Diverse financial institutions present wide-ranging funding options. When you are in the market for a loan, the first step toward approval is defining exactly what you need. In order to help with major purchases, for instance, some institutions specialize in mortgages and equity financing. Others extend credit terms for car purchases and short term cash flow needs. Another branch of the industry serves commercial accounts, furnishing funds for entrepreneurial endeavors. Before you start vetting individual prospects, identify the type of lender best-suited to your particular needs.
Within the financial marketplace, you'll recognize several types of lending organizations, including banks, credit unions, Internet loan companies, mortgage specialists and other funding entities. The landscape can be intimidating for money shoppers, so information and education are keys to success – preparing you to compare and contrast options.
Mortgage seekers are especially vulnerable to missteps, simply because the stakes are high – often hundreds of thousands of dollars. To maximize resources and land the most appropriate mortgage funding package, it is important for you to weigh various approaches, prior to locking-in residential financing. If you are looking for a mortgage or seek to refinance your existing home, several considerations help determine your best path.
With so many options available to well-qualified borrowers, settling on the right form of funding requires attention to the particulars of each deal. One would-be home owner, for example, might benefit from the terms of a standard bank mortgage, while another is more comfortable working with a local credit union.
Answering several questions up-front helps refine the search for mortgage approval, leading to the most appropriate terms for each borrower. Failing to weigh your options, on the other hand, can be an expensive mistake, resulting in unnecessary charges and high interest obligations. Cost comparisons cannot be made, until a general loan “type” is identified as a possibility. Some examples include the following forms of financing, each serving distinct funding requirements.
Loans not backed by government agencies, like FHA or Department of Veterans Affairs, are considered conventional. Issued by banks and other lending institutions, conventional financing represents a “standard” approach to home ownership, backed by strong credit references and a high probability of payback. Conforming versions, in particular, have been the cornerstone of the mortgage industry since its inception, serving countless eligible borrowers.
Conforming loans abide by conditions set out annually by the Federal Housing Finance Agency. The guidelines are primarily concerned with setting loan size limits, but there are other stipulations in place defining conventional, conforming loans. In order to qualify for conforming loans, applicants must have a record of timely housing payments, with none missed during the prior twelve months. In addition, their base credit scores must reflect minimum standards, typically calling for scores in the 600's and above. Judgements, foreclosure and bankruptcy also disqualify applicants, unless sufficient time has passed, clearing the actions from credit reports.
Each applicant's debt-to-income ratio is scrutinized by mortgage funding organizations, requiring would-be homeowners to conform to set limits. The ratios are used by lenders to evaluate income, as it relates to monthly payment obligations. Earners' whose ratios fall within a preset range present the least risk for lenders, so they are considered for conventional loans. Without two years steady employment and solid front and back end ratios, on the other hand, non-conforming loans are the only recourse for borrowers.
In addition to providing credit information to lenders, applicants must demonstrate the value of property to be financed. To initiate a mortgage, a timely appraisal must be conducted under the Home Value Code of Conduct, which prohibits outsiders from influencing the process. Using appraised value and the size of the loan, lenders evaluate each set of circumstances, determining whether property value supports the sum to be borrowed. Conforming loans typically have Loan-to-Value (LTV) ratios of 80-95%, depending upon the terms of each program.
Well-qualified loan applicants seeking conventional financing have access to the greatest number of funding alternatives, choosing from various programs reserved for those with good credit and ordinary financial circumstances. The best lenders for qualified conventional candidates are found online, at large brick and mortar banks and among specialized mortgage services. The competitive industry ensures each will offer borrowing incentives, so research and comparative analysis help would-be homeowners identify the best options.
Non-conforming loans fall outside the guidelines adopted for conforming financing, so borrowers in need of funding beyond established limits are subject to unique conditions. These jumbo loans represent a riskier form of secured financing, exceeding designated conforming dollar amounts.
Fixed Rate Financing – Conventional financing typically carries steady interest rates that don't change during the life of a loan. Monthly payments are designated up-front, detailing repayment for the entire life of the loan. During the early years of payback, a majority of each payment is applied to outstanding interest, while the remainder lowers the principal balance. As repayment unfolds, the ratio shifts over time, reserving a greater portion of each payment for reducing the debt. Advance payments are generally permitted, enabling borrowers to accelerate payback by remitting additional funds beyond each month's fixed obligation. Fixed-rate loans are available for various terms, but the familiar 30-year mortgage sets the industry standard, helping borrowers maintain affordable payments.
Adjustable Rate Mortgages – In contrast to fixed-rate vehicles, adjustable rate loan products are subject to interest rate fluctuations during repayment. In practice, an adjustable rate mortgage (ARM) often involves a hybrid approach, extending fixed terms during a portion of the payback period, and then shifting interest rates throughout the remainder of repayment. A lender might offer 3 or 5 years at a fixed rate, for instance, which is adjusted after the introductory period. Beyond the fixed phase, lenders use a pre-approved metric to establish the variable rate, which is commonly adjusted annually.
The advantages of selecting an ARM include capitalizing on prevailing low rates and retaining flexibility. By accurately predicting future low rates, variable mortgage holders effectively gain access to them, without the need for refinancing. On the contrary, rates trending upwards can cost variable-rate borrowers money. Though there are often caps in-place governing how high a rate is allowed to climb on a particular variable rate loan, increases enacted after the initial fixed-rate session expires may limit the advantages associated with an ARM.
Interest-Only Jumbo Loans – One available mortgage option for well-qualified buyers calls for interest to be paid during its initial phase, after which monthly payments increase in size. This alternative is available to affluent buyers with irregular income, needing sizable loans. The threshold varies regionally, but jumbo loans are those issued for several hundred thousand dollars and up. Once the initial interest-only period passes, borrowers begin repaying principal alongside monthly interest obligations.
In high-dollar real estate districts, like the State of California, jumbo loans are required just to keep pace with rising home prices. Despite customary asking prices in the millions, conforming loans backed by the government are capped at $625,000 in the state, so jumbo loans are commonly at the heart of workable real estate deals.
Choosing the right lender is subject to myriad concerns, each influencing the best path to mortgage success. Prevailing economic conditions, the size of a loan, an applicant's credit history, and the type of institution chosen for financing have direct impacts on borrower outcomes, so these and other factors should be considered before committing to a particular approach. Lenders each bring unique advantages to the mortgage process, so it pays to evaluate and compare services, rates and terms.
Some websites like BankRate and LendingTree compare loan offers from various financial institutions, allowing home buyers to get an idea of current market conditions and the costs associated with different financing options. For your convenience, here is a table highlighting current market rates in your local area.
Banking industry giants use volume to leverage the best terms for their customers, so well-qualified applicants fare well securing funding through traditional brick and mortar banks. Wells Fargo, for instance, operates more than 6000 branches, so local service is within reach, without sacrificing the large scale funding power of a top tier bank. In fact, the high profile national bank recently won top honors in a survey polling consumers about banking services. In addition to Wells Fargo, BB&T, Chase Bank, and U.S. Bank performed well as traditional national providers, according to participants' responses. MortageStats.com shares recent lending statistics online.
As direct lenders, major banks present several advantages for their customers. For starters, large financial organizations often maintain a wide suite of loan programs, to serve a diverse customer base. As a result, big banks enable borrowers to cover multiple financial needs at the same institution, which adds convenience and may lead to other advantages for customers. The lending power of big banks makes them excellent choices for jumbo loans, which are commonly held by major market players.
Technology changes the way we do business, including advances in the efficacy of online lending. As security and accessibility have grown, so have the number of reputable Internet lenders, now including names like AimLoan, Bank of Internet USA, First Internet Bank, and goodmortgage.com. Still, the detached nature of dealing with financial needs online means Internet loans are not for everyone.
Savvy home-buyers, or those seeking better terms for their existing property fare well using Internet funding sources, because of their familiarity with the process. On the other hand, first-timers and those with less experience navigating financial markets benefit from the added assistance given by local lenders, face to face. In practice, electronic media also appeals to younger borrowers, so Internet-based lending options have found favor with young borrowers, accustomed to life online.
Another alternative for buyers well-versed on financial procedures is to use a mortgage broker. Brokers compare multiple financial products, helping borrowers find the best programs for their mortgage needs. Their services are particularly helpful for applicants seeking unconventional financing. Not only do brokers steer borrowers to loans for which they'll likely qualify, but their ability to compare multiple funding resources often leads to better rates than those uncovered independently. When custom solutions are required, for instance, brokers know which lenders have the greatest amount of flexibility.
Comparatively small institutions add a personal touch to the mortgage lending process, and their local contacts and experience also prove beneficial for customers. Since many loans are sold on the secondary market, a local bank may shed your mortgage quickly, but their service-oriented nature helps carry inexperienced borrowers through the protocols leading up to the final closing. Compared to major national banks, local providers have more flexibility crafting loan terms. Where national institutions follow guidelines set forth by the corporate office, small community lenders evaluate each transaction independently, shaping custom solutions for their regional customers.
Community banks are typically locally owned and operated, competing briskly with larger financial players. Unfortunately, reforms aimed at protecting consumers have actually diminished the role of local lenders. As a result, some borrowers bank locally as a matter of principle, to support community enterprises and ensure access to future neighborhood resources.
Established relationships pay dividends for some loan seekers, who capitalize on existing banking connections to move deals forward. Credit unions furnish loan privileges for members, sometimes targeting customers from a particular trade, region or industry. Teachers' credit unions, municipal employee CUs and those exclusive to union members or residents of a particular community are prime resources for local funding. Members-only access ensures a personal touch, often leading to the best available rates and terms.
Each credit union designs its own programs, so custom-tailored loan products are within reach for CU applicants. Due to their exclusive nature, credit unions are good choices during lean economic times, when existing relationships help borrowers qualify for financing.
Truth in lending policies protect consumers seeking loans, especially in the wake of the mortgage industry meltdown. Still, it falls upon would-be borrowers to uncover the best approach for each funding need. In order to set the stage for success, you must consider a number of factors. How much money is needed? What type of property is being financed? Is a standard 30-year mortgage realistic? Does your credit history measure up?
Answering these and other questions helps refine your search for mortgage funding, steering you to the best available financial products. In addition to your personal circumstances; general economic conditions, geographic location and other concerns ultimately influence your mortgage outcome. Whether you are eligible for conventional financing, or require a creative, custom solution, research and follow-through are all you need to find the best available lender.
US 10-year Treasury rates have recently fallen to all-time record lows due to the spread of coronavirus driving a risk off sentiment, with other financial rates falling in tandem. Homeowners who buy or refinance at today's low rates may benefit from recent rate volatility.
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