Home buyers looking to purchase a home often make use of the services of a mortgage broker. This individual is often indispensable for many people, offering services and assistance on certain types of loans and helping home buyers identify the best type of mortgage for their needs. Understanding what mortgage brokers do will help you make use of their skills and qualifications, and find the best type of financial assistance that meets your requirements.
What is a Mortgage Broker?
A mortgage broker is an individual or a company who acts as an intermediary between a home buyer and a lender. He/She assists in and manages the process of a loan or mortgage by matching borrowers with lenders. Mortgage brokers typically review the borrower’s financial status to determine which lender has the best type of loan that fits the borrower’s needs.
How Can Mortgage Brokers Help?
A house is easily the biggest investment that anyone will ever pay for in his/her lifetime. Since many home buyers cannot pay for their purchase in cash upfront, they often turn to a lender to help them with a loan or mortgage. It is this mortgage that is the tricky part because there is no such thing as a one-size-fits-all loan. Every borrower is different and the type of mortgage that he/she takes on should fit the type of finances that he/she currently has. The role of a mortgage broker is to help find the specific type of mortgage that will allow the home buyer to leverage his paying capacity to buy his/her dream home. Mortgage brokers even assist home buyers in the mortgage application process.
Types of Mortgage Loans
Mortgage brokers can help home buyers find the loan that matches their needs and circumstances. Here are the different types of loans available through a mortgage broker.
A conventional mortgage is either a conforming or non-conforming loan that does not have the backing of the federal government. A conforming loan meets FHFA (Federal Housing Finance Agency) standards and have set loan limits, depending on the area where the property is located. Non-conforming loans, on the other hand, do not conform to FHFA standards and are best for borrowers who want to purchase large homes. These loans are also for those who do not have good credit or have a financial issue, including a bankruptcy.
As its name implies, a fixed-rate mortgage carries a fixed interest rate throughout the loan period, so borrowers can expect to pay the same amount of loan. Fixed-rate mortgages are usually available in 15- or 30-year terms. However, borrowers may often be allowed to choose any payment term period from 8 to 30 years.
ARM (Adjustable-Rate Mortgage)
ARMs carry fluctuating interest rates that increase or decrease depending on market conditions. Initially, these loans have a fixed rate for a limited time period, after which it will be changed to a variable rate for the remaining loan period. There is a potential that the borrower could save a good amount on interest payments if they remain low but if rates increase, mortgage payments could be difficult to afford.
Loans that exceed the limits set by the FHFA are called jumbo loans. These are available for purchasing properties in high-price areas, such as New York City, Los Angeles, San Francisco, and Hawaii. These loans offer higher amounts and interest rates are generally at par with other types of loans. Borrowers, however, are required to pay a down payment of 10% to 20% and must have a minimum FICO score of 700. They must also show proof of ownership of significant savings and assets in cash and must have a DTI ratio lower than 45%.
Although the U.S. government is not involved in mortgage lending, it does offer support for those who wish to purchase a home. There are three types of loans under this category. These are:
FHA Loans. These loans are best for borrowers who do not have a good credit or cannot afford to pay a large down payment. They are required to have a FICO score of at least 580 to receive as much as 96.5% financing and a 3.5% down payment.
VA Loans. These loans are available for U.S. military veterans and active duty members. Borrowers are not required to pay down payment and mortgage insurance on these low-interest and flexible mortgages. The seller may even pay for the closing costs.
USDA Loans. Available for borrowers who belong to the low- to moderate-income tier who wish to own a home in USDA-eligible areas, which are typically rural. There are income limits required but qualified borrowers do not have to pay a down payment, although there are extra fees, including an annual fee.