A huge aspect of purchasing a home is finding the right mortgage loan for you. There are several different types of mortgages that each have their own advantages and disadvantages. You should always speak with a mortgage lender to review what your best options would be. Below is a brief outline of some of the most common loans you may want to consider. While reviewing mortgage loans might not seem exciting on the surface, just keep in mind that the right mortgage loan can help save you money and planning how to spend that extra money is definitely exciting.
These loans are most often conforming, meaning they stay within the federal limits set by Freddie Mac and Fannie Mae (government owned mortgage purchasers). In the Shenandoah Valley the cap is $510,400. With these loans, if you put down less than 20% of the purchase price for the home, you will pay a Private Mortgage Insurance premium each month until you reach 20% equity in your home.
Fixed Rate Loans
This is the most common mortgage loan, making up 75% of all home loans. These loans come in 15, 20 and 30 year terms. While the 30 year term is the most popular, the 15 year term will build equity faster, in part due to a lower interest rate. The interest rate stays fixed so the monthly payments remain the same for the duration of the loan; this is great for budgeting and there are no surprises down the road if you plan to stay in your house for several years. The down-side is that you could end up paying more in interest than you would with a different kind of loan.
Adjustable Rate Mortgage Loans
With ARM loans, there is an introductory period when the interest rate is fixed (one month to 10 years) after which the loan interest rate can fluctuate according to the index they are tied to. ARM loans can be attractive to buyers who don’t plan to stay in their house long-term because their initial rates are typically lower than the fixed rate loans but they come with the risk of a much higher interest rate after the fixed period.
Government Agency Backed Loans
Unlike conventional loans, these loans have more restrictions; investment properties and second homes are typically not eligible. However, these loans offer a much lower down payment and typically lower interest rates.
Virginia Housing Development Authority offers a variety of loans designed to meet the needs of Virginia's homebuyers, including Conventional 30 Year Fixed (Fannie Mae No MI, Fannie Mae Reduced MI), plus FHA, VA (Veterans Affairs), and RHS (Rural Housing Services) loans which are listed below. VHDA also offers a down payment assistance grant, closing cost assistance, and mortgage credit certificates. Something to keep in mind is that most VHDA loans are only for first time homebuyers and there is a maximum income and loan limit by region.
Federal Housing Administration Loans come in 15 or 30 year fixed rates and offer a low down payment requirement (can be as low as 3.5%), plus the ability to use a financial gift or inheritance for the down payment. Lower credit score and debt-to-ratio requirements are also advantages to FHA loans, particularly for first time homebuyers. The biggest drawback is that FHA borrowers must pay an upfront mortgage insurance fee of 1.75% of the total loan amount, as well as a monthly premium regardless of down payment size.
USDA/ RHS Loans
United States Department of Agriculture offers Rural Housing Service Loans. They can be a good option if you wish to purchase a single family home that is located in an eligible, rural area. This loan offers a no down payment option and tends to have lower interest rates than a conventional mortgage. The disadvantages to USDA loans are that you will have to pay mortgage insurance premiums and there is an income limit (for Harrisonburg Metro area- not the city itself, which is not eligible- this is $86,850 for a 4 person or less household) as well as a loan limit ($265,400 for Rockingham County).
If you've served in the United States military, you may qualify for a Veterans Affairs loan. A VA loan doesn’t require a down payment and there are no mortgage insurance requirements. There is also no minimum credit score requirement and interest rates tend to be lower. Because these loans come with so many benefits, there are a few restrictions; the property in question must be your primary residence, and it must meet “minimum property requirements" (not a fixer upper) which can prolong the appraisal process. There is also a funding fee associated with the loan.
There are several other, lesser-known mortgage loans (such as Balloon, Bridge, Jumbo, Interest-Only, Rental Property, etc) that may warrant some additional research as you determine the best loan for your situation. While one mortgage type may work for your friend or relative, it may not be the best fit for you which is why you should work with your lender and review the terms of any loan carefully.
One of the main hurdles in a contract is financing. This is why their are two points at which sellers ask for verification from the buyers that things are moving forward. Most people are familiar with the first, a pre-approval letter. Buyers are often encouraged to get a pre-approval letter before looking for houses and most sellers require to see the letter before considering an offer.
Sellers and buyers are often not familiar with the second "checkpoint" that is built into the contract. This is called the Loan Commitment Letter.
The pre-approval letter is the bank communicating that they have reviewed the buyers information and believe they will be able to get a loan. The loan commitment letter will generally come around 30 days after ratification. This letter usually comes after the underwriters have reviewed the buyer and house in more depth.
It is best practice to make sure you have the loan commitment not contingent upon the appraisal. There will always be contingencies to the loan commitment but a letter contingent upon an appraisal means that it the report hasn't been turned in yet, the underwriter flagged items on the report, or the underwriter hasn't reviewed it.