Getting Started with Home Financing

Buying a home can be one of the biggest financial decisions you make—and understanding your mortgage options is a critical first step. This guide addresses some of the most common questions homebuyers have about loans, down payments, credit, and lenders.

No-Cost and No-Fee Loans

Despite frequent advertising, “no-cost” or “no-fee” loans are rarely free. These loans often have higher interest rates—typically 0.5% to 0.625% more—because costs are rolled into the loan balance. While you may not pay upfront, you end up paying more over time.

Some refinancing programs do cover closing costs without adding to your loan balance. Still, application fees and loan amount restrictions may apply. Always read the fine print.

Paying All Cash vs. Financing

An all-cash purchase allows you to:

• Avoid mortgage interest, loan fees, and closing costs
• Strengthen your negotiating power
• Speed up the transaction process

However, paying cash forfeits the mortgage-related tax deductions, and it ties up liquidity. Carefully compare the return and risk of a cash purchase versus financing before deciding.

Qualifying for a Home Loan

Lenders typically follow these affordability guidelines:

• No more than 28% of your gross monthly income should go toward your mortgage
• No more than 36% toward total debt (including car loans, credit cards, etc.)

Other factors include your credit score, available down payment, closing costs, and reserves. Agents and lenders can pre-qualify you before you begin shopping.

No-Down Payment Loans

Options include:

• VA loans for veterans and active military
• Builder incentives in slow markets
• Seller financing in specific situations
• Certain pension fund or union programs

Down payment assistance programs may also be available through local and federal agencies.

Low- and No-Documentation Loans

Once common, “no-doc” or “low-doc” loans are now rare and more expensive. These loans are generally reserved for:

• Self-employed borrowers
• Those with variable income
• Buyers making a large down payment (typically 25%+)

Documentation may still be required, including credit reports, appraisals, and sometimes tax returns—even for “no-doc” loans.

Should You Put More or Less Down?

Smaller down payment:

• Retain more liquid cash
• Maximize mortgage-related tax deductions
• May require private mortgage insurance (PMI)

Larger down payment:

• Lower monthly payments
• Less interest paid over time
• Easier loan approval in some cases

Low Down Payment Loan Programs

Many government and nonprofit programs assist buyers with limited cash. For example:

• FHA loans require 3% to 5% down
• Fannie Mae’s Community Home Buyers Program allows 3% down, with gifts allowed for 2%
• Borrowers must usually be first-time buyers and complete a homebuyer education course

Conventional vs. Non-Conventional Loans

• Conventional loans (conforming): Follow guidelines from Fannie Mae and Freddie Mac
• Non-conventional loans (non-conforming): May be government-backed (FHA, VA) or offered by private lenders for those with limited income or credit issues

Non-conventional loans often carry higher rates but can provide access to homeownership when conventional loans aren’t an option.

What Are Conventional Loan Limits?

Loan limits vary by loan type and geography. In 2008, the conforming loan limit for a single-family home was $417,000 (higher in certain markets and for multi-unit properties). FHA and VA loans have their own regional limits. Your lender will confirm what applies to your situation.

What Does a Mortgage Broker Do?

Mortgage brokers shop loans on your behalf from a range of lenders. While they offer flexibility, they are not always required to find you the best deal unless you formally hire them as your fiduciary agent.

Always:

• Compare broker fees
• Ask how they’re paid (points, lender-paid compensation, etc.)
• Shop multiple brokers to compare offers

What Is a Mortgage?

A mortgage is a loan secured by the property you are purchasing. The lender holds legal claim to the home until the loan is paid off. A mortgage typically includes:

• Principal and interest
• Property taxes and homeowners insurance
• Private mortgage insurance (PMI) if your down payment is under 20%

You can reduce your monthly payment by increasing your down payment.

Conforming vs. Non-Conforming Loans

Conforming loans meet the criteria of Fannie Mae and Freddie Mac (loan limits, credit requirements, down payment).
Non-conforming loans are for borrowers who do not meet those standards—often due to self-employment, limited documentation, or poor credit.

How Lenders Evaluate Applications

Lenders look for:

Positive indicators:

• Steady employment
• Strong credit history
• Significant down payment
• Savings and reserves

Red flags:

• Frequent job changes
• Self-employment without stable income history
• High levels of open credit
• Poor credit or no borrowing history

Even if you don’t meet all ideal criteria, lenders may still work with you.

Choosing the Right Loan

The right loan depends on:

• How long you plan to stay in the home
• Your other financial obligations
• Interest rates vs. upfront and closing costs

Don’t rush the process. Choose a loan structure that fits your goals and comfort level.

Where to Get a Mortgage

Potential sources include:

• Banks and credit unions
• Mortgage companies and brokers
• Finance companies and thrifts
• Government agencies
• Sellers (via seller financing)

Start by comparing offers from at least 5–6 lenders. Ask about rates, points, fees, and credit requirements.

Note: Multiple credit inquiries for a mortgage within a 30-day window usually count as a single inquiry and won’t hurt your credit score. Checking your own score does not impact it.

Why Lenders Require a Down Payment

A down payment reduces the lender’s risk and shows your financial commitment. Traditionally, lenders require 20%, but that can drop to 5–10% with mortgage insurance or government guarantees (e.g. VA loans). Very few lenders offer 100% financing without special programs or insurance in place.