3. PULLING THE TRIGGER
So, you've finally spotted a listing that makes your heart skip a beat. It's in the right neighborhood, the right price range, and miracle of miracles, hasn't had its character strip-mined out by ham-fisted remuddlers. You've been to the open house, and returned at night. Yeah, the fireplace is only decorative and not a real wood-burning one, but how often would you really use that kind of fireplace if you actually had one anyway? Probably not that much, we bet. Come on, it's LA!
Where does one get a loan? Usually people start by browsing mortgage providers online, but you can also go to institutional lenders (banks), credit unions, insurance companies, the seller of the property, and, largely, mortgage bankers. Mortgage brokers make up the majority of lenders--more than half, in fact. A mortgage broker acts as an agent between a lender and borrower. Different brokers have different lending contacts, so be sure to do your homework on who you’re hiring. Mortgage bankers, on the other hand, work for a bank and offer bank loans.
JP Morgan Chase and Wells Fargo are too well-known examples of commercial banks. Mortgage lending is not their main business, yet they often provide competitive rates and sometimes even discounts to members. Credit Unions offer mortgages as well.
Here's your basic mortgage vocab lesson for today:
Most mortgages are "amortized loans" where equal payments (usually monthly) of the principal and interest are made over a certain period (usually 15 to 30 years.) The payments cover both the principal and the interest.
*Adjustable vs. Fixed Rate
An adjustable-rate mortgage (ARM) changes the monthly payment based on fluctuating interest rates and usually offers a lower interest rate. A fixed rate mortgage locks in the payment and interest rate for the length of the mortgage. If you can lock in a mortgage at a low fixed rate, woohoo! You win. Interest rates are set by state laws, and charging over that rate is usury.
Jumbo mortgages are home loans that are bigger than normal. They're called jumbo loans because they exceed the "conforming limit," which is the maximum amount that Fannie Mae and Freddie Mac will buy. In Los Angeles, New York City, and other big metro areas, the conforming limit is currently $625,500 and in much of the country it's $417,000. Full list here. Since the recent downturn, jumbo mortgages have become more difficult to get. Expect to put down at least 20% of the down payment and to get an adjustable-rate loan, as fixed-rate jumbo mortgages are relatively rare.
Conventional mortgages are loans not made by the VA, FHA, or the Rural Housing Service and are usually offered by banks, credit unions, and savings and loans institutions. Conventionals are categorized as conforming or non-confirming, the prior being acceptable to government-sponsored enterprises such as Fannie Mae and Freddie Mac. These kinds of loan usually require at least 5% down payment; a down payment of less than 20% requires Private Mortgage Insurance (PMI). PMI translates to a percentage of your loan amount.
Government-backed mortgages are insured by some federal agency. The loan can be made by the private sector, but still receives the insurance of the federal government. The biggies are
-- FHA Loans - insured by the Federal Housing Administration and the most popular type of government loan. You’re required to pay less of a down payment than with a conventional loan, and there’s more leeway if you have qualification roadbumps, but you are going to pay a premium for government mortgage insurance.
-- VA Loans - a program managed by the Department of Veterans Affairs, these loans are available to military servicemembers and their families. VA loans can be used to finance 100% of the home purchase.
*Pre-Qualified vs. Pre-Approved
Pre-qualification is when a mortgage broker informally lets you know how much money you can borrow based on factors including your debt-to-income ratio. (See below.) Pre-Approval is a more intense process where you have to submit financial documentation and then the lender will agree to the loan in writing in a commitment letter. This letter has an expiration date, so make sure you know your timing, because you'll also have to include it in any board package.
Basically, the percentage of your gross monthly income that goes towards paying your debts. These could be housing related (rent, mortgages, etc) and also debts like school loans and car loans. Check out this calculator to figure out some more details.
Now, what about points? Points are packets of extra prepaid interest payments that equal 1% of the loan amount. Do you get points for being bad? Some mortgage (plans) might lower the interest rate in exchange for extra points paid upfront, which is known as a buydown. Some buydowns don't last for the whole loan but rather for just the first few years, while others last the whole loan.
Remember, this is just very basic info--mortgages are complicated to the average Joe, but explained in much more detail by a professional. Do some scouting, get a recommendation and call up a mortgage broker for the whole shebang.
· Curbed University [Curbed LA]