I’m not a lender. Repeat. I’m not a lender. However, in order for many of my clients to purchase a home a loan is involved. I thought I’d break things down to basics in the hope that my home buyers out there will have a little more of a foundation when they start thinking about getting a mortgage. And away we go!
The one thing to remember with loans is that it is a calculated (get it?) process to get one. You need to achieve synergy between your credit score, income, and money in the bank. The better that these 3 things meet up at, the better your interest rate will be which plays a large part in how much your mortgage payment will be each month.
I tend to recommend fixed rate mortgages for most of my clients as that provides some security when the market becomes more volatile, but variable rate mortgages can be advantageous if you don’t plan on staying in the property long and you are able to place yourself in a home with some embedded equity.
Most important thing to remember before we dissect the loan types available is to work with a trusted and experienced local lender. I unfortunately have had clients go through horrific experiences with lenders who are not based in Ventura County, who promise the lowest interest rates, and magically disappear when the going gets rough. You know the ones that use pop-up banners on websites featuring dancing aliens and bright pink, flashing lettering? Don’t use them. If you’re not sure who to use I have some great ones that I can recommend, just ask.
Loan Types
Without getting too technical there are four main types, FHA, VA, Conventional and Jumbo. Most transactions fall under these categories. Each of them have pros and cons, eligibility requirements, and varying features that make them work or not work for you. At the end of the day one of them should work and provide you with the entry you need to the American Dream of home ownership. Here’s a breakdown:
FHA
The first, FHA (Federal Housing Authority), is a government insured loan. It is usually issued to low to moderate income buyers and those with lower credit scores. It has a maximum loan amount that peaks at $603,750 in Ventura County. The best part is low interest rates and down payments are only 3.5%. The goal is to make home ownership possible for those not swimming in money bins. Many first time homebuyers fall into this category, but it certainly isn’t limited to first time homebuyers only. There is mortgage insurance on the life of these loans which can up your payment a bit versus using a conventional loan (discussed below in Conventional section).
One challenge that FHA buyers experience is that the home you are buying must be FHA eligible. When dealing with condominiums, townhomes, and planned urban developments (PUD) it can be tough finding communities that have maintained their eligibility. Many developments sign up when they are first built and after 2 years they don’t renew.
One workaround to this challenge is using the Fannie Mae HomeReady program. The down payment is low like an FHA, 3%, but instead of having to only buy FHA eligible properties you have a much greater selection of homes to choose from. There are income restrictions in some communities that you have to be careful to adhere to. For example, many areas of East Ventura have an income limit of around $85,300/year and RiverPark in Oxnard has no income limit at all. There is a handy website you can use to look up a property address to find out what income restrictions there are.
FHA properties can’t have any major structural issues. No cracked foundations, no homes hanging off a cliff. Also, FHA loans can’t be used for income properties, they must be the owner’s primary residence.
VA
Before even delving in to this I must express my sincere gratitude for the people who serve our country. Some of the most rewarding transactions I’ve been able to be a part of have involved working with veteran buyers and sellers. Thank you for your service.
VA (Veterans Affairs) loans are for the benefit of those who serve our country in the armed forces. Rates are in line with FHA rates, definitely on the lower side as it should be. Down payments are not required, again as it should be. In the past and in some transactions today the seller would contribute the veteran buyers’ closing costs as well.
Like FHA, VA loans must be used for the owner’s primary residence and the property is required to pass an inspection that verifies the property is free of any major structural issues and in the case of VA loans, the home must be cleared of any active termite infestations. Again, as it should be.
I highly encourage anyone who has served to check on their VA eligiblity and whenever possible take advantage of it to purchase their home.
Conventional
This Swiss Army Knife of home loans right here. That does come, however, at a cost. Down payments are usually at 20%, but there are programs out there that offer 10%, 5%, and even 3% (see Fannie Mae HomeReady program above), so that does keep your options open. The lower down payment options are restricted to single family homes and can’t be used for duplexes, triplexes, etc. 20% down, again, you have free reign.
The main advantage of conventional loans is that there isn’t any mortgage insurance added to your monthly payment. Over time you can really save some money this way. Also, you can use this type of loan for investment properties, distressed fixers, and land.
Conventional loans require higher credit scores, usually around 700 and up, and that scale usually slides by the amount of money you are willing to put down. Interest rates are slightly higher than FHA/VA, but with more money down in this scenario monthly payments remain very manageable in comparison.
Like FHA/VA conventional home loans are backed by federal agencies and allow lenders to be a little more flexible when it comes to qualifying.
Jumbo
As the name states this is for the home buyers that are looking to purchase something outside of the limits of the first three we’ve discussed. These loans are typically reserved for higher end properties which are mainly more expensive and require more money to purchase. These tend to fall in the sweet spot for buyers that are extremely qualified, but don’t have the ability to throw down all cash to purchase a home at that price point.
Since these loans aren’t backed by federal agencies the bank is little more exposed and as you might imagine, they are more strict with giving these out. Higher credit scores, income, and lower debt-to-income ratios come into play here. For most borrowers looking at these loans though these factors are not an issue.
Interest rates can be a bit higher, again because the bank is more at risk, but this can certainly depend more on the buyer’s financial situation. The banks love these types of clients as they tend to purchase more products than a mortgage like wealth management services and will do what it takes to earn their business.
Fund the Fun
I hope you found this remedial breakdown helpful, but as I said in the beginning I am in no way an expert in all things home loans. There are some amazing products out there that I didn’t cover including down payment assistance and special loan programs for teachers, police officers, and fire fighters. The best thing to do is to reach out to me and allow me the opportunity to connect you with some of the best lenders in Ventura County that offer the best programs that fit your situation. As you can see home loans is not a one-size-fits-all kind of thing. They all, however, offer an incredible thing – providing your family a home that will become the backdrop for your life and when they fund the fun can begin.
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