LOS ANGELES—The economy is slowly improving and so is the real estate market which means good news for families looking for a new home to call their own. As more head into the market, the greater the need to learn about the ins and outs of home financing.
As you explore the landscape of mortgage financing, it’s important to know the basics of home loans. You can begin by going online and browsing through the various web sites run by mortgage providers. You may also look into institutional lenders, or banks, as well as mortgage bankers, credit unions, the seller of the property and insurance companies. Mortgage brokers, who make up the majority of all lenders, serve as the agent of the borrower and lender.
It’s important to do your research when it comes to mortgage brokers since they generally have different contacts with lenders. Mortgage bankers, however, offer bank loans since they work for banks.
You can also work with mortgage providers who offer government backed loans, or FHA loans. If you’re a first-time homebuyer, this program is geared for you. You don’t need to have perfect credit or a lot of money in the bank for a down payment. The typical FHA loan generally requires a 3.5 percent down payment, instead of the 20 percent required by most lenders. Under FHA rules, those paying less than 20 percent down payment and over 15-year amortization are required to pay mortgage insurance premium every month as part of the monthly payment.
Another type of government loans are VA loans, managed by the U.S. Department of Veterans Affairs which are available to members of the U.S. military and their families. These loans are available to finance 100 percent of the purchase of a home.
One of the first things you’ll decide is whether you prefer an adjustable or a fixed rate loan. An adjustable loan adjusts the monthly payment according to the fluctuating interest rate charged by the Federal Reserve Bank and that means it offers a lower interest rate. A fixed rate loan, however, locks in the monthly payment and interest rate for the life of the mortgage. If the rate is low then it’s to your advantage, but if it’s not, then its you who may end up paying more.
Conventional loans are those generally offered by banks, savings and loans and credit unions. These types of loans require at least 5 percent down payment and those who make a down payment of less than 20 percent will require Private Mortgage Insurance which would increase your monthly payment.
Another type of loan is called a Jumbo mortgage, named after the fact that it’s a larger loan than usual since they exceed the maximum amount that mortgage giants Fannie Mae and Freddie Mac would buy. In Los Angeles and other major cities, the limit for mortgage loans is $625,000. But such jumbo loans have been more difficult to get due to the down economy.
Learning the difference between being pre-qualified and pre-approved for a loan is especially important. Being pre-qualified is when your mortgage broker informs you how much money you may borrow based upon your financial status which includes such things as your credit rating and your debt-to-income ratio. Being pre-approved is when you have to submit financial documents and your lender agrees in writing to provide you with a loan.
For more information, be sure to consult with your real estate agent. Home financing is a complicated subject with many issues and nuances and the more informed you are the better your chances of financing your ideal home.
David Rosenfeld is a Real Estate broker and president of Advantage Real Estate, a Real Estate and investment firm in Santa Monica, and a Rotary Club member. He has more than 20 years experience in commercial and residential property investments and financial counseling. He can be reached at 310 450-4488 and at dr@advantage-realestate.com
By David Rosenfeld
