Home Loan Programs Explained
Different loan programs have different rules and requirements. Our job is to match you with the loan that works best for your specific situation, whether you are purchasing a home or investment property or refinancing.
Characteristics that lenders consider when qualifying clients for loans include:
- Credit score and credit history
- Income (over the past few years)
- Amount of loan
- Down payment
- Purpose of loan (i.e. primary residence, second home, refinance, investment property)
Types of loans
Due to changes in the lending industry, many previously available programs are no longer available for borrowers. Now, full documentation is required for most of our programs. This means, for instance, we will require formal verification of your employment from your employer and bank deposits from your bank. If you are self-employed, you’ll need to provide your Schedule Cs from filed federal tax returns. The most common loan programs include:
- An FHA loan—Insured by the Federal Housing Administration(FHA), an FHA loan is the most flexible type of mortgage and may allow you to purchase a home with as little as 3.5% down. There are programs within FHA for rehabilitating homes and for down payment programs.
- A Conforming loan—This type is eligible for purchase by the two major Federal agencies that buy mortgages after closing, Fannie Mae and Freddie Mac. There are two loan levels for Conforming loans: Agency and Agency Jumbo. Agency loans have a maximum loan amount of $417,000; Agency Jumbo loans are capped at $729,750, subject to geographic restrictions. Conforming loans that do not require a 20% down payment require private mortgage insurance.
- A Jumbo mortgage— When you require a mortgage larger than the maximum eligible for a conforming loan, you are looking at a jumbo mortgage. It generally refers to a first or second mortgage in excess of $729,750, subject to certain geographic restrictions.Your LaSalle loan advisor will explain the details of each loan type and answer any questions you may have.
Fixed versus adjustable rate
You will often have the option of getting a fixed rate loan or an adjustable rate loan. Your decision may depend on the current lending rates and whether you expect your income to change over the next five to ten years.
Why choose a fixed rate loan?
With a fixed-rate loan, your monthly payment of principal and interest never changes for the life of your loan. Your property taxes may go up, and so may your homeowner’s insurance premium part of your monthly payment, but generally with a fixed-rate loan your payment will be very stable.
Fixed-rate loans are available in all sorts of shapes and sizes: 30-year, 20-year, 15-year, and even 10-year. During the early amortization period of a fixed rate loan, a large percentage of your monthly payment goes toward interest, and a much smaller part toward principal. That gradually reverses itself as the loan ages.
You might choose a fixed-rate loan if you want to lock in a low rate or simply want the security of always knowing what your mortgage payment will be.
Why choose an adjustable rate mortgage?
Adjustable Rate Mortgages (ARMs) come in even more varieties. Generally, ARMs determine what you must pay based on an index, such as the one-year LIBOR rate, the one-year Treasury Bill rate or the Federal Home Loan Bank’s 11th District Cost of Funds Index (COFI. They may adjust every six months or once a year.
Most programs have a “cap” that protects you from your monthly payment increasing too much at once. There may be a cap on how much your interest rate can go up in one period—say, no more than two percent per year, even if the underlying index goes up by more than two percent.
You may have a “payment cap,” that limits how much your monthly payment can go up in one period (versus capping the interest rate directly). In addition, almost all ARM programs have a “lifetime cap.” This means your interest rate can never exceed that cap amount, no matter what.
ARMs often have their lowest, most attractive rates at the beginning of the loan, and can guarantee that rate for anywhere from a month to ten years. For instance, you may fix the introductory rate for five, seven, or ten years that then adjusts every year thereafter for the life of the loan according to an index.
You might want an adjustable rate mortgage with a lower introductory rate than you can get with a fixed loan if you anticipate selling the house within a certain period of time, plan to refinance again when rates go up or imagine being able to pay more if mortgage rates adjust upward. With ARMs, you do risk your rate going up, but you also take advantage when rates go down by pocketing more money each month than would otherwise have gone toward your mortgage payment.