The home buying process has many steps and one of the first and most important is shopping for a mortgage loan. This means that close to three quarters of property sales include the buyers obtaining a mortgage loan. There are common factors across lenders like interest rates based on Fannie Mae / Freddie Mac guidelines, 15- and 30-year mortgages, and certain required terms and conditions. However, there are a lot of variables such as specific loan availability, communication, timing of execution, and third-party fees which are all an important part of the process.
Finding A Home Mortgage Lender
Finding lenders can start in a few ways but we recommend beginning with those that have been referred by your Broker, friends, or family. Once you have narrowed it down to two or three you can set up an initial interview during which you want to learn about the lender and company.
Here are some sample questions:
- Can you walk me through the whole process?
- What information will I need to supply?
- What types of fees should I expect?
- How long do these types of loans take to close?
- Are there options to expedite if needed and is there a cost?
- What is your communication style and availability?
- Do you foresee any issues that we can address up front?
This year, interest rates have significantly increased and fluctuated as shown in the chart below. Mortgage rates are based on many factors including the bond market, unemployment rates, inflation rates, the nation’s economy, and much more. In 2020 and 2021, record low rates were set at just over 2%, which significantly impacted the real estate market - 2021 specifically saw the second highest amount of sales, following just behind 2005 - 2006. In comparison, the 1981-82 recession set record high interest rates at over 18% which cut real estate activity by less than half nationwide.
Types of Mortgage Loans
While rates have been hovering in the high 7% range and median home prices are still increasing, this has unfortunately priced many buyers out of the market. In turn, lenders are offering more creative mortgage loans to assist new homeownership. “What loans best fit my needs?” is also pertinent questions to ask your lender. Below are different loan products common to our area below.
Conventional loans are commonly set at 15- or 30-year time frames with slightly different interest rates. During your 15- or 30-year time period, you will have a fixed monthly payment for the loan amount and the fixed-rate interest. The monthly payment can adjust based on changes in property taxes and homeowners insurance, which are typically paid through an escrow account managed by the mortgage company. These loans typically require a higher credit score and at least 3.5% down payment.
Adjustable Rate Mortgage
Commonly known as ARMs, these loans are also paid back over a set period of time (most often 3, 5, or 7 years) but the interest rate is not fixed for the life of the loan. The initial interest rate is typically lower than a fixed-rate loan and will remain fixed for the designated period; after that the interest rate moves down or up causing your payments to do the same.
This option allows buyers to pay the lender an additional fee upfront which reduces the interest rate by 0.25% - 1% for the whole term of the loan. 3-2-1 buydowns decrease the rate 3% the first year, 2% the second year, 1% the third year, then returns to the original rate. The cost to buy down rates depends on the amount of the loan and the loan length. Since interest rates have increased, sellers may be open to giving the buyer a credit at closing towards a buydown with an acceptable offer.
This option is used less frequently than the aforementioned because it relies on the seller being in a financial position to carry the loan. The seller and buyer negotiate the terms and conditions at the time of the contract. The seller receives regular payments, essentially acting as the bank. Interest rates for these can be higher or lower than fixed rates and may also depend on the down payment amount. This can also be used as an incentive to attract buyers, as well as allow the seller to earn interest income.
HomesFund is a Southwest Colorado program offering mortgage assistance to help buyers who are local and purchasing a primary residence. HomesFund offers multiple types of assistance with the most popular being the shared appreciation loan. This product contributes to part or all of the down payment. The amount provided by HomesFund is not paid monthly, but is repayable upon the sale of the home or in 30 years, whichever comes first, and shares part of the equity the home gained.
Bridge loans are used by homeowners who need financial assistance during the transition between selling their current home and purchasing another. These loan terms are designed to last six to twelve months and require the currently owned home be put up as collateral. Bridge loans can be costly, so we recommend the homeowner compare this option to a home equity line of credit.
VA / FHA / USDA Loans
These three government backed loans offer options based on specific qualifications. Veterans Affairs (VA) loans are guaranteed by the Department of Veterans Affairs and provide lower interest rates for veterans, active duty military, and spouses. These do not require a minimum credit score or a down payment. The Federal Housing Administration offers FHA loans designed to expand eligibility to buyers with a lower credit score. This product requires at least a 3.5% down payment. USDA loans are backed by the U.S. Department of Agriculture and are kept specifically for home buyers purchasing in rural areas. They require no down payment and buyers need to fall under a certain income threshold. These are fairly common in Southwest Colorado.
Many of these options allow buyers to buy time while rates are higher with the future plan of refinancing when rates are lower. If you are thinking about purchasing a home or refinancing within the next 6 months, we highly encourage you to begin the process of selecting a mortgage lender now so you can hit the ground running once you find the right property. Your mortgage lender is an integral member of the team and we are happy to provide recommendations of local lenders that we work with regularly and trust to make the process understandable and smooth. Please do not hesitate to reach out to us for lender referrals, mortgage questions, or anything else about the home buying process.