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 government-guaranteed mortgages.

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 mortgage?

A:        Typically, conventional mortgage loans are less expensive over the life of the loan than government-guaranteed loans. 

Q:       What 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 documentation requirements.

  

Q:       What is a government-guaranteed loan, and might I qualify for one?

A:        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.

Q:       What 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.

Q:       Are 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.

Q:       What 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.

Q:       How 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.

This “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.

Most people have emotional ties to their homes because of family memories created there, but the responsibilities that come with home mortgages can become financially burdensome to seniors. There are many factors you should consider when thinking about applying for a mortgage to buy, refinance or make improvements to your home.

Q:       What should I keep in mind when considering a mortgage loan?

A:        If you already own a home, consider whether it makes sense to stay in your current home or to downsize. As children move out, a large home may no longer be practical. Downsizing can both cash out equity from a larger home and reduce monthly expenses by replacing a larger mortgage payment on a larger home with a smaller mortgage payment on a smaller home. Moving to an apartment or condominium without a yard or where much of the maintenance is handled by a homeowner’s association is also an option.

            If your home is already the right size and you can afford to stay, you may want to consider refinancing your existing mortgage loan. With proper financial planning, younger seniors can plan to repay their mortgages before they retire. However, many seniors are not able to retire without mortgage debt, and refinancing allows you to lower the interest rate or reset the term of your existing mortgage. By resetting the mortgage term, the outstanding balance of your existing loan will be spread out over a longer period of time. Extending the term may increase the overall interest charges you will pay, but it also will lower your monthly payments and free up money for other monthly expenses. If you are on a fixed income, consider refinancing from an unpredictable adjustable rate mortgage to a stable fixed rate mortgage.

 

Q:       Will I qualify for a mortgage loan?

A:        Your eligibility for a mortgage loan generally will depend on your income, your assets (checking, savings, stocks, bonds, IRAs, etc.), your credit score and the value of the property that will be securing the mortgage loan.

            Not everyone who applies for a loan will be approved or will get the same loan terms, but lenders must consider reliable income from part-time employment, Social Security, pensions and annuities when making mortgage loan decisions. They must also consider reliable public assistance income in the same way that they consider other income. The Equal Credit Opportunity Act (ECOA) prohibits lenders from credit discrimination on the basis of a number of factors, including your age and whether you get public assistance. A lender may ask you for most of this information in certain situations, but may not use it as the basis of a decision to reject your mortgage application or to set your loan terms. If your mortgage application is denied, the lender must give you specific reasons for the denial.

Q:       Even if I qualify, how will I know if a mortgage loan is right for me?

A:        There are many types of mortgage loans, including conventional home loans, FHA insured loans, VA guaranteed loans for veterans, Rural Housing Service (RHS) guaranteed loans, home equity lines of credit and reverse mortgages. Some loans have strict qualification requirements while others are designed for lower income homebuyers.

            Obtaining a mortgage loan carries costs that can vary with the type of loan you choose. Usually there will be lender fees, an appraisal fee, title insurance costs and other closing expenses related to the mortgage loan. You must also factor real estate taxes and homeowners insurance into your budget. Usually you will be required to make a down payment of between 3.5 percent and 20 percent, depending on the type of loan and the bank’s requirements. While lower down payments can be appealing in the short term, they come with higher monthly payments due to higher interest rates. Smaller down payments also may require additional mortgage insurance, increasing your total costs over the long term. However, making a higher down payment can deplete your savings and investments. It is critical to consult a trusted financial advisor and get independent financial advice before deciding which mortgage product may make sense for you, and what terms best suit your financial situation.

This “Law You Can Use” legal information column was provided by the Ohio State Bar Association. It was prepared by Adam Saurwein, an attorney in the Cleveland office of the firm of Benesch Friedlander Coplan & Aronoff. 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 the advice of a licensed attorney.