Are you looking to purchase your first home? Here are some requirements you need to have before you begin the process!
“Step by step, place became property, property became a mortgage, and mortgages became derivative investments.” – Douglas Rushkoff, Life Inc.: How the World Became a Corporation and How to Take it Back
Are you considering purchasing a new home? You might be upgrading your existing residence. Or, you might be buying an additional residential property to increase your investment portfolio. Finally, you might be a first-time homebuyer. While the reasons for purchasing a new house are appropriate, the question of how to pay for your new home is extremely relevant. The fact of the matter is that very few people can afford to purchase a residence by paying the total amount in cash. 2019 Statistics show that in circa 70% of the USA, workers cannot afford to buy a home, even though house sale prices are more affordable than they were in 2018. Some of the reasons for this include:
- The cost of housing versus the average monthly wage.
- According to the Federal Housing Administration, mortgage loan requirements have become more stringent.
Finally, according to Elizabeth Renter, in her article titled “2018 Home Buyer Report”, notes that 75% of all USA residents believe that buying a home is a priority. Therefore, the question that must be asked and answered is how to solve the affordability challenge.
Financing Your New Property
At this juncture, it is worth summarizing that the biggest challenge to buying a home is the buyer’s affordability rating versus the cost of the property. Additionally, this point is the primary driver of what type of residential property you will be able to purchase. The good news is that there are several ways to solve the affordability challenge. The fundamental or most straightforward way is to apply for a mortgage. This statement seems to be juxtaposed directly opposite an earlier comment in this article that noted that mortgage loan requirements have become less flexible. Thus, it is easy to assume that it is virtually impossible to apply for a mortgage successfully. This assumption is not necessarily correct. The salient point is that, it will still be possible to qualify for a home loan. Prospective buyers need to ensure that they meet the stricter requirements.
Therefore, let’s look at the different mortgage types and their individual requirements:
At the outset of this topic, it’s correct to assume that different mortgages have a loan cap. USA home loans are divided into two broad categories: The Conforming Mortgage and the Jumbo Home Loan.
The Jumbo Mortgage
Succinctly stated, the Jumbo mortgage is a high-end loan, and it is used to purchase homes that cost more than the Conforming loan’s maximum allowed limit. Furthermore, it is safe to assume that the Jumbo loan presents a higher risk level to both the lender and borrower. In other words, there is a higher chance that the borrower might default on the loan repayments. Thus, the qualifying criteria include elements such as an excellent credit rating, and the down payment percentage is generally higher than a conventional mortgage loan. It’s also vital to be mindful of the fact that higher risk levels translate into higher interest rates. Thus, the Jumbo mortgage will incur a higher interest rate than one of the Conforming mortgages.
The Conforming home loan
As mentioned above, home loan types that belong to the Conforming mortgage category have a maximum monetary limit. At the end of 2019, the Federal Housing Finance Agency announced that the maximum value of the conforming loan is $510 400 (USD). In other words, homebuyers cannot purchase a home that costs more than circa $510 000 and fund it using one of the Conforming mortgages. Buying a higher value home using the mortgage instrument requires the Jumbo loan. In conclusion, here are a few details of the more popular Conforming mortgages:
The ARM or Adjustable-Rate Mortgage allows the successful applicant to choose between fixing the interest rate for the total loan repayment period or allowing the interest rate to change after a pre-determined time, based on specific criteria like the loan’s overall period and repayment behaviour. On the other hand, a Fixed-Rate Loan’s interest rate is fixed from the loan’s inception to conclusion. The VA Loan is guaranteed by the federal government and is only available for military veterans as well as current service members and their families.
When choosing to purchase a home using the mortgage vehicle, it is vital to consider all the available options as well as determine the maximum purchase amount. Otherwise, the risk of defaulting on the monthly repayment is high. And, the consequences of defaulting on the loan repayments can be dire and not worth risking.