Owning A Home
It’s part of the American dream to own a home and most people accomplish this through a mortgage. A mortgage is essentially a loan a person gets in order to purchase real estate. Originally, the term “mortgage” was derived from a French legal term used in the middle ages which stood for “death pledge”, because most people who had mortgages in those days passed away before they were able to pay off the debt. In today’s world, while the name is still used, people can often pay off their loan…If they plan correctly. There are different types of mortgages to fit different needs and different situations. Most of the time, mortgages are provided by mortgage companies, otherwise known as lenders, who work with borrowers through banks or other financing avenues.
The objective of this lesson is to provide Hometown Hero Project sales agents with more in-depth information about mortgages and how connecting with more VA clients, can help mortgage lenders. When working with prospective mortgage lenders and brokers it is important to understand the mortgage process.
Mortgage lenders make money by closing on loans, especially successful loans. A large portion of a lender’s pay comes from commissions. They earn a percentage of the principal (loan amount before interest), on each closed deal. Some loan officers working for larger mortgage companies are paid by salary, but they do get extra benefits in the form of bonuses for closing on more low-risk mortgages than high-risk mortgages. Independent mortgage brokers earn the majority of their money through commissions from the larger lenders whom they act as the intermediary for. Overall, loan officers want to approve loans, but approving a large number of loans that end up defaulting is not a good career move (though in past years, the opposite was true). The more loans they can legitimately approve, the more money they make. With that being said, HNN can promote their business and connect them with local Veterans looking to purchase a home or refi.
Types of Mortgages:
Fixed Rate Mortgage
Fixed rate mortgages are the most popular option. A set interest rate means predictable monthly payments. These payments are spread over the length of a term, which ranges from 15 to 30 years, typically. Currently, shorter loan terms are becoming more popular. Back in 2011, USA Today noted that 34 percent of refinancers shortened from a 30-year to a 20-year or 15-year loan.
Generally, the shorter your loan’s term, the lower the interest rate. Lenders take on less risk with a shorter loan term. This means you’ll pay much less interest over the life of a 15-year mortgage versus a 30-year mortgage.
- 30-Year Mortgage: Freddie Mac notes that about 90 percent of home buyers in 2016 chose the typical 30-year, fixed-rate mortgage. The longer term makes payments much more affordable, which can help home buyers get into a more comfortable payment or a more expensive home.
- 20-Year Mortgage: Like the 30-year mortgage, this fixed-rate option offers consistent payments. You just pay off your house sooner. Some consumers like to split the difference between the longer and shorter terms. The 20-year mortgage will typically have a slightly lower interest rate than a 30-year mortgage.
- 15-Year Mortgage: You’d think that payments for a 15-year mortgage would be twice as high as payments for a 30-year. But because 15-year mortgages generally have lower interest rates, this isn’t the case. That’s one reason these shorter-term mortgages are becoming more popular.
Adjustable Rate Mortgage (ARM)
As you might guess, the interest rate on an adjustable rate mortgage fluctuates. Exactly how the interest rate changes depends largely on the type of loan you get.
In many areas of the world, including Britain and Australia, adjustable rate mortgages are the norm, though they’re much less common in the U.S. If interest rates are going down, ARMs let homeowners take advantage of that without refinancing. If interest rates rise, however, ARMs can result in surprisingly sky-high payments.
- Variable Rate Mortgage: This is just another name for an ARM, but a true variable rate mortgage will have adjusting rates throughout the loan term. Rates normally change to reflect a third party’s index rate, plus the lender’s margin. Mortgage rates will adjust on a set schedule, whether every six months, every year, or on a longer term, and many cap the maximum interest you’ll pay.
- Hybrid ARMs: These adjustable rate mortgages come with an initial fixed rate for a particular period of time. Common hybrids are 3/1, or three years of fixed interest followed by floating interest rates, and 5/1, the same but with a five-year introductory period.
- Option ARM: This type of ARM offers the borrower four monthly payment options to begin with: a set minimum payment, an interest-only payment, a 15-year amortizing payment, or a 30-year amortizing payment. Often, an Option ARM is used to get a borrower a larger loan than he would otherwise qualify for.
Balloon mortgages typically have a short term, often around 10 years. For most of the mortgage term, a balloon mortgage has a very low payment, sometimes interest only. But at the end of the term, the full balance is due immediately. This can be a risky proposition for most borrowers.
Interest-only mortgages give borrowers an option to pay a much lower monthly payment for a certain time, after which they’ll need to begin paying principal. Balloon mortgages are technically a type of interest-only mortgage. But most interest-only options don’t require a lump sum payment of principal.
Instead, these payments will allow the borrower to pay only interest for a set amount of time. After that, the borrower will need to make up for lost time by paying more principal than they would have had they begun with a traditional fixed rate mortgage. In the long term, interest-only mortgages are more expensive. But they can be a decent option for first-time home buyers or individuals who are starting businesses or careers with only a little money at first.
This type of mortgage is for seniors only. A reverse mortgage gives homeowners access to their home’s equity in a loan that can be withdrawn in a lump sum, with set monthly payments, or as a revolving line of credit. Homeowners don’t have to make payments, but the lender will have a lien on the home for the amount owed upon the death of the borrower(s).
With a reverse mortgage, you’re fine until you have to move out of the house. If you move out, even if it’s before your death, you’ll need to repay the mortgage out of the proceeds of the loan. This can drain the equity many seniors depend on to fund long-term care expenses. In some situations, a reverse mortgage can be a reasonable choice. Just be sure you know what you’re getting into.
Combination mortgages are helpful for avoiding Private Mortgage Insurance (PMI) if you can’t put 20 percent down on a home. Usually, you take out one loan for 80 percent of the home’s value and another for 20 percent of the home’s value. This is an 80/20 combination loan. Usually the first loan has a lower, fixed interest rate. The second loan has a higher rate and/or a variable rate.
This can sometimes be more expensive interest-wise. But do the math. PMI can be expensive, as well. If you can pay off the higher-rate 20 percent equity loan quickly, you may come out better off with a combination mortgage.
In an effort to encourage home-ownership, the federal government offers some loans that are backed by government entities. This means that if a borrower defaults on the loan, the government will cover the lender’s losses. Because of this guarantee, government-backed loans are often an ideal solution for first-time and low-income home buyers.
- FHA Loans: These loans are backed by the Federal Housing Administration and are great for first-time home buyers or those with bad credit. FHA loans can be used for single-family homes, cooperative housing projects, some multifamily homes, and condominiums. The specialized FHA 203(k) loan can also be used to fix up a home in need of significant repairs.
- USDA Loans: The United States Department of Agriculture encourages rural home ownership with specialized, low down payment loans for certain families buying homes in rural areas.
- VA Loans: The Department of Veterans Affairs backs these zero down loans for active duty, reserve, national guard, and veteran members of any branch of the armed forces.
- Indian Home Loan Guarantee: These HUD loans are available to lower-income Native Americans, as well as Native Alaskans and Hawaiians.
- State and Local Programs: If you’re struggling to come up with a down payment or adequate credit score for a home loan, check out state and local government programs. Many programs are geared toward revitalizing areas where many homes are abandoned or in need of repair.
If you have a home and have some equity built up in it, you can take out a home equity loan, also known as a second mortgage. This is just another loan secured by the equity in your home. Another option is a home equity line of credit. This is a revolving loan based on the equity in your home.
These loans will typically have a higher interest rate than your first mortgage. But they can be a good option for funding home renovations or other necessary expenses, especially in such a low interest rate environment.
To qualify for a home loan you will need a credit score of at least 580, 2 years of consistent verifiable income with w2’s and tax returns. You will also need a down payment, however there are several low down and no down payment loan options available.
Lenders want to know that the loans they provide will be paid. This is why some set even higher standards than those listed above. This is where our Heroes News Network has some serious benefits for lenders. Let’s say they want to provide loans to Veterans in their area. We can help them target their advertisements inside these posts, which provides them with a little more assurance that their marketing dollars are well spent.
Benefits to Lenders using HNN:
We create an ad that displays any information promoting their business on the Heroes News Network inside local Veterans Posts. That same ad will also be displayed on our national website www.hnnusa.org to anyone who is online in their area looking to use a VA Loan.
Targeting to a demographic like Veterans can mean more commissions for the lender
Not only can we target Veterans but we can also use special targeting groups to promote the lender in front of a specific demographic in any area with people who have a certain credit score, a certain annual income, and are renters over a certain age.
Generally, the following people are eligible for a VA Loan:
- Veterans who meet length and character of service requirements
- Service members on active duty who have served a minimum period
- Certain Reservists and National Guard members
- Certain surviving spouses of deceased Veterans
VA Home Loans Are Available from Local Lenders
Unlike most other VA benefits which are handled by the government, the VA Guaranteed Home Loan is available from private companies. The Department of Veterans Affairs takes no part in the application process, nor do they make any decisions in the approval of the loan or the distribution of funds. All of this is handled by the individual lender or mortgage company. The government simply offers some guarantee of repayment, thus reducing the risk of the Veteran borrower. This greatly speeds up the process for the mortgage lender and the borrower.
VA Home loans provide the lender with some assurance from the VA if the Veteran is unable to continue making payments. This makes Veterans lower-risk applicants and makes it easier for lenders to make the decision to move ahead with the loan. Secondly, it is far easier for an eligible Veteran to qualify for a VA Home Loan than a traditional loan. Because the requirements are lowered, more Veterans, especially first-time buyers, can take part in the American dream of owning a home. Another positive aspect of the VA Home Loan is that the borrower does not pay mortgage insurance. This is good for the Veteran and the lender because the borrower can purchase a better home for the same monthly payment as someone not using the VA Home Loan. Moreover, VA loans come with some of the lowest foreclosure rates of any loan type, further reducing the risk for lenders. In other words, working with and supporting the Veteran community is a great business move.
Benefits to Lenders Working With Veterans:
- It is far easier for a Veteran to qualify for a home loan, so a lender working with Veterans will close on more loans and earn higher commissions.
- Because qualifying Veterans do not need to pay mortgage insurance, they can purchase more home, which means more commissions for the lender (and real estate agent).
- Working with qualified Veterans is lower risk, allowing lenders to approve more loans and increase their commissions.