What is the best loan program for your home buyer?
Realtors you are the home buyers' most trusted advisor when it comes to buying a new home. As you know, buying a home is not all about the dream house; a lot of it comes down to the financing. What the home buyer qualifies for, can afford, and what is the best mortgage scenario for their circumstances.
Not all home loans are the same. Knowing what kind of loan is most appropriate for your client's situation helps you tailor their home search and prepares them to have the best home shopping experience. Working closely with a lending partner will enhance your client's overall experience and will help them make the best financial decision for their needs.
The first thing your buyers should know is that their mortgage is made up of three different components:
- Loan Term
- Loan Type
- Interest Rate
Here's a little cheat-sheet to help you, as the agent, answer any mortgage questions your home buyers may have about these three areas.
The term of the loan refers to the length of time the buyer has to repay the loan. The most common loan terms are either 30 years or 15 years, but home buyers can work with their mortgage professional on a repayment term that works best for them.
The loan term affects the monthly principal and interest payment, the interest rate of the loan, and how much interest the buyer will pay over the life of the loan (or total cost of the loan).
|SHORTER TERM||LONGER TERM|
|Higher monthly payment||Lower monthly payment|
|Typically lower interest rate||Typically higher interest rate|
|Lower total cost of the loan||Higher total cost of the loan|
Give your buyers good advice and have them review multiple loan quotes comparing the different terms of a loan. Doing so will allow them the opportunity to see the overall cost of the loan visually.
The best loan type for your buyer entirely depends on their overall financial portfolio and goals. There are so many different loan programs available for home buyers from the federal level all the way down to the county level. Be sure to check with your trusted mortgage partner to learn about the most current loan programs in your area.
The most common loan programs are:
- Conventional: A majority of mortgages fit into the conventional category. Due to the lack of government backing, conventional loans typically cost less than FHA loans but can be more challenging to get.
- FHA: Backed by the government, the FHA Loan has a lower down payment requirement, lower credit score threshold usually, and income qualification. Generally these loans are best for first time home buyers.
- VA: This earned benefit is offered to all active duty and retired military personnel. It has highly competitive pricing, no mortgage insurance requirement, and the option to wrap the down payment into the loan principal. These benefits can be extended to spouses, and further benefits are extended to disabled vets.
- USDA: Ideal for low-to-middle income home buyers looking to buy in a rural area and who may not be able to get conventional financing. It’s managed by the Rural Housing Service and offers flexible credit criteria and zero percent down.
Let's compare the general requirements of these loan programs side-by-side:
|GOVERNED BY||Fannie Mae/ Freddie Mac||Federal Housing Administration||Department of Veteran Affairs||Department of Agriculture|
|DOWN PAYMENT||Minimum 3%||Minimum 3.5%||0% Required||0% Required|
(Private Mortgage Insurance)
|Lots of PMI Choices||.85% Monthly Payment||No PMI||0.35% Monthly Payment|
|UPFRONT FEES||0%||1.75%||2.15% - 3.3%||1%|
If one of the above loan options doesn't fit your buyers' needs, they may need to consider an alternative. Non-traditional loans, such as Jumbo, Zero Score, Interest Only, Adjustable Rate, etc., offer versatile methods of financing for select borrowers.
Interest Rate: Fixed Rate vs. Adjustable Rate:
Beyond what the market determines as the interest percent to be paid back to the lender, interest rates come in two basic types: fixed and adjustable.
- Fixed Rate Mortgage: This is an unchanging rate that stays the same throughout the entire term of the loan.
- Adjustable Rate Mortgage (ARM): This is usually broken into two periods. The first period is a set number of years (usually five years) within the term of the loan that the interest rate is fixed and won’t change. The second-period rate goes up and down regularly (usually every year) based on market changes. ARM's also have specific rules that affect a borrower's mortgage, always have a lending professional fully explain the details of an adjustable rate.
|Fixed Rate||Adjustable Rate|
|Lower risk during the life of the loan
||Higher risk during the life of the loan|
|Typically higher interest rate depending on the market
||Typically lower starting interest rate depending on the market
|Interest rate never changes||After a fixed period, the rate will increase or decrease based on the market|
|Monthly principal and interest payment stays the same for the life of the loan
||Monthly principal and interest payment will increase or decrease for the life of the loan|
In terms of interest rate types, share with your buyers that; a fixed rate gives homeowners stability and certainty for the life of their loan, an adjustable rate is less predictable. It might be cheaper in the short term but has significant financial ramifications if the market spikes.
No matter what, encourage your home buyers to review multiple options that could fit their situation. As the real estate professional, it's crucial for you to partner with a trusted mortgage lender. Request that the lender provides several quotes with as many qualified scenarios available, so your client can see which option offers them the best deal.
Your home buyers will thank you!
This information is intended for broker use only and is not intended for distribution to the general public. All program guidelines are subject to change without prior notice. Please refer to a home loan specialist for more underwriting details and full product guidelines.