Buying A Home in Farmington Hills: 7 Things to Do Before Applying for a Mortgage

Buying A Home in Farmington Hills: 7 Things to Do Before Applying for a Mortgage

 

Buying A Home in Farmington Hills: 7 Things to Do Before Applying for a Mortgage

If you’re thinking about buying a home in Farmington Hills MI, applying for a mortgage is never simple, but it’s even trickier when you don’t know what to expect. If you are a first-time homebuyer, you can make the process easier by learning as much as you can ahead of time, before you’ve found your dream house.

Knowing what to expect allows you to plan ahead and improve your chances of getting a home loan with favorable terms. Here are 7 things to do before applying for a mortgage:

1). Review your credit report

Review your credit report to ensure there are no surprises long (several months) before you begin the mortgage process. Put simply, a low credit score will lead to a much higher mortgage rate, and even disqualification if it drives your monthly mortgage payment high enough.

When you submit a mortgage application, they’ll check your credit reports maintained by one or more of the three national credit bureaus (Experian, TransUnion, and Equifax), and the credit scores derived from those reports.

Lenders use credit information to help decide whether they’re willing to issue you a home loan and, if so, how much they’re willing to lend you and how much they’ll charge you in interest.

Farmington Hills MI Homes for Sale

Once a year, you can obtain a free credit report from all three credit reporting agencies at AnnualCreditReport.com. You’ll want to review each credit report carefully to make sure it accurately reflects your credit history and be ready to dispute anything on the report that isn’t accurate.  

2). Get familiar with basic mortgage terms

“Amortization,” “origination fee,” “earnest money” and other common terms used in mortgage lending might be phrases you’ve never even heard before. Since we are talking about your money and 10 to 30 years of your life, you’ll want to familiarize yourself with basic mortgage terms before speaking to lenders.

Everything you learn will position you to make the best choices for your finances and your future. Also, don’t be afraid to ask your lender or even your Farmington Hills REALTOR® lots of questions about the mortgage process, including mortgage terms you don’t understand.  

3). Know your budget

You don’t want to wind up with a mortgage you can’t pay – so it’s important to be realistic about your monthly income and expected expenses, and to leave some breathing room in your budget for emergencies or unexpected costs that might come up.

Most financial advisors agree that you should spend no more than 28% of your gross monthly income on housing expenses and no more than 36% on total debt. That includes housing as well as things like student loans, car expenses, and credit card payments.

The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay every month. To calculate how much 28% of your income is, simply multiply your monthly income by 28.

If your monthly income is $6,000, for example, the equation should look like this: 6,000 x 28 = 168,000. Now divide that total by 100. 168,000 ÷ 100 = 1,680.

Knowing what you can afford can help you take financially sound next steps. The last thing you want to do is jump into a 30-year home loan that’s unrealistic for your budget, even if you can find a willing lender.

If you want to qualify for a mortgage on your first try, it’s important to know how big of a loan you can reasonably afford. You can speak to a lender and go through a quick pre-qualification process to find out how much you can qualify to borrow and determine your budget for a home.

4). Improve your debt-to-income ratio

A high debt-to-income ratio (DTI) is the #1 reason why mortgage applications get rejected. Your DTI is all your monthly debt payments divided by your gross monthly income.

Most lenders typically offer loans to creditworthy borrowers with DTIs as high as 43-47%. That limit is based on policies by government-backed lenders like Fannie Mae, put in place to protect customers against predatory lending practices.

Simply put, the lower your DTI, the more financing options will be available to you.  If you have some flexibility on when you plan on buying, taking time to lower your DTI (and improve your credit score) can save you a lot of money over the life of your loan. 

A few DTI reduction strategies to consider:

  • If possible, pay off your car loan before applying for your mortgage.
  • If you plan on purchasing a car, considering waiting until after you’ve bought your home.
  • Start paying off your credit cards in full, one by one, but don’t close them out. 
  • If possible, refinance or consolidate current loans to reduce your monthly payments.
  • Consider adding a co-borrower with a low DTI and good credit history to your loan 

5). Consider various loan options

Not all home loans are the same. Knowing what kind of loan is most appropriate for your situation prepares you for talking to lenders and getting the best deal.

Understand how these choices affect your monthly payment, your overall costs both upfront and over time, and your level of risk. A loan “option” is always made up of three different things: loan term, interest rate type, and loan type.

Loan term 

Interest rates come in two basic types: fixed and adjustable. This choice affects whether your interest rate can change, whether your monthly principal and interest payment can change and its amount, and how much interest you will pay over the life of the loan.

With a fixed-rate loan, your interest rate and monthly principal and interest payment will stay the same. Adjustable-rate mortgages (ARMs) offer less predictability but may be cheaper in the short term. In the later years of an ARM, your interest rate changes based on the market, and your monthly principal and interest payment could go up a lot, even double.

Explore rates for different interest rate types and see for yourself how the initial interest rate on an ARM compares to the rate on a fixed-rate mortgage.

Interest rate type 

Interest rates come in two basic types: fixed and adjustable. This choice affects whether your interest rate can change, whether your monthly principal and interest payment can change and its amount, and how much interest you will pay over the life of the loan. 

With a fixed-rate loan, your interest rate and monthly principal and interest payment will stay the same. Adjustable-rate mortgages (ARMs) offer less predictability but may be cheaper in the short term. In the later years of an ARM, your interest rate changes based on the market, and your monthly principal and interest payment could go up a lot, even double. 

Explore rates for different interest rate types and see for yourself how the initial interest rate on an ARM compares to the rate on a fixed-rate mortgage.

Loan type 

 Mortgage loans are organized into categories based on the size of the loan and whether they are part of a government program (conventional, FHA, or special programs). This choice affects how much you will need for a down payment, the total cost of your loan, including interest and mortgage insurance, and how much you can borrow, and the house price range you can consider. 

Each loan type is designed for different situations. Sometimes, only one loan type will fit your situation. If multiple options fit your situation, try out scenarios and ask lenders to provide several quotes so you can see which type offers the best deal overall.

6). Shop around

You’ll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars. Home loans are available from several types of lenders – commercial banks, mortgage companies, thrift institutions, and credit unions.

Different lenders may quote you different prices, so you’ll want to contact several lenders to make sure you’re getting the best price. You can also get a home loan through a mortgage broker with access to several lenders, giving you a wider selection of loan products and terms to choose from.

Keep in mind that brokers are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Therefore, you should consider contacting more than one broker, just as you should with banks or thrift institutions.

Good agents know good lenders

Your Farmington Hills real estate agent can help you find a mortgage lender. Most agents have a plethora of lenders in their referral database, and a group of lenders that they have personally worked with before. Agents can be trusted to refer a mortgage lender with a proven record and who can close loans.  

The Real Estate Settlement Procedures Act (RESPA) prohibits agents from receiving a “thing of value” from a lender in exchange for sending you its way, and this inhibits them from entering into quid pro quo arrangements that might not be best for their clients.

Most homebuyers want their new home purchase to be handled thoughtfully. They want to close within the contract period. That scenario is more likely to happen if you use your agent’s preferred mortgage lender.

7). Pull together your financial documents  

It’s a good idea to start prepping your financial documents. Lenders will request paperwork for your mortgage application that proves things like how much money you make and your debts. 

 Depending on your financial situation, the documents you will likely need when applying for a mortgage include 2 years’ worth of tax returns, pay stubs, W-2s or other proof of income, bank statements and other assets, credit history, gift letters, photo ID, and rental history.

If you’re self-employed or have other sources of income (such as child support), you will need to show your lender proof through 1099 forms, direct deposits, or other means. 

If you have any blemishes on your credit reports such as a previous short sale or a foreclosure, be prepared to write a statement that explains any negative items. Lenders may look at one-time unavoidable circumstances differently from habitual delinquency. 

The takeaway

The more you prepare ahead of time, the easier it should be to get the loan you need on the home you want and can comfortably afford. Don’t forget to compare different loan products, such as fixed-rate mortgages vs. ARMs, and conventional loans vs. FHA loans.

Both have their pros and cons and should be carefully considered. There is no one-size-fits-all approach. Also, be sure to shop around and get rate quotes from more than one lender. By doing so, you’ll likely get a better interest rate, more favorable loan terms, and save money now and in the long term.

Speak with your Farmington Hills MI REALTORⓇ about referring a lender to you. Real estate agents who routinely close a lot of deals have experience working with multiple lenders and know which of them will deliver.

Partner with Highly-rated Farmington Hills MI REALTOR -Tom Gilliam

Whether you are interested in Farmington Hills MI homes for sale or it’s time to list your current property, experience matters most in a changing market. Serving Farmington Hills and the surrounding area for over 20 years, Tom is able to provide his clients with the kind of knowledge, skills, commitment, and personalized service they need and deserve.

An extremely down-to-earth person, Tom is someone you can trust and feel good about working with. His clients appreciate his honesty and transparency and feel it helps them as they make important real estate decisions. Tom makes himself available to his clients whenever they have questions or concerns and promptly returns any texts, calls, or emails.

Farmington Hills MI Homes for Sale 

As your Farmington Hills MI real estate agent, Tom will protect your best interests, advocate for you, negotiate on your behalf and do whatever is necessary to ensure the best results possible. Having a trusted professional like Tom by your side means there is one less thing to worry about.

To find out more about buying or selling real estate in Farmington Hills MI, or homes in the surrounding Oakland County area, please give highly-rated REALTORⓇ – Tom Gilliam a call directly at (248) 790-5594 or send him an email

Tom Gilliam, REALTOR®
RE/MAX Classic
29630 Orchard Lake Rd.
Farmington Hills 48334
Direct: 248-790-5594
Office: 248-737-6800
Email: Tom @ Homes2MoveYou.com
License #314578 

Farmington Hills MI Real Estate

 

 

 

Oakland County MI First-time Home Buyers: FHA Loans 101

Oakland County MI First-time Home Buyers: FHA Loans 101

 Oakland County MI First-time Home Buyers: FHA Loans 101

While most people consider homeownership the American dream, many are not able to qualify for a conventional loan, which is a type of mortgage loan that’s not insured or guaranteed by the government. Unlike conventional loans, FHA loans are backed by the Federal Housing Administration and help to take some of the risk from lenders and place it on the government for higher-risk borrowers. Although the government insures the loans, they are actually offered by FHA-approved mortgage lenders.

The FHA, which is part of the U.S. Department of Housing and Urban Development (HUD), offers a wide range of loans to help different groups of people. FHA loans are helpful for Oakland County MI home buyers with limited savings and/or lower credit scores as they allow for down payments as low as 3.5% and a 580 FICO.  These types of loans are not only for first-time home buyers. Repeat buyers can get an FHA loan as long as they use it to buy a primary residence. FHA loans can also be used to refinance your home or for repairs on an older home.  

How FHA Loans Work

The Federal Housing Administration’s flexible underwriting standards allow borrowers who may not have stellar credit, high incomes, and/or cash savings the opportunity to become homeowners. With an FHA loan, borrowers must pay mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan. The cost of insuring your loan is generally higher than with conventional mortgages, and you can expect to pay higher mortgage insurance premiums (MIPs) each month. Government-guaranteed mortgages are not available on high-priced homes, and you can see the cap in your area using the online tool on HUD’s website.

The differences between an FHA loan and a conventional loan 

When buying a home in Oakland County MI, It’s easier to qualify for an FHA loan than for a conventional loan, which is not insured or guaranteed by the federal government. FHA loans require mortgage insurance regardless of the down payment amount, compared to conventional loans where you need mortgage insurance for down payments under 20%. FHA mortgage insurance payments will be the same regardless of your credit score.

FHA loans

  • More rigid property standards
  • Lower credit scores allowed 
  • Somewhat higher down payment needed
  • Private Mortgage Insurance (PMI) is required for down payments of less than 20%

Conventional loans

  • Higher credit score needed (at least 620)
  • Slightly smaller down payments allowed
  • Private Mortgage Insurance (PMI) is required for down payments of less than 20%
  • More liberal property standards

One of the biggest advantages of an FHA loan is that only a 3.5% down payment is required for a home loan purchase (with a minimum 580 credit score). This is a lot less than other conventional types, which will ask anywhere from 5 to 20%. It’s worth noting that If you were to combine the FHA loan with a down payment assistance program, it could potentially mean that you would only need to put 0.5% down.

With an FHA loan, the down payment doesn’t have to come directly from the borrower; It can come from a family member, employer, or charitable organization as a gift. Also, if you prepay your mortgage before a certain amount of time, many conventional lenders will charge a prepayment penalty. With an FHA loan, there is no penalty for prepayment.

FHA loan limits for Oakland County MI in 2021

No matter which type of FHA loan you’re seeking, there will be limits on the mortgage amount. These limits vary by county. Limits for FHA Loans in Oakland County, Michigan range from $356,362 for a 1 living-unit home to $685,400 for 4 living-units.   

The different types of FHA loans

Loan qualification guidelines are fairly similar across the various types of FHA loans available:

  • Fixed-rate loans – Available in fixed-rate terms between 15 and 30 years, FHA mortgages come with a low down payment advantage- one of the lowest on the market.
  • Adjustable-rate loans – An FHA adjustable-rate mortgage (ARM) comes with an interest rate that “adjusts” over the loan’s term; generally increasing. Many people are drawn to ARM mortgages because they offer initial rates significantly lower than a fixed-rate product.
  • FHA 245(a) loan – An FHA 245(a) loan packs a fixed rate graduated-payment mortgage, also known as a “growing equity mortgage.” Graduated payment mortgages structure your monthly payment to scheduled increases over the life of your loan. As your loan amortizes, you’ll reach a point in time when your equity starts gaining traction. These mortgages are set up in 30-year terms, but it’s not uncommon to pay off the loan early depending on which graduated plan you choose.
  • FHA energy efficient mortgage – The FHA Energy Efficient Mortgage (EEM) program is a financing add-on that allows FHA borrowers to roll the cost of approved energy efficiency upgrades into their home loan. Homebuyers commonly use this program to update their home’s windows, HVAC systems, and insulation.
  • FHA loans for mobile homes – It is possible to use an FHA loan to finance a manufactured or mobile home, but finding a lender willing to approve financing may take a few tries.  
  • FHA loans for condos – Many are surprised to find that they can purchase a condo using the FHA loan. Since some condo associations enforce rules regarding property sales and improvements, however, there are some restrictions when it comes to using your FHA loan for a condo.
  • FHA 203(k) – Compared to other types of FHA products, 203(k) loans offer the opportunity for buyers to purchase fixer-uppers while financing additional funds for home repairs and renovations into the mortgage.
  • FHA reverse mortgage (HECM) – FHA Reverse mortgages are used as a home equity conversion mortgage (HECM). This allows a qualified homeowner to receive monthly cash disbursements by liquidating the equity they’ve built up in their home.

How to qualify for an FHA loan

Getting prequalified for an HOA loan is a simple and quick process, and can even be done over the phone. Your loan officer will require information about your basic finances, such as debt, income, and assets.  After running these numbers and evaluating them, he/she can tell you an amount you may qualify to borrow. To be eligible for an FHA loan, borrowers must meet the following lending criteria:

  • A FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down.
  • Verifiable employment history for the last two years.
  • Income is verifiable through pay stubs, federal tax returns, and bank statements.
  • The loan is used for a primary residence.
  • The property is appraised by an FHA-approved appraiser and meets HUD property guidelines.
  • Your front-end debt ratio (monthly mortgage payments) should not exceed 31% of your gross monthly income.
  • Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43% of your gross monthly income. (Lenders may allow a ratio of up to 50% in some cases).
  • If you’ve had a bankruptcy, you will need to wait 12 months to two years to apply, or three years after a foreclosure. (Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances).

Your credit score

The minimum credit score for an FHA loan is 500. If your score falls between 500 and 579, you can still qualify for an FHA loan, but you’ll need to make a larger down payment. Again, these are FHA guidelines — individual lenders can opt to require a higher minimum credit score.

Your debt-to-income ratio (DTI)

The FHA requires a DTI of less than 50, meaning that your total monthly debt payments can’t be more than 50% of your pretax income. This includes debts that you aren’t actively paying off.

FHA closing costs

FHA closing costs include the mortgage insurance (MIP), lender and third-party fees, and prepaid items that are due when signing your mortgage paperwork. Here’s the breakdown:

  • FHA mortgage insurance premium (MIP) totals 1.75% of your loan amount, due at closing. You can also finance this charge as a part of your loan. You’ll also find that an additional ongoing FHA MIP of 0.45% to 1.05% is built into your monthly payment. While the rate remains the same for the life of the loan, the premium is adjusted annually based on the remaining principal loan balance.
  • Lender fees typically include an origination fee, underwriting fee, document preparation fee, supplemental loan origination fee (for FHA 203(k) renovation loans only), and interest rate lock fee.
  • You may also decide to buy discount points (a prepaid interest that lowers your loan’s interest rate), which will be listed as a lender fee.
  • Third-party fees include fees for services offered by other providers and could include Title insurance policy premium (for the lender and an option for the buyer to purchase as well), notary fee, credit report fee, Recording fees, appraisal fee, courier fee, attorney fees, and flood certification fee.
  • Prepaid items are fees that are paid in advance, with some shared between buyer and sellers such as tax and insurance escrow deposit, flood and hazard insurance premiums, real estate taxes, and per diem interest.

In summary 

Whether an FHA loan vs a conventional loan is the better choice, when buying a home in Oakland County MI, really depends on the situation as each borrower, financial situation, and home are different. Likewise, each loan has its benefits. An FHA loan is more flexible to obtain, but no matter how large your down payment, you will have to pay mortgage insurance. Whereas, a conventional loan requires a higher credit score and more money down, but doesn’t have as many provisions. You’ll want to speak with your mortgage professional to discuss which loan makes more sense for your individual financial situation and needs.

Partner with award-winning Oakland County MI REALTOR® – Tom Gilliam   

Tom Gilliam is proud to be a trusted REALTOR® in Oakland MI for the past 20 years – offering his guidance and expertise to both home buyers and sellers. Tom understands that buying or selling a home is a significant financial and life decision and that you are looking for someone you can trust. As your agent, he will protect your interests, advocate for you, negotiate on your behalf, and guide you towards a smooth and successful transaction.   

Whether you are ready to buy a home in Oakland County MI or its time to list your your current property, feel free to reach out to Tom directly at (248) 790-5594 or you can get in touch with him by email.

Tom Gilliam, REALTOR®
RE/MAX Classic
29630 Orchard Lake Rd.
Farmington Hills 48334
Direct: 248-790-5594
Office: 248-737-6800
Email: Tom @ Homes2MoveYou.com
License #314578 

 

 

Buying a Home in Farmington Hills MI? Conventional Mortgages 101

Buying a Home in Farmington Hills MI? Conventional Mortgages 101

Buying a Home in Farmington Hills MI? Conventional Mortgages 101: This year, you are finally ready to buy a home in Farmington Hills MI. Whether it is your first time or you are an experienced homebuyer, all the mortgage options out there can be overwhelming. Not all home loans are the same and knowing what kind of loan is most appropriate for your particular situation will prepare you for talking to lenders and getting the best deal.

In this article, we are going to take a closer look at conventional mortgages so that you can determine whether this type of loan is the right one for you. 

  • The majority of home loans are conventional loans
  • Conventional loans typically cost less than FHA loans but they can be harder to qualify for.
  • Conventional loans are not guaranteed in part or in full by the government.
  • Conventional loans are offered by private lenders and may be secured by Freddie Mac or Fannie Mac (government-sponsored entities)  

Conventional loan requirements

Requirements for conventional loans vary by lender, but you typically need to demonstrate credit-worthiness and the ability to make your payment every month. Here are some things that a conventional loan lender might look at:

  • Your credit score. In many cases, the bottom cut-off for conventional loan approvals is a credit score of 620. Though depending on other factors, such as the amount of the mortgage and your income, you may need a higher score to qualify.
  • Your credit history. Mortgage lenders may look more in-depth at your credit than other lenders, and you may be asked to clear up old accounts or negative items before final approval.
  • Your income and debt. The lender wants to ensure that you’re able to pay the required monthly amount. They’ll look at how much you make, as well as how much debt you already have—the ratio of your debt to your income. If your debt is already taking up a large chunk of your income every month, you’re less likely to be able to pay a mortgage and less likely to get approved.
  • The value of the home. Typically, banks won’t approve a loan that’s more than the value of the home in question. You usually have to get the property appraised before a mortgage can be finalized for this reason.

Types of conventional loans 

Conventional loans come in a wide range of types. Here are the five most common forms of conventional financing:

1). Conforming loans

A conforming loan simply means the loan amount falls within maximum limits set by Fannie Mae or Freddie Mac, the government-sponsored enterprises (GSEs) that back most U.S. mortgages. The main difference between Fannie and Freddie comes down to who they buy mortgages from. Fannie Mae mostly buys mortgage loans from commercial banks, while Freddie Mac mostly buys them from smaller banks or “thrift” banks.  Fannie and Freddie must purchase loans that fall within the loan limits set by the Federal Housing Finance Agency, which is why conventional loan limits exist.  The types of home loans that don’t meet these guidelines are considered non-conforming loans.

The 2021 maximum limit for conforming loans on single-family homes is $548,250 for most counties across the U.S. Conforming loans are best for borrowers with good credit and low debt-to-income ratios who are looking to get a mortgage with a loan amount that doesn’t exceed conforming loan limits.

2). Non-conforming or ‘jumbo’ loans

Also known as non-conforming loans, jumbo loans are conventional mortgages that exceed the conforming loan limits in a given area. Higher-end homes are often associated with this loan type. Because their significantly higher balances don’t conform to Fannie Mae and Freddie Mac guidelines, jumbo loans aren’t eligible for purchase by either entity. 

Jumbo loans differ from high-balance loans, which are conforming loans with higher balances to reflect average home prices in high-cost areas such as several counties throughout New York and California. The conforming loan limit on single-family homes in high-cost areas for 2021 is $822,375. Jumbo loans are best for borrows who are looking to finance the purchase of a home that costs more than the conforming loan limit in their county.

3). Fixed-rate loans

A fixed-rate loan is a type of conventional mortgage that has the same interest rate for the life of the loan and won’t change. The principal and interest portion of your monthly mortgage payment will be the same amount each month. You’ll generally pay more interest with a longer-term loan and interest rates typically are higher than rates on adjustable-rate mortgages. It also takes longer to build equity in your home with a fixed-rate mortgage. This type of conventional loan is best for borrowers who plan to stay in their home for at least seven to 10 years and who prefer predictable, stable mortgage payments, so they can more precisely budget other expenses month to month.   

4). Adjustable-rate mortgages (ARMs)

Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down depending on market conditions. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. For example, if you have a 5/1 ARM, your mortgage rate would be fixed for the first five years and then adjust annually for the remainder of the loan term. 

ARMs typically start out with lower rates than fixed-rate mortgages, but you can expect rates to increase over time. Most ARMs have a lifetime cap of 5%. During the years that the rate adjusts, it can go as high as 5% above the initial fixed-rate, according to the CFPB. Adjustable-rate mortgages are best for borrowers who are comfortable with a certain level of risk. If you don’t plan to stay in your home beyond a few years, an ARM could save you big on interest payments.  

5). Non-qualified mortgages

A Non-qualified mortgage (Non-QM) is a loan that doesn’t meet the standards of a qualified mortgage and uses non-traditional methods of income verification to help a borrower get approved for a home loan. This type of conventional loan caters to borrowers with low credit scores or other unique financial situations such as self-employed borrowers or those who rely on commissions or bonuses for a large portion of their income. Non-qualified mortgages will typically have higher mortgage rates and fees than prime mortgages, which are reserved for buyers with excellent credit scores. 

Non-QM loans have gotten a bad rap due to the large number of subprime loans that were doled out before the housing crisis and then went into foreclosure. Thanks to a tightening of federal regulations on the mortgage industry, lenders are now more cautious about who they loan to – non-QM lenders included. But for prospective homebuyers, there are plenty of non-QM lenders who can serve their needs. This type of conventional loan is best for borrowers who have serious blemishes on their credit profile, a DTI ratio above 43% or other unique financial situations, but can comfortably afford a mortgage.

Advantages of conventional loans

Conventional loans usually require less paperwork and can be obtained more quickly than government-insured loans. A conventional loan is a great option if you have a solid credit score and little debt. One of the best advantages of conventional loans is the mortgage insurance (MI). Typical monthly MI for FHA loans is 1.35 percent of the loan amount and in most cases will last for the life of the loan. Whereas typical conventional lending MI can be as low as .50 percent of a loan amount on a 95 percent Loan-To-Value (LTV), depending on your fico score. You can avoid PMI by paying 20% of the loan upfront, which will lower your mortgage payments.  

Conventional loans can be more flexible than FHA or other government-backed loans. Lenders of this type of loan don’t have to follow specific government guidelines, which means they may be able to work with borrowers who don’t fit those requirements. They can also provide mortgages for properties that are more expensive. In most cases, borrowers save money in the long run with a conventional loan because there’s no upfront mortgage insurance fee, and the monthly insurance payments are cheaper. 

Disadvantages of conventional loans

Significant documentation is required with this type of loan to verify income, assets, down payment, and employment. Conventional loans also generally come with a higher bar for approval because they are not guaranteed. Because the lender is taking on all the risk, risk, you may need a higher credit score and stronger debt-to-income ratio to qualify for these loans.

Closing costs on a conventional loan usually must be paid at settlement and can’t be rolled into the mortgage as they can with an FHA loan. Such things as loan origination fees are set by the lender, not the government agency, and may be higher. Additionally, lenders may require processing or application fees not applied with government-insured loans. With a conventional loan, you are also more than likely have to pay PMI if your down payment is less than 20 percent of the purchase price.

The Takeaway

Before you move forward on a mortgage, carefully consider your individual financial situation. Review your circumstances and needs and do your research, so you know which types of mortgage loans are the best fit and most likely to help you reach your goals.

Partner with Award-winning Farmington Hills, MI REALTOR® – Tom Gilliam   

Tom Gilliam is proud to be a trusted REALTOR® in Farmington Hills MI for the past 20 years – offering his guidance and expertise to home buyers and sellers. Tom understands that buying or selling a home is a significant financial and life decision and that you are looking for someone you can trust. As your agent, Tom will protect your interests, advocate for you, negotiate on your behalf, and do whatever it takes to ensure a smooth transaction and the best results possible.

Tom works hard for his clients and is able to provide the kind of knowledge, skills, dedication, and expertise you need when buying or selling a home. Feel free to reach out to Tom directly at (248) 790-5594 or you can get in touch here.

Tom Gilliam, REALTOR®
RE/MAX Classic
29630 Orchard Lake Rd.
Farmington Hills 48334
Direct: 248-790-5594
Office: 248-737-6800
Email: Tom @ Homes2MoveYou.com
License #314578 

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