mortgage will best suit those needs. The following links take you to checklists that help you match your home-buying requirements with different loan options.
The short answer is mortgage insurance.
The long answer comes by way of explanation. Mortgage companies can offer you a low down payment mortgage (less than 20%, usually around 5%) when accompanied by insurance. If you default on the mortgage payments, the company is protected from financial loss. You can get mortgage loans and insurance through commercial banks, saving and loans, and mortgage bankers. Mortgage insurance differs from credit life insurance (also called mortgage life insurance) in that mortgage life insurance covers if the policyholder dies.
The options for mortgage insurance are government and private:
Government Insurance. The following insure government-backed mortgages, though restrictions do apply for the latter two.
- Federal Housing Administration (FHA)
- Department of Veterans Affairs (VA)
- Farmers Home Administration (FmHA)
Private insurance is found through conventional financing. Private mortgage insurers back your mortgage rather than the government. There are special programs that allow 2% of the 5% down payment to be covered by a gift or grant of some sort - from a friend, relative, community group, or some other similar organization. The FHA most commonly offers this type of mortgage, but always ask the individual mortgage broker or lender you are dealing with.
Rules for qualifying for a low down payment loan state that you need:
- Enough income to cover the monthly mortgage payment
- Enough cash to pay the down payment, standard closing costs and related expenses
- A good credit record that demonstrates a reliable payment history and a willingness to pay
- Sufficient appraisal value that shows the house is at least equal to the purchase price
- In some cases, a cash reserve for two monthly mortgage payments
Use the debt-to-income ratio to figure out how much mortgage you can reasonably afford.
- Housing expenses should be no more than 26-28% of gross monthly income.
- Total monthly costs, including long-term debt, should not exceed 33-36% of gross monthly income.
These are the percentages most lenders offering conventional loans are looking for. Government-backed loans, such as FHA, will allow for a higher percentage: 29%, housing; 41%, total expenses. Have an extra reserve of cash when buying and moving into a new home to cover additional expenses, such as utility costs, maintenance, and insurance.
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Looking For The Best Mortgage
Next subject: Loan Programs
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