How to find Best Home Loans
Finding the best home loans can be a challenging business. Investigation of issues like affordability, especial concessions like FHA or VA, loan pre-approvals, interest rate mechanisms and so on, can greatly aid in the process of finding loans that are most suited to one’s conditions and criteria.
Affordability
It is always a good idea to check whether one can make the monthly loan payments before delving into a purchase contract. Pricing and affordability is certainly one of the foremost criteria of the best home loans. There are a number of ways to gauge the affordability of a loan. One way is to use front-end ratios. This ratio compares the payment the buyer is going to make every month as a percentage of his gross income. Typically, mortgage lenders go for a front end ratio that is in the 31-33% range. For a 33% front-end ratio, if one’s gross income is $4,000, then the monthly affordable payment is $1,210.
Given our monthly payments, we can work backwards to know what sales price we can afford. Assuming we want to pay $1,000 on our mortgage and a 6% interest rate, we can calculate from amortization tables that we can get a $170,000 loan. If the interest rate was 7%, we could only afford $150,000.
An aspect that concerns affordability is down payment. Some loans like Veteran Affairs (VA) loans which are for veterans of the armed forces require no down payment at all. Federal Housing Administration (FHA) loans are also quite cheap in that they require just 3.5% down payment. Commercial loans generally require equity participation of greater than 20% if private mortgage insurance is to be avoided which increases the amount of monthly payments.
Another way to check whether we can really afford the expected monthly loan payments on a loan is to set aside the expected amount every month for 4-5 months to see how well we fare. If we can take care of our other expenses during this period with ease and without any hassle, then we are indeed ready for a new home mortgage.
Veteran Affairs (VA) loans
VA loans or loans that are guaranteed by the Veteran Affairs department are especially designed for people belonging to the armed forces. They exhibit various characteristics that make them more appealing than conventional loans. Their biggest advantage is that they are one of the few loans that require no down payment. Thus, houses can be bought by using 100% financing. Moreover, 20% of VA loans are guaranteed by the government making it easy for lenders to issue them. These loans also typically have less stringent underwriting requirements. Moreover, there are no prepayment penalties and the refinancing is much more streamlined.
These facilities open doors for 80% of all veterans who typically do not qualify for a loan.
FHA loans
The Federal Housing Administration (FHA) previously used to issue loans but now only acts as a guaranteeing agency. The guarantee minimizes default risk for the lender in case the buyer fails to make his payments.
FHA loans allow for loans to be made even in those cases where the credit history of the applicant is blemished. Moreover, an FHA loan can be obtained 2-3 years after one’s bankruptcy charge given that a good credit history has been maintained since then. It is also available 2-3 years after a foreclosure provided the same condition is met. The interest rate also moves less and borrowers can put up just 3.5% of the price to get the loan.
However FHA loans are only available to the lower economic classes or first time home buyers.
Adjustable Rate Mortgages (ARMs)
ARMs are loans whose payments are linked to an economic index. If the index moves up, the size of the monthly payments also goes up and vice versa. ARMs have initial interest rates that are lower than that of fixed rate mortgages, which may qualify the buyer to obtain a larger loan. However, the biggest drawback of an adjustable rate mortgage is the possibility of a rate increase. Thus one might be duped into believing that he is getting the best home loan while in reality he is being trapped into an ARM. However, this can be mitigated if the buyer plans to sell the house within a small period of time.
The problem of the index moving up can also be mitigated by choosing a loan that follows an index that has not moved much during the past few years. If this is the case, it can fairly be deduced that the index will not move in the future as well.
There are interest rate caps as well that limit the rate increase that can occur over an adjustment period. However such caps sometimes come with negative amortization. This happens when there is a cap on the monthly payments and rate actually increases in such a way that the monthly payments actually go above the cap. The extra amount that is not paid is added back to the principle in essence increasing the principal amount. The end result being that at the end of the year, the principle has actually risen despite regular payments being made.
Loan Pre Approval
Loan pre-approval is an approval for a loan the buyer has already obtained before going into the market to look for a house. This has several advantages. For one thing, it allows the buyer to only focus on those houses which fit the criteria of the approved loan. This saves him both time and effort. The decreased inventory of houses means that one can spend more time scanning the houses in detail and checking out various nuances to see whether they fit his criteria or not. Also, preapproved loans increase the bargaining power of the buyer since sellers will be willing to sell to buyers whose loans have already been approved. They know that their house is sold and can be taken off the market. Also, loans that are preapproved will enjoy a faster closer period. This can come in handy if one wants to move quickly.
Conclusion
Buying the best possible home and financing it through the best home loans is a dream held dear by almost everyone. However, a little homework can turn that dream into reality. Checking just a few items whether we qualify for a VA or FHA, can go a long way in ensuring the best possible mortgage deals.