Education for Buyers

Basic Types of Loans

FIXED-RATE CONVENTIONAL MORTGAGE

A conventional loan is a loan made to a buyer without a third party involved. They are typically paid off in equal monthly payments spread over 15, 20, or 30 years. The interest rate stays the same for the life of the loan; therefore, the monthly principal and interest payment stays the same. Terms may vary among lenders, but many can be obtained with as little as a 5-10% down payment. When the down payment is less than 20%, it is necessary to obtain private mortgage insurance (PMI). This protects the lender from a buyer's default. Advantage: Quick processing and stable payments.

ADJUSTABLE-RATE MORTGAGE (ARM; also VARIABLE RATE)

The interest rate may go up or down over the years and is tied to a financial market index. Monthly payments may also be adjusted on a periodic schedule. Most set a cap on possible increases to interest rates and monthly payments. Advantage: The lower initial interest rate and monthly payment allow the buyer to pay less in the early years for a larger loan and help buyers qualify for a more expensive home.

FHA LOAN

The Federal Housing Administration doesn't make loans but insures loans, which increases lenders' willingness to make low down payment loans. This loan enables a homebuyer to make a small down payment. The down payment can be as low as 2.25%, depending on the size of the loan. Second mortgages are permitted depending within specific guidelines. Points (prepaid interest) can be charged by the lender. This may be negotiated between purchaser and seller. FHA buyers of single-family homes can finance 100% of closing costs. FHA charges an advance mortgage insurance premium fee (MIP), as well as a monthly charge for all loans. Advantage: Low down payment, low interest rates, long terms, many are fully assumable loans, no prepayment penalty, and second mortgage permitted under certain circumstances.

VA LOAN

Qualified veterans can take out loans up to a specific limit with no down payment. VA-guaranteed loans can be combined with second mortgages and are fully assumable by any qualified buyer. Qualification guidelines are more flexible than those for conventional loans. Advantage: Usually no down payment, points can be paid by the seller, loan origination fee is tax deductible, no prepayment penalty, assumption make the home very attractive to buyers when you decide to sell.

VHDA LOAN

If you haven't owned a home in the last 3 years and if your income is below a certain level, you may be able to qualify for a lower interest loan through the Virginia Housing Development Authority. You must have excellent credit and assets not over 50% of the sales price. There is always one discount point.

What Information Specifically Will the Lender Ask for When I Apply for a Loan?

• The kind and amount of mortgage loan you wish to obtain
• The source of your down payment money (bank account statements, gift, etc.)
• The length of time you wish to borrow the money for
• Your current address, previous address, and length of time at each
• Your employment history, your current employment, address and income
• Your Social Security number
• Your assets, including your gross monthly income, your bank balance(s), your possessions (car, credit cards, etc.)
• Your debts and account numbers (car payments, credit cards, etc.)

Next: What Are You Paying in a Mortgage Payment?