During the home buying process, most people will need to obtain a mortgage on their property. The following information is of a general nature and is furnished as a courtesy only. All information is considered commonly available and is believed to be accurate to the extent furnished, however has not been reviewed or edited by recognized experts. While every endeavor has been made to ensure that the information on this website is correct and fairly stated at the time of publication, no liability is accepted for error or omission. Also, the information provided is not for decision-making nor intended to be construed as a substitute for obtaining proper expert advice from recognized mortgage professionals and your attorney.

Conventional:  A "traditional" mortgage, not directly insured by the Federal Government. Conventional loans are administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government).

FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD), and designed for, in general, low- and middle-income borrowers and many first-time buyers. There are, however, limits (which vary from county to county) to the maximum loan amount. FHA loans may have somewhat more relaxed qualifying standards and ratios than conventional.

VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages. May have lower down payment requirements (as low as 0 down) and somewhat more lenient qualifying ratios.

No-Document ("No-doc) Loans: No-doc mortgages are generally a wise choice for self-employed people, those who do not wish to verify their income, and those with a brief or blemished credit history, or no credit. The benefits of a no-doc mortgage include a shorter application process since you are not required to provide income, employment or asset documentation, as well as a streamlined approval process because there is little subsequent verification. However, no doc mortgages generally will be at slightly higher interest rates and are offered by fewer lenders.

FIXED RATE MORTGAGES:

A fixed rate mortgage is a mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "biweekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan

For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher.

ADJUSTABLE RATE MORTAGES (ARM):

An adjustable rate mortgage may get you started with a lower monthly payment than a fixed rate mortgage, but your payments could get higher when the interest rate changes.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.

Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.

Whether you have credit problems or not, it’s a good idea to review your credit report for accuracy and completeness before you apply for a loan. To order a copy of your credit report, contact:

Equifax: (800) 685-1111
TransUnion: (800) 888-4213
Experian: (888) 397-3742

More on Private Mortgage Insurance (PMI)

One of the most frequently misunderstood aspects of mortgaging a home, especially for first-time buyers, is Private Mortgage Insurance (PMI). The most common misconception is that PMI is a mortgage life insurance policy whereby the mortgage would be paid off should the borrower die. It is not.
Instead, PMI is an insurance that most lenders require of all borrowers who put less than 20% down. It's purpose is to protect the lender against losses should the borrower default.

Virtually all conventional mortgages with less than a 20% down payment will dictate the inclusion of PMI. FHA mortgages, which are insured by the Federal Government, require a different type of insurance with different coverages. The cost of PMI will depend on a number of factors, including the insurance carrier and the size of the loan.

When confronted with PMI for the first time, many buyers will ask "If I'm paying the premium but it is the lender who is protected, what's in it for me?" Simply, the ability to purchase a home with less than 20% down. Lenders have found that those who put down less than 20% are far more likely to default than those who put down more. With the protection of PMI, lenders are able to make more loans (and more buyers are able to buy homes) with down payments as low as 5% or 10%. This is especially important to first-time buyers, where liquid cash for down payments and closing costs is often tight.

Unlike the mortgage insurance on FHA loans (which remains through the life of the loan) PMI is, under certain circumstances, cancellable. A new law, the Homeowners Protection Act of 1998, simplified this cancellation process greatly. Where once it was an involved process to get the PMI removed from the loan, the procedure is now much more "owner-friendly". With all qualifying loans that originated after July 29, 1999, a homeowner has the right to request cancellation when the mortgage balance is less than 80% of the original purchase price or appraised value (whichever is less). In order to request cancellation, the loan must be current with no delinquencies in the last 1-2 years. In addition, an appraisal of current value (at the homeowner's cost) may be required.

The Homeowners Protection Act also stipulates (in the case of most loans) that when the balance reaches 78%, cancellation is automatic. Again, the loan must be current for the cancellation process to begin.

Obviously, your first goal should be a 20% down payment level since this achieves a number of goals. First, it eliminates the cost of PMI entirely. Second, it lowers your monthly payment (since you have financed less). Third, it allows you to buy more house since the money that would have been for PMI can now be for a higher mortgage payment.

Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.