You’re smart about selecting the home that’s right for you, now be smart about the type of loan you go with. Leslie Lowry, Sr. Mortgage Consultant with First Federal Bank shares her knowledge to keep you in the know.
KCHS: What are the common types of home loan programs? Are there any new ones that people aren’t aware of?
LOWRY: The most common loan for first-time homebuyers is FHA because it requires less down payment and lower credit scores. Young people who haven’t been in the credit system very long have lower scores. FHA loans only require 3.5% down payment and the mortgage insurance is permanent, meaning, in the future you would have to refinance to remove the mortgage insurance. Interest rates in the future may not be favorable for refinance. I speak to buyers about their first home which is unlikely the “forever” home so there is no need to refinance as they are likely to move in about five years.
Home buyers on their second or third home are typically financing on a conventional loan. When you put 20% down on a conventional loan there is not any mortgage insurance. Mortgage insurance rates vary for down payments less than 20% and credit scores. Other loan types to consider are: VA loans for Veterans; First-Time Homebuyer Loans available with down payment assistance; Construction Insurance and Loans; Blanket Loans, unique to First Federal Bank; Remodeling loans for the fixer upper and USDA – Rural loans.
KCHS: Is there anything you shouldn’t do before your loan closes?
LOWRY: Quit your job! Unbelievably, I’ve had buyers quit their job and start a new one without notifying me. Ten days out from closing, Kansas City mortgage companies verify employment. Buying anything on credit. The lender can see your credit through the whole process. A purchase on credit can change your debt-to-income ratios and jeopardize your loan. Go on vacation! It’s never a good idea to go on vacation while in the purchasing process. During the mortgage process you’re not closed until you are closed! If the lender needs something, you need to be available.
KCHS: Should you check your credit before buying a home?
LOWRY: There are many service providers who claim to offer credit scores but the three credit bureaus Equifax, Experian and Transunion, all use proprietary software for the credit scoring model. Credit score service providers try and mimic the scoring model but none are exact. It seems the real credit scores are always lower. It’s frustrating for buyers.
KCHS: What is the difference between the interest rate of a loan and the annual percentage rate?
LOWRY: The interest rate is the rate on the amount borrowed. The Annual Percentage Rate or APR was created by the Federal government to assist homebuyers in comparing lenders. Financing is complicated and buyers tend to gravitate to the lowest interest rate. Lenders try and advertise the lowest rates but what is not understood is that the lowest rate might come with thousands and thousands of closing costs. It’s hard for the consumer to figure it out, so APR measures the interest rate, closing costs and mortgage insurance into one figure for comparison. Your lowest APR is your lowest priced loan which does not always equate into the lowest interest rate.
KCHS: What’s the best tip you give your clients on home loans?
LOWRY: Put the minimum down on a mortgage or put 20% down. The current interest rates are so low, that a down payment barely makes a dent when looking at the monthly payment. In the current interest rate market, I recommend buyers buy as much house as they can possibly get approved for and hold for the long term! We know there’s only one way for interest rates to go and that’s up. It’s much better to purchase a home that will suit your needs for 5 to 10 years than to under buy and need another home soon. In case interest rates really go up, it may be the last opportunity to purchase for a long while.