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Understanding the loan programs




Understanding Your Mortgage Options

LENGTH OF MORTGAGES (also called loans):

A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan.  The life or term of a mortgage is 30 years by industry standards, but 15 and 20-year term loans are also available.
Shorter term loans come with cheaper interest rates.

A 15-year mortgage's interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you'll also pay less over the life of the loan than you would if you borrowed the same amount of money with a long term loan.  Monthly payments of a shorter term loan, however, are generally higher than the same loan for a long term because the larger payments of the short term loan are necessary to repay the debt sooner.

A long term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter term loan could be to your advantage.  Whatever term you choose, fixed rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate should rates fall. 
Fixed rate mortgages include traditional FHA, VA, USDA and conventional products.

FHA:

FHA Loans are great loans for first-time home buyers, as they tend to more relaxed requirements, giving new borrowers greater flexibility.  FHA loans are backed by the Federal Housing Administration, which means that the FHA guarantees that a lender will not have to write off a loan if the borrower defaults.  Because of this guarantee, lenders are typically more willing to finance large mortgage loans.  Typically, FHA loans tend to have more lax requirements than conventional loans.  Home buyers can put as little as 3.5% down, must have a minimum FICO score of 620, and will have to have mortgage insurance for a minimum of five years. 

To qualify for a FHA loan, a buyer will have to have a reasonable debt to income ratio and decent credit. In Uintah, Duchesne and Daggett Counties, the FHA county loan limits are up to $271,000 for a single-family home.  The general documentation needed is still the same as other loans.  Borrowers will need to submit tax returns and W-2 statements for the last two years, bank statements and pay stubs for the last two months, and a credit report. Based on this information, a Mortgage Advisor will be able to determine the loan amount and rate a potential buyer qualifies for.

Veteran's Administration Loan or VA:

Is a VA Loan right for you?  The VA loan is designed for active or retired military, Coast Guard and National Guard personnel.  A surviving spouse can also qualify for a VA loan.  The first step in qualifying for a VA loan is to make sure that you are VA entitled.  The regulations tend to be different for service members depending on factors such as when they served, the nature of their service, and how much time they spent in uniform.  The quickest way to make sure you are eligible and have VA entitlement is to get a DD214 form, which any qualified mortgage advisor can assist with obtaining and filling out.  VA loans are terrific loans.  One of the key features is that you have the option to put 0% down for financing loans.  Qualifying for a VA loan is also a lot more lenient in regards to the debt to income ratio.  You can put 0% down and are allowed to go higher into the debt to income ratio, which means a client can typically qualify for more of a loan, definitely a plus for those active or retired service members.

The second step entails qualifying and getting pre-approved for a VA loan and is relatively straightforward.  Usually a Mortgage Advisor will need to see at least two months of the most recent Leave and Earning Statements (LES) that all active members and some retired members get as well, two years of W-2’s and tax returns if necessary.  If you are retired, the Mortgage Advisor will look at retired income still received from the government, as well as civilian income if they are still out in the workforce. 

 

 

Adjustable Rate Mortgages:  ARM’s

The second major category of mortgages are ARMs. They come with interest rates that adjust up or down, depending upon current economic trends.  An ARM's rate is based on a money market index. The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed mortgages. ARMs might also be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes. 

To come up with the ARM rate, the lender will add a "margin," usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about a quarter point to two points or more, depending upon the economy. When the first adjustment occurs (from six months to many years) and how often the rate adjusts, depends upon the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year, or during larger periods. The adjustment period is disclosed in the loan.

ARMs generally have limits or "caps" on how high it can adjust during each adjustment period as well as over the life of the loan.  The caps protect you from drastic market changes, but ARMS don't offer the stability of a fixed rate loan.  ARMs' lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you'd have to pay for the same mortgage with a higher fixed rate. And if index rates fall with an ARM, of course, so does your monthly mortgage. 

ARMs could also be a good choice for someone who knows his or her income will rise and at least keep pace with the loan rate's periodic adjustment cap. If you plan to move in a few years and are not concerned about the possibility of a higher rate, an ARM also could be a good choice.

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