How they work: "The dominant number of loans made in the conventional market use Fannie Mae and Freddie Mac guidelines for conforming loans," says John Councilman, federal housing chairman for The National Association of Mortgage Brokers in McLean, Va. The U.S. government bailout of Fannie Mae and Freddie Mac may affect both entities' underwriting guidelines going forward, but no changes have been made yet.
Conventional loans are "conforming" if they are generally $417,000 or less for a single-family home. Conforming loan limits can be higher in pricier regions of the country. For example, in such states as Alaska and Hawaii, it's $625,500.
There are also established guidelines for borrower credit scores, income requirements and minimum down payments. For example, most conventional loans require somewhere between 5 percent and 20 percent down.
"Right now those guidelines are changing frequently but they should have at least a 620 credit score," Councilman says. "Anything below a 740 credit score and they (lenders) are going to start adding fees which can be quite sizable, in the several-percent range, as borrowers' credit scores drop compared to loan-to-value (LTV)."
Conventional loans can be conforming or nonconforming. Loans above the lending limits set by Fannie Mae and Freddie Mac are called nonconforming or jumbo loans.
Most conventional mortgages have either fixed or adjustable interest rates. Typical fixed interest rate loans have a term of 15 or 30 years. A shorter-term loan usually results in a lower interest rate. Adjustable-rate mortgages, or ARMs, fluctuate in relation to the rate of a standard financial index, such as the LIBOR. Monthly payments can go up or down accordingly.
The Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development, or HUD, claims it has backed more than 35 million mortgages since its inception in 1934.
The FHA, like the VA, does not lend money. It provides government backing in the event that the borrower defaults on the loan. FHA loans can be fixed-rate or adjustable-rate mortgages, but the majority of loans are fixed-rate mortgages, according to the FHA.
"Right now, it's the fastest growing loan program out there," says Michael Ashley, chief business strategist with Lend America, in Melville, N.Y.
Ashley says that growth in the FHA loan program is being fueled by borrowers with newly adjusting ARMs looking to refinance into fixed-rate loans, as well as borrowers whose credit scores fall somewhere between excellent and subprime.
The FHA loan program has been revamped, at least temporarily, by new federal housing legislation signed into law in July 2008. Effective Oct. 1, 2008, changes include the follow.
1. Q: "Can I become a home-buyer even if I had or; I now have bad credit and I don't have much money for a down payment?"
Answer: You may be a good candidate for one of the federal mortgage programs. The first step is to start by contacting one of the HUD-funded housing counseling agencies that can help you sort through your options. Also, contact your local government to see if there are any local home buying programs that might work for you. Look in the blue pages of your phone directory for your local office of housing and community development or, if you can't find it, contact your mayor's office or your county executive's office. We can help you expedite the process. Contact us today and start step 1. No obligation.
2. Q: "Should I use a Colorado real estate broker? If so how do I find one?"
Answer: Using a Denver real estate broker is a very good idea. All the details involved in home-buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. A real estate broker will be well-acquainted with all the important things you'll want to know about a neighborhood you may be considering...the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. He or she will help you figure the price range you can afford and search the classified ads and multiple listing services for homes you'll want to see. With immediate access to homes as soon as they're put on the market, the broker can save you hours of wasted driving-around time. When it's time to make an offer on a home, the broker can point out ways to structure your deal to save you money. He or she will explain the advantages and disadvantages of different types of mortgages, guide you through the paperwork, and be there to hold your hand and answer last-minute questions when you sign the final papers at closing. And you don't have to pay the broker anything! The payment comes from the home seller - not from the buyer.
By the way, if you want to buy a HUD home, you will be required to use a real estate broker to submit your bid. Metropolis Realty can help you find HUD homes and is an expert in Denver real estate. Ask me how to start the process. If you are moving to Metro Denver we offer relocation services. Ask for a free Colorado relocation guide today.
3. Q: "Why should I stop renting and buy a home?"
Answer: A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you'll enjoy having something that's all yours - a home where your own personal style will tell the world who you are. Start your unique decorating!
4. Q: "What are "Colorado HUD homes, and are they a good deal?"
Answer: HUD homes can be a very good deal. When someone with a HUD insured mortgage can't meet the payments, the lender forecloses on the home; HUD pays the lender what is owed; and HUD takes ownership of the home. Then we sell it at market value as quickly as possible. Read all about buying a HUD home. Check our listings of HUD homes and homes being sold by other federal agencies.
5. Q: "Are there special home-ownership grants or programs for single parents?"
Answer: Yes there is help available. Start by becoming familiar with the home buying process and pick a good real estate Denver broker. Although as a single parent, you won't have the benefit of two incomes on which to qualify for a loan, consider getting pre qualified, so that when you find a house you like in your price range you won't have the delay of trying to get qualified. Contact one of the HUD-funded housing counseling agencies in your area to talk through other options for help that might be available to you. Research buying a HUD home, they can be very good deals. Also, contact your local government to see if there are any local home buying programs that could help you. Look in the blue pages of your phone directory for your local office of housing and community development or, if you can't find it, contact Metropolis Realty today with no obligation. Take the first step!
6. Q: "How do I know if I can get a loan?"
Answer: Use our simple mortgage calculators to see how much mortgage you could pay - that's a good start. If the amount you can afford is significantly less than the cost of homes that interest you, then you might want to wait awhile longer. But before you give up, why don't you contact a real estate broker or a HUD-funded housing counseling agency? They will help you evaluate your loan potential. A broker will know what kinds of mortgages the lenders are offering and can help you choose a lender with a program that might be right for you. Another good idea is to get pre qualified for a loan. That means you go to a lender and apply for a mortgage before you actually start looking for a home. Then you'll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams.
7. Q: "How much money will I have to come up with to buy a home?"
Answer: Well, that depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money - the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house.
When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies. If you buy a HUD home, for example, your deposit generally will range from $500 - $2,000.
The more money you can put into your down payment, the lower your mortgage payments will be. Some types of loans require 10-20% of the purchase price. That's why many first-time homebuyers turn to HUD's FHA for help. FHA loans require only 3% down - and sometimes less.
Closing costs - which you will pay at settlement - average 3-4% of the price of your home. These costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise. If you buy a HUD home, HUD may pay many of your closing costs.
8. Q: "How do I find a lender?"
Answer: You can finance a home with a loan from a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best prices. Different lenders can offer quite different interest rates and loan fees; and as you know, a lower interest rate can make a big difference in how much home you can afford. Talk with several lenders before you decide. Most lenders need 3-6 weeks for the whole loan approval process. Your real estate broker will be familiar with lenders in the area and what they're offering. Or you can ask an expert here at Metropolis Realty in Denver. HUD does not make loans directly - you must use a HUD-approved lender. If you're interested in an FHA loan, Metropolis Realty can help you find one.
9. Q: "So what will my mortgage cover?"
Answer: Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you've borrowed; homeowners insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year. Most loans are for 30 years, although 15-year loans are available, too. During the life of the loan, you'll pay far more in interest than you will in principal - sometimes two or three times more! Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments. In the final years, you'll be paying mostly principal.
10. Q: "In addition to the mortgage payment, what other costs do I need to consider?"
Answer: Well, of course you'll have your monthly utilities. If your utilities have been covered in your rent, this may be new for you. Your real estate broker will be able to help you get information from the seller on how much your utilities normally can cost. In addition, you might have homeowner association or condo association dues. You'll definitely have property taxes, and you also may have city or county taxes. Taxes normally are rolled into your mortgage payment. Again, your broker will be able to help you anticipate these costs.