Financing 101

WHY DO I NEED A PRE-APPROVAL? AND WHAT IS THE LENDER LOOKING AT?

Here’s the scoop on why you need to be pre-approved BEFORE you begin looking at houses.

You need to understand what your actual buying power is! How much you can spend & what type of loan is going to be best for your particular situation is the most important first step ever! My pro tip: get with your lender after you’ve determined what you are able to afford for a monthly mortgage payment. They’ll be able to pair that with your qualification information (credit score, debt-to-income ratio, income) and translate that into a price range for us to work within!

LOAN TYPES

You’ve probably heard a lot of things about loan types with some acronyms and wondered what in the world all that means. Let’s break down the different types of loans you could qualify for & utilize for your purchase:

Conventional Loans

Conventional loans are the most commonly used loans by purchasers. They are best for buyers with a strong credit score and can afford to make a bit of a down payment. They are available from just about every lender, can be used to finance your primary home, your second/vacation home, and your investment/rental properties. For a conventional loan, you can put down as low as 3% down. If you put less than 20% down, you will be required to pay for private mortgage insurance (PMI) until you’ve paid 20% of the loan. You also need a credit score of at least 620 to qualify and a lower debt-to-income (DTI) ratio compared to other types of mortgages

FHA Loans

These loans are insured by the Federal Housing Administration (FHA) and are a great option for buyers who have less than perfect credit but can still put some money down. Your credit score needs to be 580 or higher with a 3.5% down payment or as low as 500 with a 10% down payment. FHA loans do require the buyer to pay mortgage insurance premiums which will add to your overall costs and the amount you can borrow is less than with a conventional loan.

USDA Loans

These loans are helpful for moderate to lower income buyers to buy homes in USDA-eligible areas (which is pretty much all of the NRV apart from the Town of Blacksburg). Guaranteed by the U.S. Department of Agriculture (USDA), these loans don’t have a credit score or down payment requirement, which means you could get into a home with 0% down! However, they do charge their own fees that will be added to your overall expense.

VA Loans

These loans are only available for members of the U.S. Military (active duty, veterans, National Guard, and Reservists) and surviving spouses. Guaranteed by the U.S. Department of Veterans Affairs, these loans come with a funding fee from 1.25-3.3% but have no minimum down payment, mortgage insurance, or credit score requirement.

Adjustable Rate Mortgages (ARM)

An ARM is advantageous for a buyer who doesn’t plan to stay in a home more than a few years. These types of loans come with a fixed introductory rate for a set period of time. After that period, the rate changes based on economic conditions at the time and could go up or down at preset intervals for the remaining term of the loan. To utilize an ARM, you need to be comfortable with some risk because your rate & payments could go up if you live there past the introductory period in your loan. On the flip side, you could pay less over time if interest rates fall!

Construction Loans

If you want to build a home, a construction loan is a short-term loan you can use to build your home. They usually have tougher criteria than conventional financing for existing homes. These loans can cover the purchase of the land, the contractor labor, building materials, and permits. The initial term of the loan is for the building phase: usually about one year. During this time, the builder has to provide the lender with the building timeline and a detailed plan and budget so that they can release funds at various phases of the build to pay the builder/contractors.  With a construction loan, you will typically be required to make interest payments only during the construction stage. It’s important to note that the interest rates on a construction loan are typically higher than a conventional loan because there’s no finished house to serve as collateral, meaning that the lender is taking on more risk.