The world of mortgage loans could be described in many ways—but few of us would think to call it simple. From different interest rate structures to the various acronyms for different types of mortgages (FHA, VA, etc)1, it might feel like you need to go to school just to get started on your home loan search.
Fortunately, it’s not all that complicated once you break down the basics—which we’re going to do for you right now! Here’s a quick peek at some of the most important mortgage basics for new borrowers to learn and love, including types of mortgage loans, different types of interest payments, and more.
Fixed-rate vs. adjustable-rate mortgages
Interest is the amount of money you pay for the privilege of getting a loan: the additional cost, on top of the principal loan amount borrowed for the home, that you’ll pay to the lending company over time.
Interest is wrapped up in your monthly payments, so you don’t have to think too hard about it on a regular basis—but when you’re first shopping for a home loan, it’s important to understand how much you’ll be paying in interest (your rate) as well as the type of interest structure you’re signing up for: fixed-rate or adjustable.
A fixed-rate mortgage is, as its name suggests, fixed: you’ll pay the same, fixed interest rate over the entire life of the loan, which means you can calculate at the beginning exactly how much you can expect to pay over the course of the loan term. (Psst: That’s the period of time the loan extends over).
With an adjustable-rate interest, on the other hand, the rate changes with the market, and may get either high or lower depending on how the economy fares. Usually, these loans do have a set period in the beginning of the loan wherein the interest rate is fixed. Then the rate will be recalculated by adding the margin (which is basically a floor rate) plus the Index. The index will be based on some industry standard. The going rate may be lower than similar fixed-rate loans available at the time, which makes adjustable-rate mortgages, or ARMs, attractive—but after that initial fixed period, the variable rate is almost certain to surpass the initial interest rate offered. All of which is to say: approach these mortgages with caution!
Mortgage programs for first-time buyers
First-time home buyers often face unique challenges in the housing market: since they don’t already have a home (and therefore home equity) to their name, they must save up a significant amount of money to jump the hurdle into homeownership.
But certain mortgage programs make it a lot easier for first-time buyers to hop over that barrier to entry.
For example, FHA loans1 are a common type for first-time buyers to look into. Offered by lenders but insured by the federal government by way of the Federal Housing Administration (making it less risky for those lenders), these loans allow buyers to put down as little as 3.5% for those with credit scores of 580 or higher but require the payment of mortgage insurance premiums. Those parameters can make it a lot easier for new buyers just getting established to meet the eligibility requirements.
VA loans1 are another option offered through the Department of Veterans Affairs that offers very achievable eligibility metrics—though they’re only available to active service-members, veterans, and their surviving spouses.The United States Department of Agriculture also offers a similar USDA loan program1 for those looking in certain rural areas. Certain household income requirements do apply.
Keep in mind when you offer a low down payment, however, you may be required to pay private mortgage insurance, or PMI, which may increase your monthly payment a bit due to the insurance premiums. Still, these types of programs may be the best mortgage for a fresh buyer, since saving up for the down payment and closing costs can be such an overwhelming task.
Best of all: while their relatively lax qualification requirements make these loans attractive to first-time buyers, they’re not limited to first-time home buyers only. Even if you’re an existing homeowner on your second or third mortgage, you can look into these programs to help stack the odds in your favor when it comes to applying for a home loan.
Mortgage programs for non-traditional borrowers
What about mortgages for those whose tax documentation or income doesn’t match up with what is usually expected by a conventional mortgage lender? For instance, what if you’re a freelancer who files using W-9s, a small business owner or a foreign national?
Conventional mortgages generally include a pretty stringent income verification process—which makes sense. Lenders do need to know that you’ll be able to make your mortgage payment each month!
But there are alternative loan programs out there, such as non-QM loans or what was once called “no-doc” mortgages, which can help borrowers whose paperwork looks a little different.1
With these loans, you may be able to provide alternative documentation to verify your income, such as bank statements or a business profit-to-loss statement. However, these types of loans may also require higher minimum down payments and credit scores than similar types of conventional or government-insured loans, so they’re not right for everybody.
One option in this vein: Quontic’s Community Development Loan, or CDL1, which is specifically built for non-traditional borrowers. We utilize a holistic approach when it comes to qualifying you for a mortgage, taking your entire financial situation into account, and we can also help current homeowners refinance their real estate holdings.
Want to learn more? Contact one of our mortgage specialists to get started.
1Quontic Bank is not affiliated with or acting on behalf of or at the direction of Federal Housing Authority (FHA) or any government agency or government sponsored entity. All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of April 3, 2022 & is subject to change without notice.