Mortgage: Types and ways to obtain it
When you wish to purchase a house with the help of a mortgage, you must be aware of the different types of home loans available, how you can obtain them, what you can afford and how much you can borrow.
What are the different types of home loans available?
Mortgage loans can be broadly classified into 2 types – conventional loans and government loans. Government home loans include FHA, VA and RHS loans. All other home loans fall in the category of conventional loans. The most common types of conventional loans are:
• Fixed-rate loans: The interest rate and monthly payments remain the same throughout the term of a fixed-rate loan. These loans are very affordable when interest rates are low.
• Adjustable-rate loans: The rate of interest on adjustable-rate loans remain fixed for a set initial period and then changes in line with market interest rates.
There are also other types of mortgages like two-step loans, hybrid loans, balloon loans and jumbo loans.
How can you obtain a conventional mortgage?
In order to obtain a conventional mortgage, you have to qualify the debt-to-income ratio set by the Federal National Mortgage Association (Fannie Mae). A debt-to-income ratio comprises of the following:
• Front-end ratio: Your pre-tax gross monthly income divided by your monthly home loan payment (including interest payments, property tax and homeowners insurance) gives the front-end ratio. This ratio should not exceed 28 % of your gross monthly income. This is also known as housing-to-income ratio.
• Back-end ratio: Your gross monthly income (before tax deduction) divided by the sum of monthly debt payments (including the new home loan payment) gives the back-end ratio. If you have a ratio of above 36 %, lenders will consider it risky to offer you a loan.
Lenders generally want you to pay 20 % of the purchase price of your property as down payment. However, if you are unable to put down the required amount, you can still obtain a mortgage. But in such a case, you have to purchase a private mortgage insurance to protect your lender in case you default on the loan.
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