Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SATURDAY, May 5, 1990 TAG: 9005080133
SECTION: AMERICAN HOME WEEK PAGE: AH14 EDITION: METRO
SOURCE: SARAH COX
DATELINE: LENGTH: Long
There are many types of loans to choose from, and what you end up with may depend on what kind of house you are buying and what kind of financial ground you are standing on. The first step is to determine the price category of home you can afford, and a real estate agent can help with that.
To qualify for a conventional loan, your house payment cannot exceed 28 percent of your gross monthly income. With your new house payment, the total debt-to-income ratio cannot be more than 36 percent of your total income, which means combined household incomes.
Once this is done, you should explore the various financing arrangements available. Debbie Wilson, a loan originator with Signet Mortgage Corp., explained the categories and their suitability to different situations. Under conventional loans, there are fixed-rate, adjustable-rate and balloon loans, plus temporary buydowns.
"A fixed-rate loan is fixed at a certain percent for the entire term of the loan," said Wilson. "It's good to use when the home buyer plans to stay at this house for any length of time - if it's his dream home."
"Any length of time" means five years or more, she said, because it's a good rate regardless of the market.
The adjustable-rate loan has rates that start out low, and gradually increase, or decrease, depending on the market. A one-year adjustable rate mortgage (ARM) can increase or decrease every year, up to 2 percent, and not more than 6 percent for the life of the loan. This fluctuation restriction is called a "cap."
The three-year ARM is similar, but can be adjusted every three years, up to 2 percent, and not more than 6 percent for the life of the loan. The five- and seven-year ARMs are similar, but convert to one-year ARMS after the fifth and seventh years.
"It's good to use the one-year ARM if you're a young professional who can't afford a large home payment immediately, but can afford to have it increase because your income escalates," said Wilson.
It's also a good idea to start out with the lowest possible rate, she said, if you have a tough time qualifying for the loan - it reduces your debt-to-income ratio.
Additionally, if a professional person moves to town, but is not going to stay for long, the one- or three-year ARMs are advisable. "They need to invest because they're making too much money. If pays for them to go with these rates," she said.
The five- and seven-year ARMS are ideal for people who plan to stay in that home for four or five years, or who are investing in their first home and plan to stay there for several years. And if your income looks good, but your debt load is heavy, these loans are attractive - you pay less now, and as your debt decreases your payments increase.
Something even better for short-term stays might be the seven-year balloon loans. They offer an even lower rate, according to Wilson, but at the end of the seventh year the loan is called: it demands payment in full.
What happens at that point? "You have two options. You can convert to a fixed-rate mortgage, which usually carries a fee, or you can refinance the loan entirely," said Wilson. The conversion fee, she said, usually runs about $250, and this method is easier and can be preferable. However, for those who are willing to do a little digging, sometimes refinancing can turn up a lower rate loan.
The fourth type of loan, a temporary buydown, is literally paying a fee to buy the loan rate down.
Wilson gave an example of how this works. "On a 10 percent rate, you want to have a two-one buydown; you pay a fee to buy the rate down 2 percent the first year [to 8 percent], and 1 percent the second year [to 9 percent.] Then it goes to a fixed rate the third year, and for the remainder of the term."
The fee - what you pay to buy the loan down - is normally 2 3/4 percent of the loan amount and can be paid by either the seller or buyer, she said.
The advantages of a temporary buydown come into play when the home buyer already owns a home. Wilson sees this used with purchase of lake homes.
"You've got a first mortgage and you want to gradually adjust to two mortgage payments."
In addition to conventional loans, there are some attractive state and federal housing loans available.
The Virginia Housing and Development Authority (VHDA) is specifically targeted to first-time home buyers, or those who haven't owned a home in the last three years.
"They want all families to experience the `American dream,' " said Wilson.
A further restriction, she said, was that the home could not be used for income-producing purposes - "you can't sell Mary Kay [cosmetics] and qualify."
VHDA loans require the seller to pay the discount points, which is the pricing for the loan rate. "The higher the rate, the lower the points, and the lower the rate, the higher the points. The rate is fixed for 30 years."
The Federal Housing Administration (FHA) can be the answer to those who have little cash. It offers low down payments, but higher back ratios (debt-to-income ratios).
"It can be as little as 3 percent down payments; conventional loans are at least 5 percent," said Wilson. "The only limit is the maximum loan amount is $93,750 for the Roanoke area. One big advantage is the higher ratios - $29 and 41 percent, with fixed- or one-year ARMs."
The Veterans Administration offers its own loans, especially for veterans and eligible spouses.
"The VA sets the maximum rate we can charge. The current ceiling is 10 percent," said Wilson.
The points are the same as FHA loans. The advantage is that there is no down payments required for a loan up to $144,000. "Anything from $145,000 to $184,000 requires a 10 percent down payment. This is the type of loan where anything goes - you can borrow the down payment and closing costs. The seller is required to pay the points, and can pay all the closing costs including prepaid items.
"In an FHA loan, that can't be done. Literally, a veteran can get in a house without paying out any cash," said Wilson.
Two other loans, outside the realms of conventional and government-funded, are the conventional jumbo rate and bridge loans. The former usually brings higher rates with it, even though the mortgage is for more money.
"If your first mortgage is more than $187,450," said Wilson, "then the lender has to go to the private sector, and that's why this rate is higher."
A bridge loan is a tool used to purchase real estate and can only be used on a home you already own.
"If the current interest rates are so high that you'd rather wait, you can use the equity on your current home to purchase a new home. And you can borrow up to 80 percent - in some cases 90," Wilson said.
So you have your loan all figured out? But the bucks don't stop there.
Private mortgage insurance, required on all conventional loans with less than 20 percent down, insures the top portion of the loan against foreclosure.
"If you have a $100,000 home loan, can't make the payments, it goes to foreclosure and the house is auctioned off at $75,000. This insurance pays the other $25,000," Wilson said.
VA loans have this same type insurance with their VA Funding Fee; FHA calls it mortgage-insurance premium.
And those aforementioned prepaid items - which are items for your personal use - include the required homeowners insurance; escrow accounts for taxes; per diem interest - which is interest paid from the day of closing to the end of the month - and mortgage insurance.
Closing costs include prepaid items and an onslaught of other expenses. These are the attorney's fees (includes a title search); the discount points; the origination fee, which pays the lender, such as Signet Mortgage, to get the loan; the recording costs, which go to the courts; the appraisal and credit report fee; the title insurance, which is insurance against any defect in the title; and title binders, a temporary policy until the deed of trust is recorded.
It's best to have done as much preliminary paperwork as possible before starting your search for a home.
by CNB