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Looking For the Right Mortgage For You

Types of Loans

Fixed rate mortgages are traditional loans in which the interest rate and principle monthly payments do not change for the entire duration of the loan. (Your escrow payment will most likely change annually.) While usually more expensive than ARMs, these loans are preferred by many borrowers because they are predictable. These loans are best suited for people who plan to stay in their home long term, ie, more than 7 years.

Highlights

  • Provides peace of mind due to knowing exactly what your mortgage payment will be each month for years to come
  • Interest rate is locked in, so if the market rates rise, you’ll often save money compared to those with adjustable rate mortgages
  • Not limited to first time home buyers
  • Best fit for buyers planning to stay in their home long term
  • Good for buyers with very good credit (FICO score of 740 or higher)
  • Can be refinanced later down the road

Terms

  • 15 year
  • 20 year
  • 30 year

The interest rate on an Adjustable Rate Mortgage through New Era Bank will vary based on the United States Treasury Bill index. Monthly payments may change over time due to fluctuations in that index. Usually there will be an initial period where the rate is fixed and then it will adjust. These loans are good for people who plan to move within five years.

Highlights

  • Those who are planning to move or refinance within the first 5 years
  • Those whose income has a high probability of increasing
  • Those who need a low initial rate to qualify for their mortgage
  • Those with good credit (FICO scores of 680 or higher)

 

Terms

  • 1 Year ARM
  • 2 Year ARM
  • 3 Year ARM
  • 5 Year ARM

 

1 year ARM

With this mortgage, the interest rate can change each year. Annual rate increases are limited to 2% annually or 5% for the duration of the loan. The initial rate is lower to reflect the risk that the borrower is assuming, so you may qualify for a larger mortgage amount. You will not have to refinance your mortgage if rates drop, and you could benefit from continued lower payments if rates do not rise.

2 year ARM

With this mortgage, the interest rate is fixed for two years, and then changes to a two-year adjustable rate in the third year. From there, the rate will adjust every two years for the duration of the loan. Annual rate increases are limited to 2%, and the lifetime increase is limited to 5%. Typically, the initial interest rate is higher than a one-year ARM, but lower than a fixed-rate.

3 year ARM

With this mortgage, the interest rate is fixed for three years, and then changes to a three-year adjustable rate in the fourth year. From there, the rate will adjust every three years for the duration of the loan. Annual rate increases are limited to 2%, and the lifetime increase is limited to 5%. Typically, the initial rate is higher than a one-year ARM, but lower than a fixed-rate.

5 year ARM

With this mortgage, the interest rate is fixed for the first five years and then switches to a five year adjustable rate in the sixth year. From there, the rate will adjust every five years for the duration of the loan. Annual rate increases are limited to 2%, and the lifetime increase is limited to 5%. The initial rate is usually lower than most 30- or 15-year fixed rate loans. This mortgage makes the most sense if you plan on staying in your house less than five years.

ARM tip

Annual rate changes can make budgeting difficult, so calculate your monthly payment in the worst-case scenario, and if it fits your budget and is an acceptable level of risk, the ARM will save you money in the end.

A USDA loan provides many options for borrowers. Made possible through the US Department of Agriculture, this type of loan reduces costs for homebuyers in rural and suburban areas and is one of the most cost-effective loan programs in the marketplace. USDA home loans are available to borrowers who meet certain income and credit standards. The most important requirement of a USDA loan is that the property must be located in a USDA-eligible geographic area.

Highlights

  • 100% Financing
  • Annual guarantee fee paid monthly
  • $417,000 maximum loan amount
  • Properties limited to 1-unit, non-farm, primary residences
  • 6% limit on seller concessions
  • No financial reserves required for 1-unit properties
  • 102% maximum loan-to-value
  • Closing costs can be financed

The Fannie Mae HomeReady Mortgage is designed to help creditworthy borrowers with lower to moderate incomes obtain an affordable mortgage with reduced closing costs. Income from a non-borrower household member may be used for qualification. Another feature of this program is that co-borrowers are not required to live in the home, so a relative or other individual may assist with the home purchase.

Highlights

  • 3% down payment
  • Lower mortgage insurance requirements
  • No minimum borrower contribution (1 unit properties only)
  • Extended household income can be used for qualification
  • Not limited to first-time home buyers (borrower cannot own other real estate at the time of closing)
  • Homeownership education course required
  • Gifts, grants, and cash-on-hand permitted as a source of down payment and closing costs (1 unit properties only)

Backed by the Federal Housing Administration (FHA), these loans are designed for low to moderate income borrowers who are unable to make a large down payment. An FHA loan is an attractive alternative to borrowers because credit and income requirements are less strict than traditional loans.

Highlights

  • 3.5% down payment
  • Mortgage insurance required
  • $271,050 maximum loan amount
  • Single-family and 1–4 unit properties qualify
  • 6% limit on seller concessions
  • No financial reserves required for 1 unit properties
  • Not limited to first time home buyers
  • Down payment can be gifted
  • Home being purchased must be appraised by FHA-approved appraiser and meet certain conditions

You served your country with honor—let the VA loan program honor your service. Backed by the Department of Veteran Affairs, these loans are designed to help qualified veterans, reservists, and active duty members finance homes.

Highlights

  • 100% financing
  • No monthly mortgage insurance premiums
  • Not limited to first-time home buyers
  • 4% seller concessions
  • Come in both fixed-rate and adjustable-rate options

PMI Explained

If you don’t have a 20% down payment, you will be asked to carry private mortgage insurance (PMI). This insurance covers the lender in the event that you aren’t able to make your loan payments. You are required to carry this insurance until you’ve paid 20% of the purchase price of your home. PMI rates vary based on lender, your credit score, and other factors, but they’re typically 0.3–1.5% of your loan amount, broken down into 12 monthly payments per year. The lower your down payment amount, the higher the rate of your PMI. You’ll pay your PMI in your monthly mortgage payment.

Veterans who receive home loans through the VA will not have to pay PMI.

Escrow

Your escrow account is a separate account meant for paying yearly taxes and insurance that is opened after you close on your house. When using an escrow account, you pay 1/12 of your annual taxes and insurance costs each month—when you make your monthly payment, principal and interest get paid while the additional amount funds your escrow account. The bank will manage your escrow account and make the necessary tax and insurance payments for you when the time comes. An escrow account ensures that you have everything you need to make your yearly payments and keeps you from having to pay thousands of dollars at once when insurance and tax payments come due. Since taxes and premiums can change on a yearly basis, someone from the bank will review all the costs with you once a year to make sure your escrow account is on track.

Pre-Approval

The pre-approval stage is where a lender will formally check your income, expenses, and credit history to determine if you’re qualified for a home loan. You’ll also find out the maximum amount you might be able to borrow during this process. A pre-approval will show as an inquiry on your credit score and is only valid for 90 days, so you shouldn’t apply for pre-approval until you’re sure you want to buy within that 90-day window. Pre-approval is also attractive to sellers, showing that you’re a vetted buyer with the support of a lender.

A pre-approval loan amount isn’t set in stone, however. Numbers could still change during the official mortgage application process, so it’s a good idea to choose a home that’s priced under your maximum pre-approval amount. It’s also recommended that you avoid opening new lines of credit during this time period. New credit lines might cause your credit status to change for your official mortgage application, potentially leading to surprises in your numbers.

Documents Checklist For Pre-Approval

You’ll need to have these documents ready for the pre-approval process. If you have a co-buyer, their documents are needed as well.

Residential History

  • The last two years of residential address(es)
  • Name(s) and address(es) for your landlord(s) for the last two years

 

Assets

  • Recent bank account statements for all of you and co-buyer’s checking and savings accounts
  • Statements for previous two months on other assets, like IRAs, stocks, bonds, CDs, securities, etc.
  • Any current real estate holdings, like property address, market value of property, mortgage lender’s name and address, loan account number, balance, monthly payment

 

Employment and Income Verification

  • Pay stubs for last 30 days that includes YTD earnings
  • W-2s or I-9s for last two years

  • Any debt that doesn’t appear on your credit report, ie, recent student loans, car loans, new credit cards, etc. You’ll need to provide the creditor’s name, address, account number, minimum monthly payment amount, and each account’s outstanding balance

Making An Offer

Once you’ve found the house you’re looking for, it’s time to make an offer! The negotiations process on home buying is formal and involves written proposals between your real estate agent and the seller’s agent. Your real estate agent will provide research on the market value of the house you’re interested in and the surrounding area that will help you come to an offer number. You can of course offer list price, but the seller will often have a little wiggle room you can use to negotiate a lower price—your real estate agent will be able to advise you on which approach they think is best.

Many negotiations involve a few back and forths, so don’t get discouraged if your first offer isn’t accepted.

Making Yourself An Attractive Buyer

There are several ways to put your best foot forward when making an offer. Being pre-approved for a loan is one of the best ways—it shows the seller you’re serious and a lender can financially back up your offer. Putting forward earnest money will further show your commitment to buying the house, and it might make you look better than another bidder who doesn’t offer money up front. You can also make things easy on the seller by scheduling your inspections quickly—remember that sellers are regular, busy members of the community just like you!

Seller Concessions

Sometimes a seller may make “concessions” in the negotiations process to come to an agreement more quickly. For example, a seller might agree to give some money towards a buyer’s closing costs, give extra money towards upgrades like carpet replacement, agree to leave appliances in the house, etc. Sellers are under no obligation to make concessions—talk to your real estate agent about when it’s appropriate to ask for one during negotiations.