Home Loans types
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Buying a home !! You might need some kind of financing. Before getting pre-approved its better to get educated about different kinds of loan options. |
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Each borrower has different needs and situations like loan amount,downpayment funds availability ,loan term. |
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A loan that may fit one borrower's need and situation, might not fit the other borrower. |
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Before preapproving, a lender determines the risk associated with each type of loan. These risks can be determined by borrower's income, net worth and credit reputation . |
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If a buyer has a stable income,good credit history and a strong net worth then obtaining a loan becomes easy otherwise if any of the these standards are missing, like |
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a borrower has a low credit score or an unstable income then getting a loan becomes far more difficult. |
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Other things that affect the loan are Loan features and Current market conditions.Loan features include interest rate,repayment period,prepayment penalties etc. |
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Now lets discuss about different type of Home Loans: |
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Fixed loans: As the name suggest fixed loans have fixed interest rate.These are conventional fully amortized loan with fixed mortgage payments during the entire |
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loan term.The rate gets fixed when your loan is approved and remain the same during the whole loan term. |
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Lets say ,you were approved for fixed loan with an interest rate of 3.25% for 15 year fixed loan then your intrest rate will remain same 3.25%for the entire loan term. |
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One thing to keep in mind is when the market rates are stable and low it is best to get fixed loan.But if the market interest rates are high then going for |
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fixed loan will not be a good idea. |
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The loan to value ratio required for the fixed loan is 80%. If the borrower can't put 20% then a private mortgage insurance is required. |
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ARM Loans/Adjustable Rate Mortgage:ARM is also a conventional loan. |
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When the interest rates are fluctuating Adjuatable Rate Mortgage or ARM is a good option. |
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ARM allows the lender to adjust the loan's interest in response to a fluctuating market.If the interest rate goes up the payment will increase and if the interest |
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rates goes down then the mortgage payments will decrease as well.When a borrower goes for ARM loan ,The interest rate is the market rate at that time. |
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The lender the chooses an index and ties it to your ARM and from then the interest rates moves up and down according to the market. |
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There are rate adjustment cap and payment caps to avoid payment shocks to the buyer though. |
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There is one more option to ARM called Hybrid ARM. With the Hybrid ARM intial few years are fixed and then become adjustable.For eg. in 3/1 ARM initial 3 years will be |
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fixed and after that it will become adjustable and the payment will be adjusted each year. |
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FHA 203(b)Loans: FHA stands for Federal Housing Administration.FHA loans are insured loans that is intended to help low and middle income buyers . |
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FHA provides mortgage insurance on loan made by FHA approved lenders. |
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These lenders are called Direct Endorsement Lenders.FHA loan is approved for primary residence from single family residence or a four unit dwelling |
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but the owner must occupy one of the unit. |
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To qualify for FHA loan , FHA arrpraisal is required and the appraiser must meet FHA education and certification requirements. |
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The underwriting standards are less stringent than other conventional loans. The downpayment required for thes type of loans are very low. |
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It is 3.5% for people with credit score of 580 or more and 10% with the credit score 500-579.There are no pre-payment charges and mortgage insurance is reqired |
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regardless of downpayment.Loan peroid can be 30 year fixed or 15 year. |
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VA loans: VA or Veteran Affairs loans are guaranteed loans made to Veterans to buy thier home. These home loans are guaranteed by Department of Veteran Affairs. |
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Owner Occupancy is must in this type of loan and a Cerificate of ELigibilty is required,which is active service duty in US Armed forces-90 days in war time |
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and 24 months or more during peace time.VA loans also have some unique features like no downpayment, but there is a funding fee is some percentage of loan ammount. |
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(currently 2.15%).A notice of value is required. Notice of Value is appraised value of the property ,appraise according to VA appraising standerds. |
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Sinces these are guaranteed loans Mortgage insurances is not required. VA loans are 30 year fixed loans but some adjustable loans are also available. |
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USDA Loans:,/b> USDA loans are Rural development loans guaranteed by United States Department of Agriculture.These loans are made out to people with low income, |
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to provide them with safe,decent and sanitary housing in rural areas. A rural area with the population of 35,000 or less are eligible. The loan |
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is funded through direct loans and guaranteed loans. Generally no downpayments are required and the loan term is payback period is 33-38 year. |