Generally, you can finance a
home through a conventional mortgage, a government-guaranteed mortgage, or through
seller financing. This article focuses
on residential financing through the use of conventional mortgages and
Q: What is a conventional mortgage, and how can
I get one to finance my home?
A: A conventional mortgage is a loan that a
lender (such as a bank or a mortgage company) makes to a buyer. A conventional mortgage
generally follows guidelines set by Fannie Mae or Freddie Mac, two mortgage
associations that the U.S. government originally created to raise home
ownership levels. Although created by the government, Fannie Mae and Freddie
Mac do not guarantee home loans
(unlike VA and FHA loans, which the government guarantees). When shopping for a
conventional mortgage, you will compare interest rates and terms. Most
conventional mortgages have fixed or adjustable interest rates. Typical fixed-rate
loans have a term of 15 or 30 years. A shorter-term loan generally carries a
lower interest rate. Adjustable-rate mortgages (ARMs) fluctuate, so your
monthly payments can go up or down according to the rate of a standard
financial index. Before agreeing to give you a conventional mortgage, the
lender will review your financial history, income and credit score. Generally,
you will need an excellent credit score to qualify for a conventional mortgage with
a good interest rate. The standard down payment for a conventional loan is currently
20 percent of the purchase price.
Q: What are the benefits of getting a conventional
A: Typically, conventional mortgage loans are
less expensive over the life of the loan than government-guaranteed loans.
are the drawbacks of a conventional mortgage?
A: Some borrowers have difficulty qualifying
for a conventional mortgage because they cannot meet credit score or other
is a government-guaranteed loan, and might I qualify for one?
Government mortgages are
guaranteed either by the Federal Housing Administration (FHA) or the U.S.
Department of Veterans Affairs (VA). This means that the government guarantees
that the value of the home will be high enough to repay the lender in the event
of foreclosure. To qualify for a
government loan, you must meet the requirements of the loan program you choose. VA loans are for military veterans. FHA loans are typically for first- time home
buyers and have income limitations.
are the benefits of getting a government-guaranteed loan?
A: There are two primary benefits. Initially,
and for many new home buyers, the most important benefit is that the lender
will loan you a much higher percentage of the purchase price. FHA and VA loans
typically cover nearly 100 percent of the loan as compared to the home’s value,
while a standard mortgage covers no more than 80 percent of this
“loan-to-value” ratio. Secondly, a government program generally doesn’t require
as high a credit score as conventional financing does.
there any drawbacks to financing my home through government -guaranteed loans?
A: Yes. The government insurance component is
not free. As a borrower, you would pay an insurance premium to the government
that can be as much as three percent of the loan amount, depending on the loan-to-value
ratio. Also, not everyone qualifies for government-guaranteed loans. A VA loan is
intended for veterans and FHA loans are restricted to those who qualify
according to income and other criteria. Additionally, government-guaranteed
loans require inspections by certified inspectors and will require certain
repairs to be made. Many sellers do not like working with buyers who use
government-guaranteed loans because of these requirements and because some fees
traditionally paid by buyers are required to be paid for by the seller.
if I don’t qualify for a government-guaranteed loan and don’t have 20 percent down
payment money for a conventional mortgage?
A: You can also consider getting private mortgage
insurance so that you can borrow more than 80 percent of the value of the home
you want to buy. Private mortgage
insurance increases the overall cost of the loan, and this cost is built into
your payments or financed through a higher interest rate.
do I find out which loan is right for me?
A: Any reputable, full-service mortgage
lender will offer both standard financing and government- guaranteed financing,
and will be able to explain the product options to you.
The Department of Housing and Urban Development (HUD) provides
information about mortgage loan shopping and the home buying experience. HUD’s
mortgage borrower’s information booklet is available at: www.hud.gov/buying/booklet.pdf.
“Law You Can Use” column was provided by the Ohio State Bar Association. It was
prepared by Dublin attorney William C. Heer III, vice
president and counsel for First American Title Insurance Company. Articles appearing
in this column are intended to provide broad, general information about the
law. Before applying this information to a specific legal problem, readers are
urged to seek advice from an attorney.
Labels: homeowners, mortgage, mortgage lender, mortgage loans, residential financing