The Nuts and Bolts of Securing New Home Financing

The prospect of securing that dream home can be an uphill task for those who go about it with a touchy-feely approach. You can be lumped with an unsavory life time commitment or make it work for you, providing you get to know the nuts and bolts of securing a great mortgage.

We provide a whistle-stop tour for the first-time home buyer so that you don’t feel short-changed on the whole experience.

Start at the beginning

A good place to start is to know what criteria lending houses look at while reviewing your application for new home financing.

Most lenders usually look at how much collateral you can provide as security against the loan, your capacity to repay, credit history and the amount of personal equity or down payment you can make to secure the loan.

Financing basics

There are different kinds of financing options available in the market today to help individuals finance the construction or purchase of homes.

Construction loans

Home construction requires a constant stream of money to keep the construction process going smoothly. Construction loans help do this by allowing you to get money in tranches at various stages of completion of construction. The good thing is that you only need to pay the interest component on the money disbursed until construction is complete. Once complete, you will be required to start repaying the interest and the principal component. Usually, construction loans are short term. Options to convert these into construction-to-permanent mortgage exist, where once construction is complete these loans convert to permanent, long term mortgage loans. You will need to have an approved builder and a mortgage loan approved to qualify for a construction loan in most cases.

Interest-Only Mortgages

This is a misleading name, it is really not a mortgage it is a type of loan; what you are really getting is an interest-only payment. Eventually you will have to pay the loan principal also. A fair amount of mortgages offer this option, along with others as a means of paying back your loan.

This is not a good fit for everyone. Here are some reasons it might be right for you: if your income is infrequent as with commissions or bonuses, or if you expect to earn a lot more in a few years than you do right now. Also, some people will take the principal amount they would normally give to the bank and invest it in something else that would give them a better return.

There are a lot of misconceptions about this type of loan so it is important for you to do your research to be sure that an interest-only loan is suitable for your needs.

Balloon mortgages

Balloon mortgages are loans that have a specific repayment period of 5-7 years at a fixed rate. Once this period is over, the borrower is expected to repay the entire loan amount. In balloon mortgages, once the specific period is over, there is a spike in the payments in case the entire loan amount is not repaid. Therefore the term ‘balloon’ is used to describe such mortgages. People who anticipate an increase in their income and hope to close the loan through increased earnings or refinance within the specified time frame go in for balloon mortgages. Refinancing might make you run the risk of paying a higher rate of interest prevailing at that time.

Low-doc mortgages

Low-doc mortgages are those that require very little or no documentation and are mainly of three types.

• No income / No asset verification (NINA) is the mortgage for you if you are not drawing a steady pay check. NINA mortgages are for those who are credit worthy and never fail to pay their bills on time
• No-ratio loans are for the wealthy, who have complex financial arrangements and investments
• Stated-income mortgages are available for those who work, but do not have a regular pay check and make a living from commissions or tips

The first two types of mortgages allow individuals to keep information about their incomes private. All these require very little documentation, but require a credit report and a home appraisal. The rate of interest for low-doc mortgages is higher and may range ¼ to 1% more than other types of mortgages. It also depends on the size of down payment (normally larger than what conventional mortgages expect), credit score and the property appraised.

No-ratio mortgages

These mortgages exist for credit-worthy individuals to expedite their loans. Such mortgages are called no-ratio because the lender is unable to calculate the debt-to-income ratio as the borrower does not declare it. However, the borrower should declare assets such as bank savings, investments, stake in business, real estate, etc.

Knowing the costs on mortgages

Regardless of the type of mortgage you go for, it is important for you to know the costs involved – this is important as it might take a bit of digging to get the full picture. Typical costs include lender or appraisal fees, origination and discount points, credit report costs, third party fees such as attorney’s fees, title insurance, amount of prepaid interest, if any, amounts for setting up an escrow and hazard insurance.