Home Finance Basics

When it comes to home finance, you have come to the right place. Purchasing a home is a significant commitment. The median cost of homes in the United States now exceeds $300,000. Unless you can come up with that kind of cash, you must borrow to finance a house. The type of loan you need is called a mortgage.

A mortgage payment includes several items. The principal is the money you borrow. The mortgage payment also has interest. Interest is the cost of borrowing money. In addition, lenders require you to take out home insurance and pay the property taxes on the home.

Types of Mortgages

If you had to repay a $300,000 home loan in just a few years like you do to buy a car, the payments would be huge. Mortgages offer much longer repayment timetables. This keeps costs at a manageable level. There are two types of mortgages:

Fixed-Rate Loan

  • The most popular kind of mortgage is a 30-year fixed-rate loan.
  • “Fixed rate” means the interest rate remains the same for the life of the loan.
  • You can save on interest by making a 15-year mortgage, but the monthly payments will be higher.

ARM Loan

  • A second type of home loan is the adjustable rate mortgage or ARM.
  • The starting interest rate can be low, keeping monthly payment amounts down.
  • However, the ARM interest rate may increase. If this happens, payments also increase.

Who Are Mortgage Providers?

Mortgage banks, commercial banks, mortgage brokers, and credit unions originate mortgages. These entities underwrite loans that meet or exceed the parameters that the investor provides. Who is the investor? Mortgages are generally broken into three categories: conventional loans, government loans, and non-conventional loans.

  • Conventional Loans

    Conventional loans are underwritten to meet Fannie Mae or Freddie Mac guidelines. This allows the paper backing these loans to be traded in the marketplace with the guarantee that the underlying loan meets their guidelines.

  • Government Loans

    Government loans are underwritten to FHA, VA and USDA guidelines, and that paper can be traded, too.

  • Non-Conventional Loans

    Non-conventional loans are underwritten to meet individual investor (or bank) guidelines. Traditionally, the paper backing these loans is not traded, and the bank underwriting the loan will always service it.

Home Financing Requirements

A loan originator analyzes a mortgage application submitted by prospective borrowers. Additionally, lenders will ask you to provide supporting documentation such as pay stubs, taxes, and bank statements. Furthermore, the loan officer will also pull your credit score. Good credit is necessary but not essential. With this in mind, your loan officer should be well-trained to quickly analyze various loan programs that meet your income and credit profile. Also, lenders will require an appraisal of the property. Often, you need a down payment, but some programs don’t require that.

If you have additional questions about home financing in the Austin area, contact Joel Richardson today!

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