General September 13, 2020 1

What Are Home Loans?

Hello Friends, I hope everyone is doing peachy! While there are different types of debts/loans out there, I wanted to specifically talk about home loans today. You most likely will encounter this type of loan at some point in time in your life. Unless you have the whole cash amount, you will end up taking a loan, but that is okay. I’m going to try and provide you with as much information as possible. Sit back, relax, and enjoy the show!

What are Home Loans?

Mr. Nahas, what are home loans? Good question! Home loans are a specific type of debt that is used to purchase a home. This debt is considered secured, which means the home will be the collateral in the event you default on your payments. These loans are amortized, which means payments are spread over multiple periods (term). When it comes to home loans, there are a few different things you will need to know. I will go over some of them more detail later on in this post.

  1. Occupancy – This is describing how you intend to use the property
  2. Type of Property – This is the type of property that you will buy, not all home loans are the same. Some loans are meant for single family homes, multi-family homes, manufactured homes, mobile homes, town houses, and condominiums
  3. Loan Purpose – This specifies if you will purchase the home, refinance it, or do a cash-out refinance
  4. Product – This is the type of loans that you are getting. There are different types of loans that you can get to meet your financial needs
  5. Loan Amount – The initial amount that is borrowed
  6. Down Payment – This is how much cash you will put down towards the purchase price of the home
  7. Interest Rate – The Federal Reserve sets interest rates and then your lender determines the interest rate they give you based on your credit score. The interest is simple. You also have the option of fixed or an adjustable rate
  8. Discount Points – These are fees that you pay directly to the lender in exchange for a lower interest rate
  9. APR (Annual Percentage Rate) – this is the annualized representation of your interest rate that includes fees like mortgage insurance, some closing costs, discount points, and loan origination fees
  10. Primary Mortgage Insurance (PMI) – This is insurance that you pay on the lender’s behalf. If you do not put at least a 20% down payment, you will have to pay this until the loan reaches a loan to value of 80%. Loan-to-value is the amount of the loan divided by the purchase price
  11. Term – This is the time period that the creditor wants the debt to be paid back. The most common term is 30 years, but there are options for shorter terms
  12. Payment Due – This takes into consideration the principal amount, interest rate, and the term to get a specific payment due. Payments are usually due every month, but it just depends on the creditor and the agreement
  13. Closing Costs – these are fees and expenses that you pay in order to complete the loan process and officially own your home. These fees include loan origination fees, attorney fees, title insurance, etc.
  14. Total Cost – The total cost is the principal amount plus the interest and any fees you paid over the life of the debt
  15. Amortization Schedule – this is a table detailing how each payment is split between principal and interest

I think it would be worthwhile to go over occupancy, loan purpose, and product a little more in-depth as they are important parts of the loan.

Occupancy

Occupancy is how you intend to use the property and depending on your choice, your interest rate will change. There are three main types of occupancy:

  1. Primary Residence – this implies that you will live in the property for most of the year
  2. Second Home/Vacation Home – this implies that you will use this home part time or as a vacation home
  3. Investment property – this implies that you will rent this out to other people, and you will not live in it.

This is important to the lender because it will help them determine your interest rate. Primary homes have lower interest rates than vacation homes, and vacation homes have lower interest rates than investment homes. If you come into financial trouble, your vacation home or investment property is most at risk for default because you will be trying to protect your primary home first, so the lenders need to be compensated for the risk they are taking.

Loan Purpose

This is where you describe how you will use the funds. There are a few main ways that you can use the funds:

  1. Purchase – This implies that you are going to purchase a home, so a new loan will be originated
  2. Refinance – This implies that you have an existing home loan that you would like to restructure. Most people refinance to get a lower interest rate and to lower their payments
  3. Cash-Out Refinance – this is similar to refinancing, but the main difference is that you will pull the equity out of the home and use it for whatever you would like. You are given a lump sum.

Product

There are a few different types of loans that you can get to meet your needs. Some of them have low down payments available, lower rates, and are a little bit more lenient with your credit score.

The types of loans are:

Federal Housing Administration (FHA)

This type of loan is offered and backed by the government. This type of home is usually offered for low-credit or low-income borrowers.

Pros:

  • Low down payment (3.5%)
  • Lower credit score needed
  • Higher debt-to-income allowed
  • Lower Mortgage insurance premiums
  • Better interest rate for low-credit borrowers

Cons:

  • Mortgage insurance cannot be cancelled
  • Some types of homes are not approved
  • Must be your primary residence
  • Some regions have loan limit

How to apply for an FHA home loan:

  • Visit the HUD website to find an approved lender. Once you find your preferred lender, you can visit the branch or website and apply
  • Work with a mortgage broker who has knowledge of lenders that offer FHA loans; you can either ask your real estate agent for a mortgage broker they like to work with or research one on the internet
  • Visit a mortgage search engine like Rocket Mortgage and enter your details

Conventional

This type of home loan is not offered or backed by a government entity/agency. It’s important to mention that there are two types of conventional loans: Conforming and non-conforming. Conforming means that the loan meet requirements to be sold to Fannie Mae and Freddie Mac. Non-conforming means that the loan does not meet these requirements.

Pros:

  • Low down payment (3%)
  • No PMI with 20% down payment (PMI can be canceled once loan-to-value reaches 80%)
  • Loan can be used for primary homes, second/vacation homes, and investment homes
  • Lower interest rate for high-credit borrowers

Cons:

  • Higher interest rates for low-credit borrowers
  • Stricter credit score and debt-to-income requirement
  • Must have at least a few months’ worth of payments in reserves

How to apply for a conventional mortgage home loan:

  • Visit your bank or credit union in-person or go to their website and apply for a mortgage
  • Work with a mortgage broker; you can either ask your real estate agent for a mortgage broker they like to work with or research one on the internet.
  • Visit a mortgage search engine like Rocket Mortgage and enter your details

USDA

This type of home loan is to help low to moderate income households buy a safe single-family primary residence home in a rural area. This loan is only offered at a 30-year fixed rate.

Pros:

  • No down payment required – 100% financing
  • Flexible credit and debt-to-income requirements
  • Low interest rates
  • Ability to finance closing costs

Cons:

  • Limited to single-family homes only
  • Limited to certain area only
  • Limited to a certain income range
  • Primary Mortgage Insurance is not cancellable

How to apply for a USDA home loan:

  • Visit the USDA Website to find an approved lender. Once you find your preferred lender, you can visit the branch or website and apply
  • Work with a mortgage broker who has knowledge of lenders that offer USDA loans; you can either ask your real estate agent for a mortgage broker they like to work with or research one on the internet
  • Visit a mortgage search engine like Rocket Mortgage and enter your details

VA

This type of home is a type of loan for active duty military members and veterans. It’s important to note that there are service requirements in order for the veteran or active duty member to be eligible. You must apply for a Certificate of Eligibility (COE) before you can be considered for a VA loan.

Pros:

  • No down payment required
  • No primary mortgage insurance required
  • Flexible credit and debt-to-income requirements

Cons:

  • Must be your primary residence
  • Only for military members
  • There is a fee to fund the loan

How to apply for an VA home loan:

  • Visit the VA website to apply for a Certificate of Eligibility (COE). Once you are approved for a COE, find your preferred lender that offers VA loans, you can visit the branch or visit the website and apply
  • Work with a mortgage broker who has knowledge of lenders that offer VA loans; you can either ask your real estate agent for a mortgage broker they like to work with or research one on the internet
  • Visit a mortgage search engine like Rocket Mortgage and enter your details

I hope that I provided you with enough information today! Home loans are a big step to take in your life, but they don’t have to be difficult or hard to understand. I hope this gave you a good amount of information about what home loans are, the different elements of them, and how to apply for each loan type. If you have any questions or need me to clarify anything, post a comment and I will reach out to you as soon as I can. Thank you, friends, for stopping by! Take care and see you soon!

Peace Out,

Mr. Nahas

P.S. Don’t forget to like, comment, subscribe to my email list, and to share this so I am able to help as many people as possible!

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1 Comment

  1. ceridwensilverhart

    September 17, 2020
    Reply

    This is great information! Are these loans paid off in set installments or can they, if someone manages to get enough money, be paid off before the end of the term?

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