Choosing the Best Loan Program

Loan programs come in many forms and come from many sources. Just as the loan structure, like a 30-year fixed-rate mortgage, can affect your interest rate and monthly payments, the source of funding for your loan can also affect your rate and payments. The source of funding can also affect the amount of your down payment and closing costs.

If you have at least 3% of the loan amount to use as a down payment, you may consider the common type of loan, a conventional loan. These loans consist of conforming loans, which are secured by government sponsored entities (GSE) such as Fannie Mae (FNMA) and Freddie Mac (FHLMC), and jumbo loans, which are funded by private investors for loan amounts higher than the limits set by the GSEs.

The conforming loan entities do not lend the money directly to you, but work with lenders across the country to offer mortgage loans to meet your needs. As a secondary market for mortgage loans, they purchase mortgages from lenders and package them into securities that can be sold to investors.

If you are looking for a large loan amount to purchase or refinance your home, you could consider a jumbo loan, which has a higher loan amount limit than the limits set by Fannie Mae and Freddie Mac. Because the jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.

Two Key Factors in Qualifying for a Home Loan

When a lender makes a decision about a mortgage application, they consider two basic factors: 1) your ability and 2) your willingness to repay the loan.

Ability to repay the mortgage is determined by verifying your current employment and analyzing your total income. Lenders prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years. Your proposed monthly payment will be compared to your monthly income and debt.

Willingness to repay is influenced by how you have paid previous loans and by examining how the property will be used. Willingness can be gauged by your credit report and previous commitments to pay rent and/or utility bills. There is also a greater tendency to stick with your payments if you live in a house as opposed to a rental property or vacation home.

It is important to remember that there are no set rules and each applicant is handled on a case-by-case basis. Many applicants come up a little short in one area but make up for it with other strong points. These compensating factors may include a large down payment, solid employment, extensive educational background, or overall financial health.

For applicants who need to make a lower down payment, mortgage insurance is protection for the lender in case you stop making payments. This allows low- and moderate-income families to become homeowners with low down payment programs.

Choosing a Mortgage Company

When you are ready to shop for a loan, you can work directly with a lender or with a mortgage broker representing many individual lenders. Direct lenders are lending their own money, have in-house programs, and make the final decision on your application. Mortgage brokers are intermediaries who represent many lenders and loan programs from which to choose.

If you have special financing needs or want to shop the market for the best deal, an experienced broker may be able to find the best loan for you.

Along with shopping the source, you'll also have to shop the total cost of the loan, including the interest rate, fees, points (each point is one per cent of the amount you borrow), prepayment penalties, the loan term, and a host of other items.