Financing Your Home

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Apply For A Loan

To consider your loan request, the lender will:

• Need the property address and proof of insurance.
• Require a property valuation to estimate the home’s market value.
• Verify your income and check your credit and employment history.
• Request a good faith deposit or application fee to cover costs associated with processing your loan application. This deposit will be credited back to you at closing. Application fees are generally nonrefundable.
• Verify that you have the funds needed to close.

Mortgage lenders require proof of insurance before they will fund your loan. Many lenders require only fire and hazard insurance up to your loan amount, but you should consider adding flood insurance, even if it is not required. You should also consider purchasing extra protection for your personal possessions.

The USAA Educational Foundation publication, Homeowners Insurance, offers more information.

Your lender will tell you if you must carry flood insurance, which is a separate policy from homeowners coverage.

Selecting A Loan

Fixed-Rate Loans. Also known as conventional loans, fixed-rate loans are usually repayable in 15 or 30 years and are usually the preferred type of mortgage when interest rates are low. Because the interest rate remains constant, your principal and interest payment remains stable for the life of the loan. Note: Your total monthly payment could change with an increase in property taxes or homeowners insurance rates.

Adjustable-Rate Mortgage (ARM) Loans. ARM loans may be a good choice if you will be staying in your home for a period of time less than the fixed period of your ARM loan. Many offer 30-year terms with lower initial interest rates than comparable fixed-rate loans. An initial, low fixed-rate period is followed by intervals when the interest rate fluctuates and your mortgage payment generally increases. It is important to remember that while there will be up-front benefits, the uncertainty of future interest rates could result in higher payments in future years.

VA Loans. The Department of Veterans Affairs (VA) offers loans to individuals with qualifying lengths of military service. They generally require a funding fee, but no down payment. VA-financed homes must pass rigid property valuations and be your primary residence. Consult your lender or the VA at www.homeloans.va.gov for more information.

FHA Loans. The Federal Housing Administration (FHA) offers government-backed mortgage loans through approved lenders. Buyers must pay a mortgage insurance premium (MIP). Homes must pass rigid property valuations and be your primary residence. Consult your lender for more information.

Interest-Only Mortgage (I-O) Loans. Most mortgages that offer an I-O payment plan have adjustable interest rates, which mean that the interest rate and monthly payment will change over the term of the loan. An I-O mortgage provides flexibility in the early years of the loan. Initially you pay only the interest or can choose to repay some portion of the loan balance. After the interest is paid, you must pay the remaining balance over a shorter period of time, resulting in a significant increase (sometimes double or triple the original amount) in the payment amount. In a declining housing market, you could have a minus value in your home and an increasing mortgage payment.

For more information on ARM and I-O loans, visit www.federalreserve.gov/pubs/mortgage_interestonly/mortgage_interestonly.pdf.

Assumable Loans. You assume the seller’s mortgage loan and interest rate, taking responsibility for their payments — a good idea if the original loan rate is lower than the market rate. Closing costs are generally much lower than when a new loan is established. Few fixed-rate loans are assumable.

Understand Mortgage Payments

• The principal portion of the payment lowers your outstanding loan balance. You are paying back a portion of the original amount you borrowed.
• The interest portion goes to the lender as payment for loaning you the outstanding principal balance. The lower your interest rate, the less your mortgage will cost over time.
• Your monthly payment may also include property taxes and homeowners insurance costs. If so, the lender holds these funds in escrow and pays the local property tax office and your insurance company when those bills are due.
• Depending on the down payment amount, you may be required to purchase mortgage insurance from the lender. This protects the lender if you are unable to repay the loan.

Reduce Mortgage Costs

• Make an additional lump sum payment toward principal annually.
• Increase your monthly payment by a fixed amount.
• Put additional funds toward your principal balance as available (such as when you receive a bonus or monetary gift).

Some lenders offer bi-weekly payment plans which require making 26 payments each year — one every other week — equaling one-half the regular monthly principal and interest payment. This results in making one extra month’s payment each year. Because some lenders charge a fee for this option, it may be better to simply make an extra monthly payment on your own. However you choose to pay your mortgage loan, avoid “deals” asking you to pay a fee to reduce the term.

The Home Inspection

• Schedule the inspection early enough to give the seller time to make needed repairs before closing. Do not sign closing papers until the repairs are complete.
• Choose an inspector qualified to examine every part of the home: roof, foundation, wiring, heating and cooling systems, plumbing, water heater and appliances.
• Confirm that the inspector will provide an inspection for wood-destroying insects that is acceptable to your lender.

Attend the inspection and ask the inspector questions to learn as much as you can about the home. Obtain a detailed report about the findings and schedule a follow-up inspection of any items repaired by the seller. If possible, conduct a final walk-through of the home just prior to closing. Make sure the property named in the contract — such as appliances and window coverings — is in place and that no new damage has taken place in or around the home.

Know When To Terminate

• You cannot get financing.
• The home appraises below the contract sales price.
• The home inspection uncovers major structural or mechanical defects.
• The property boundary lines are not as represented by the seller.
• The title search reveals undisclosed easements or liens that will not be satisfied at closing.
• There are problems with the deed.