Texas Conventional Home Loans
What you need to know about Conventional Mortgage Loans
So you’ve been living frugally with your parents for longer than you’ve hoped, but you’ve managed to finally save up a down payment for you first home. You’ve spent weeks, maybe even months, constantly checking out potential neighborhoods to find your perfect home. Perhaps, you’ve finally found the perfect home, but now you’re not too sure what the next steps will be. You may have heard the term conventional home loan thrown around and are unsure as to what it means or if it’s the right option for you. Before you talk to someone about rates and such there are some basics you need to understand first.
Here are some questions you should ask yourself:
What type of loan do I qualify for?
What’s the total combined cost of owning a home?
How much should I put down for my deposit?
Who should I talk to, to get my loan?
Where and how do I start?
At this point you may have a head clouded by emotions, when you should be putting your emotions aside and be thinking logically about what the best approach is to the loan approval process. The FPS Lending team has put together the following to help you better understand what a Conventional Home Loan is:
Conventional mortgage loans offer a unique opportunity to borrowers to become homeowners under very favorable terms. The loan does have some strict guidelines compared to other loan options but can be more affordable. You can see down payment requirements as low as 3% in some cases.
One thing you may need to know about these loans is that it’s not guaranteed by Uncle Sam. There are a few differences from loans that are back by the Government that you need to understand. These loans may be a bit tougher to qualify for and can have stricter qualifications. Here are some conventional mortgage loan criteria to review before contacting a Mortgage Professional:
Income – Your monthly mortgage payment, including taxes and fees, should never exceed more than 36% of your total monthly income. If you combine this with your other debts and car loans this amount should, ideally, never exceed 43% or your monthly income.
Financial History – Your lender will want to look at your past two years of income with proper documentation; W2’s and pay studs. If you’re self-employed, they may require you to show more documentation such as, profit and loss statements or even tax returns. You’ll also be required to provide certain identification, such as your drivers licenses or your social security card. What this comes down to is proving you’re able to pay the lender and that you bring home the amount you say you do.
Credit Score – Your credit score plays a major role in the approval process of your loan. In most cases your credit should be at least 620 or above to get approved. If your credit does fall below this it may make it difficult to qualify for this loan type.
Down Payment – The typical down payment required for a convention loan is 20% of the total home cost. If you’re not able to come up with the 20% you can take on a loan with as little as 3% down, but you be adding the cost of mortgage insurance which can easily add more expenses to your total home ownership cost. Luckily there are options that offer no mortgage insurance even when you put down less than 20%. Your credit score will have to be much higher to qualify, but it can help provide you with a lower fixed monthly payment. Speak with your local Texas Mortgage Lender to get all the details.
Home Price – The total amount that you want to finance will play a role in whether you’ll get approved or not. Freddie Mac or Fannie Mae loans have a cap of $417,000. This is where a Texas Mortgage Broker comes into play, since they can find the perfect loan option for you incase you need a higher loan amount. Jumbo Loans can take care of this need, but again the more you take out for your Mortgage, the tighter the qualifications and guidelines become. Make sure you talk to your Texas licensed mortgage adviser to find which loan option you can realistically take on.
Getting the best interest rates
By now, you’ve pre-qualified yourself for the mortgage amount you want and now you want to know which option fits your needs the best.
Fixed Rate Mortgages
If this is a home that you expect to live in for 5+ years you should consider a fixed rate mortgage. These range from 30, 25, 20, 15, or even 10 year periods. Most people, with the low mortgage rates today, are choosing to get locked into a fixed mortgage. The beauty of this, is that you know your mortgage payment will be same for the lifetime of the loan.
Adjustable Rate Mortgages
These mortgages have a great low rate, but add a bit more risk since if interest rates rise at the time of reset your mortgage payments will rise, increasing your total cost of your home loan. If you know that you may not be living in that home for 5+ years it may be the right option for you. Since it will bring you a lower interest rate than a traditional Fixed Rate Mortgage.
There are three main types of Adjustable Rate Mortgages:
The interest rate is a low rate at signing and then will gradually increase based on the terms that you agree upon.
Interest Rate Only
You will only pay the interest each month for the stated time period you select with your lender, but then it will switch over to principal and interest once that time period ends.
These will usually show up as 10/1, 3/1, 5/1, or 7/1. That means that they are fixed for 10, 3, 5, or 7 years, and then adjust every year past the stated period of time that you agreed to with your lender.
Here are a few things to consider before choosing an ARMS:
Starting interest rate: The initial interest rate at signing
Adjustable period: When your loan moves from fixed to variable
Index: The cost of your mortgage lender to borrow the money. Ideally, you should choose a slow changing index because as the lender’s rate climbs yours does too.
Life-of-the-loan cap: This is your mortgage’s interest rate cap
Periodic cap: This determines how much your interest rate can adjust in one year
Low margin: This is your mortgage lender’s profit margin. It’s typically around 2.75%.
Prepayment penalty: A penalty for paying your mortgage off early, and it’s typically around 6 month’s worth of mortgage payments.
Regarding interest rates there are three things you need to consider:
The base interest rate: The rate that your mortgage professional secured for you with their lender
The Annual Percentage Rate (APR): The total combined cost of your loan, including closing costs that are divided up over the number of years your loan is. This rate is typically higher than your base interest rate that your mortgage payment is attached to.
The lifetime cost of the loan: That big number that looks terrifying on paper. Basically how much you’re going to pay over the term of the loan for the principal and interest.
*Not all borrowers will qualify, credit approval is required