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Understanding Loan Types: A Deep Dive into Conventional Loans

Understanding Loan Types: A Deep Dive into Conventional Loans

by | Oct 1, 2024 | Loans, Mortgage

Understanding Loan Types: A Deep Dive into Conventional Loans

Loans | Mortgage

welcome mat for first time home buyers

When it comes to financing a home, understanding the different types of loans available can be daunting. One of the most popular options for homebuyers is the conventional loan. Within this category, there are two options: fixed-rate loans and adjustable-rate loans. In this blog, we will be breaking down these types to help you decide what might be your best option if going the conventional loan route.

What is a Conventional Loan?

A conventional loan is a type of mortgage that is not backed by the government. These loans are typically issued by private lenders and are subject to stricter credit and income requirements. Because they’re not insured by the government, lenders usually require higher credit scores and larger down payments compared to government-backed loans like FHA or VA loans.

Advantages of Conventional Loans

  1. Flexible Terms: Conventional loans offer a variety of terms, usually ranging from 10 to 30 years.
  2. No PMI with 20% Down: If you can put down at least 20%, you won’t have to pay private mortgage insurance (PMI), which can save you money.
  3. Competitive Rates: With a strong credit score, borrowers may find better interest rates.

What’s the difference between a fixed-rate and adjustable-rate mortgage loan?

Fixed-Rate Loans

What Are They?

Fixed-rate loans have the same interest rate throughout the life of the loan. This means your monthly mortgage payment (principal and interest) will remain the same, providing stability and predictability.

Pros of Fixed-Rate Loans

  1. Predictability: Your monthly payments won’t change, making budgeting easier.
  2. Long-term Stability: If you secure a low interest rate, you can benefit from it for the duration of the loan, which can be particularly advantageous in a rising interest rate environment.
  3. 3. Easier to Understand: Fixed-rate mortgages are straightforward, making them an ideal choice for first-time homebuyers.

Cons of Fixed-Rate Loans

  1. Higher Initial Rates: Fixed-rate loans often start with higher interest rates than adjustable-rate loans, which can increase your monthly payments.
  2. Less Flexibility: If interest rates decrease, you’ll be stuck with your higher rate unless you refinance.

Adjustable-Rate Loans (ARMs)

What Are They?

Adjustable-rate mortgages (ARMs) have interest rates that can change over time based on market conditions. They typically start with a lower initial rate for a specific period, after which the rate adjusts periodically.

Pros of Adjustable-Rate Loans

  1. Lower Initial Rates: ARMs usually offer lower initial interest rates compared to fixed-rate loans, which can mean lower initial payments.
  2. Potential for Lower Payments: If interest rates remain stable or decrease, your monthly payments may be lower than those on a fixed-rate mortgage.

Cons of Adjustable-Rate Loans

  1. Payment Uncertainty: Your payments can increase significantly after the initial fixed period ends, making it harder to budget.
  2. Rate Caps: While ARMs often have caps that limit how much your interest rate can increase at each adjustment and over the life of the loan, sudden spikes can still happen.
  3. Complexity: ARMs can be more complicated to understand, with various terms and conditions that borrowers must be aware of.

Choosing the Right Loan for You

Deciding between a fixed-rate and an adjustable-rate loan depends on your financial situation, how long you plan to stay in your home, and your risk tolerance.

  • Fixed-Rate Loan: Ideal for buyers who value stability and plan to stay in their homes long-term. It’s a great choice if you expect interest rates to rise.
  • Adjustable-Rate Loan: Suited for those who are comfortable with some level of risk and plan to move or refinance within a few years. If rates remain low, this can lead to significant savings.

Understanding the differences between fixed-rate and adjustable-rate conventional loans is crucial for making informed financial decisions. Take the time to evaluate your personal circumstances, future plans, and market conditions to choose the best option for your home financing needs. Whether you opt for the stability of a fixed rate or the potential savings of an adjustable rate, being informed will help you make the best choice for your situation.

 Contact our mortgage experts for help making the right loan choice for you.

The content provided in this blog is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by JVB. JVB does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. JVB does not warrant any advice provided by third parties. JVB does not guarantee the accuracy or completeness of the information provided by third parties. JVB recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

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First-Time Home Buyer Tips

First-Time Home Buyer Tips

by | Oct 1, 2024 | Loans, Family Finances, Mortgage

The Ultimate Guide for First-Time Homebuyers

Loans | Mortgage

welcome mat for first time home buyers

-Congratulations! If you're reading this, you're probably standing on the brink of one of life's most exciting milestones: buying your first home. Whether you’re dreaming of a ranch-style country home or a sleek modern two-story house, the journey to homeownership can be thrilling but also a bit overwhelming. Don’t worry—we’re here to help you navigate the process with ease. Here’s your comprehensive guide to making the home-buying experience as smooth and successful as possible.

1. Understand Your Budget

Before you start browsing listings, it’s crucial to get a clear picture of your budget. Consider the following:

  • Down Payment: Typically, you'll need 5-20% of the home’s price as a down payment. The more you can put down, the better your mortgage terms may be.
  • Closing Costs: These can include appraisal fees, title insurance, and legal fees, often totaling 2-5% of the home price.
  • Monthly Payments: Don’t forget to factor in mortgage payments, property taxes, home owners’ insurance, and maintenance costs.

Tip: Use online mortgage calculators to get an estimate of what you can afford. This will give you a rough idea of your price range and help you avoid falling in love with a home that’s out of your reach.

2. Don’t Skip the Preapproval

We understand it’s exciting to start scouring the internet for the perfect house. However, it’s important to get pre-approved for a mortgage to help set a realistic budget and understand what you can afford.

It’s also important to understand the difference between prequalification and preapproval.

  • Prequalification: A prequalification is an estimate of how much home you can afford. It is informal and based on information you provide.
  • Preapproval: A mortgage preapproval is an official letter from a lender of your choice that tells you how much money you can borrow based on your financial status, such as W-2s, bank statements, and credit score.

What are the benefits of preapproval?

  • Clarifies your budget: You’ll understand how much you can borrow, allowing you to shop within your budget.
  • Stronger offers: Sellers will view you as a serious contender, increasing your chances of securing the home you want and making your offers more competitive.
  • Streamline the closing process: You’re less likely of running into last minute delays with your mortgage lender.

What are the benefits of prequalification?

  • Know where you stand without risking your credit: You’ll receive a ballpark estimate of how much money you may be able to borrow, often times with a soft inquiry that will not affect your credit rating. (Note: Some prequalification’s may require a hard inquiry).
  • Quick turnaround: Getting prequalified is fast and easy. It will provide you with helpful information that can guide you to making better buying decisions.

3. Understand Your Loan Options

Did you know the type of loan you choose for financing your mortgage will influence your down payment amount, the type of home you can buy and more? It’s important to understand your options before selecting a loan.

  • Conventional Loan: A conventional loan is the most common type of home loan. These loans are typically issued by private lenders and are subject to stricter credit and income requirements but offer several different term options with most people choosing between 15 and 30-year terms.
  • Federal Housing Administration (FHA) Loans: An FHA loan allows you to buy a home with less strict financial and credit score requirements making them appealing to first-time homebuyers.
  • Department of Veterans Affairs (VA) Loan: VA loans are exclusive to veterans, active-duty members of the armed forces and National Guard, and qualified spouses. If you qualify, you can purchase a home with 0% down.
  • Shared Equity Loan: Also known as family-backed mortgages, a shared equity loan allows parents or other relatives to help homebuyers obtain financing with a small down payment.

4. Maintain Your Credit

During the preapproval process, lenders will pull your credit history and continue to monitor your report during your buying journey. This is not the time to open any new lines of credit. If it is discovered you have taken out another loan or line of credit, your credit balance has increased, or you’ve started making late payments on your credit cards or loans, it may risk your final mortgage approval or decrease the value of how much home you can afford.

It is important to keep paying your bills on time and avoid opening any new lines of credit. Additionally, you don’t want to attempt to influence your credit ratings, for better or worse, because lenders are looking for consistent and reliable behavior patterns for future payments.

5. Save for a Down Payment

If you qualify as a first-time homebuyer, you can benefit from assistance programs that range from 0% to 3.5% down. However, if you have a down payment for at least 20% of the purchase price, you’ll be able to avoid private mortgage insurance (PMI) on a conventional loan.

What qualifies you as a first-time homebuyer?

According to the U.S. Department of Housing and Urban Development, a first-time homebuyer is an individual who meets any of the following criteria:

  • An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
  • A single parent who has only owned with a former spouse while married.
  • An individual who is a displaced homemaker and has only owned with a spouse.
  • An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
  • An individual who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

If you meet any of these requirements, you may qualify for an FHA loan or other programs that provide down payment assistance loans and grants.

6. Save for Closing Costs

We’ve spent a lot of time discussing saving for your first home. Everyone always thinks about the down payment, but may overlook the closing costs. Closing costs are upfront expenses, ranging from 2 to 5 percent of the total loan amount, that go to your lender on closing day. These might include:

  • Application fee
  • Origination fee
  • Appraisal fee
  • Attorney fee
  • Discount points
  • Homeowners insurance
  • Title insurance expenses
  • Property Taxes

In your Closing Disclosure, you will see your exact closing costs. But don’t fret, as a first-time homebuyer, you may qualify for government-backed grants or loans that assist with closing costs.

7. Writing Down What Makes Your Dream Home a Dream Home

Once you are ready to start house hunting, it’s important to know what kind of home you are looking for. This will not only help you when searching online, but help your real estate agent suggest homes. Start a list of your needs, non-negotiable and nice-to-haves.

Do you need 3 bedrooms but would like to have a swimming pool? Write it down.

This will help you shop for homes and be less stressed when comparing properties.

8. Find a Qualified Real Estate Agent

You found a home online you like, now what? Working with a qualified real estate agent makes the buying process less stressful. They can help by:

  • Finding and showing you homes that fit your needs and price range
  • Helping you decide how much to offer
  • Submitting an offer letter on your behalf
  • Helping you negotiate with the seller’s agent
  • Attending the closing with you

9. Submit Your Offer with Confidence

Don’t risk losing your earnest money deposit, also referred to as good faith deposit. When you are ready to make an offer on a home, make sure you are 100% committed to the purchase of that home. Giving a good faith offer tells a seller you are serious about buying their home. Often, it is equal to 1-3% of your total home price, and goes towards your down payment. If you back out of your offer for a reason not listed in the offer letter, you’ll lose your deposit.

10. Hire an Inspector

Purchasing your home is likely one of the largest purchases you make in your life – one in which you want as much information as possible. For example, learning that your home will need a new roof in the next year may change your mind about wanting to buy it, or the amount you’re willing to offer. This is why you should not waive a home inspection. Home inspections can uncover potentially hazardous items in a home, such as bad wiring or structural issues, that you may not have noticed when you went to tour the home and save you money in the long run.

The content provided in this blog is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by JVB. JVB does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. JVB does not warrant any advice provided by third parties. JVB does not guarantee the accuracy or completeness of the information provided by third parties. JVB recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

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The Mortgage Process: Dos and Don’ts

The Mortgage Process: Dos and Don’ts

by | Aug 29, 2024 | Loans, Mortgage

The Mortgage Process: Dos and Don’ts

Loans | Mortgage

Group of friends taking a selfie

Do's

Don'ts

Save up for your down payment and closing costs.

Although it can be tempting to go on a shopping spree for new furniture or start buying home improvement supplies, the best way for you to prepare is to save, save, save. Even if you have your whole down payment saved already, you should also be prepared to pay roughly 2-5% of your home’s purchase price in closing costs.

Make sure you have access to the documents you need.

Your mortgage lender will ask for a variety of different documents to verify your income, your assets, and your identity. Being prepared with either physical or electronic copies when your lender requests them will help speed up the approval process. Some of these documents may include:

  • 2-3 months’ worth of bank statements
  • Past W-2s and tax returns for all borrowers
  • Recent paystubs
  • A valid photo ID
  • Proof of your current address, if the address on your ID is out of date
  • Statements for your retirement accounts (IRAs, 401Ks, etc.)

Continue making your payments on time.

Underwriters will be carefully examining your credit history, and most lenders will request an updated credit report just before closing. Make sure that you continue making all your payments in full and on time to avoid issues later.

Notify your lender of changes in your employment.

This includes changes in your pay, position, or pay status (for example, moving from an hourly wage to an annual salary.) We’ll discuss changing employers or employment status later on in this article, but the rule of thumb is to always keep your mortgage lender informed — even if it seems like a negligible difference, it’s better to provide too much information than not enough.

Tell your lender if you plan to use gift funds for your down payment.

Gift funds are exactly what they sound like — money that is given to you as a gift, with no expectation of repayment. They can be used to help you meet your down payment requirements, but different types of loans carry different restrictions on the source of the funds and how much you can receive. For example, some types of loans only allow gift funds that come from relatives, domestic partners, or fiancés; others will allow you to accept money from friends, charities, and down payment assistance programs. And in all cases, gift funds must be properly documented. Make sure you are up front with your lender about your plans to make your down payment, since this can affect the types of mortgages for which you are qualified.

Keep communication lines open.

Closing is a team effort that requires the real estate agent, the buyer, and the mortgage lender to work together. Although your lender and agent will be doing most of the heavy lifting, you can do your part by making sure to respond promptly to phone calls or emails and providing all the documentation your lender requests.

Apply for new credit.

Taking on new debt while you’re trying to apply for a mortgage is a mistake you don’t want to make: Doing so can seriously delay or even completely prevent you from closing. Do yourself a favor and avoid new credit card applications, vehicle purchases, and refinances until after you have your new keys in hand. You should also avoid co-signing for anyone else during this time.

Quit your job or change employers.

One of the things that underwriters look for during the loan approval process is stable long-term employment. Quitting your job or changing employers can signal that your employment situation may be less than stable, which could potentially impact your ability to make your monthly payment. If you do have plans to change jobs, you should notify your lender as early as possible to avoid running into issues later.

Make large, unverifiable deposits or withdrawals.

If you do need to make large deposits or withdrawals, be sure to document their purpose and where the money is going or coming from. For example, if you are taking a distribution from your IRA or 401(k) to help with your down payment, you should keep some sort of proof of the transaction, such as a copy of the check or a form provided by your broker or financial advisor. Cash deposits and withdrawals are the most difficult to verify because they have no paper trail, so avoid them if possible.

Make large advances on your credit card or line of credit.

Although it may seem like a great way to supplement your down payment or closing costs, taking a cash advance on your credit card or drawing on a line of credit can alter your debt-to-income and credit utilization ratios. Just like applying for new credit, this can cause serious issues that may prevent you from being able to close.

Close credit card accounts or pay off loans.

You might think that paying off debt would help your credit, but it’s best to consult your lender before making changes to your credit portfolio. Additionally, paying off your debt now could use up cash that you’ll need to cover closing costs and appraisal fees later.

Write out any NSF (“bounced”) checks.

No matter where you do your banking, you will need to provide copies of your statements. Overdrafts or NSF checks (short for “non-sufficient funds”) can signal problems with meeting your current financial obligations. Be sure to carefully keep track of your account balance, along with any outstanding checks or automatic payments you have coming out.

And last but not least, don't be afraid to ask questions.

Applying for and closing on a mortgage can be stressful, and sometimes it’s downright confusing. Asking questions can help you to understand the closing process, as well as your role in it. Your mortgage lender and your agent are there to help you, so don’t hesitate to speak up when you need clarification or you’d like more information.

The content provided in this blog is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by JVB. JVB does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. JVB does not warrant any advice provided by third parties. JVB does not guarantee the accuracy or completeness of the information provided by third parties. JVB recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

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