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Mortgage 101

The homebuying process can be overwhelming with the endless amount of mortgage options available to you! To simplify this process, let us break down some of the most popular mortgages and feel free to reach out to our lender to see what option works best for you and your needs.

 

Government Loans

FHA Loans

FHA loans are provided by the Federal Housing Administration. They were designed to promote homeownership by allowing people with lower credit scores and smaller down payments access to buy a home. These are more commonly used for first time home buyers that do not have a 20% down payment. If you are a first time home buyer, you should definitely check out our first time home buying guide. Keep in mind that with a lower downpayment, such as the low 3.5% down with FHA, you are going to pay mortgage insurance (MIP). MIP is an upfront premium of 1.75% of the loan amount paid at closing and can be financed into the mortgage amount. In addition, there is a monthly MIP amount included in the PITI of .85%.  This can raise your monthly payments dramatically, so be prepared to face higher monthly payments if you do not have the 20% down. So depending on your credit score situation, FHA may or may not be a good mortgage option for you.

 

VA Loans

The Department of Veterans Affairs (VA) guarantees loans offered by Wells Fargo to help qualified veterans, reservists, and active-duty service members to finance their homes. VA loans are suited for veterans with low income and limited savings. They offer 0% down payment options, flexible income, debt and credit requirements and down payments and/or closing costs that can be funded by a gift, grant or secured loan. To be eligible for a VA loan, you must have suitable credit, sufficient income, and a valid Certificate of Eligibility (COE) to be eligible for a VA-guaranteed home loan. The home must be for your own personal occupancy. The eligibility requirements to obtain a COE are listed below for Servicemembers and Veterans, spouses, and other eligible beneficiaries. VA home loans can be used to buy a home, a condominium unit in a VA-approved project, build a home, simultaneously purchase and improve a home, improve a home by installing energy-related features or making energy-efficient improvements, and buy a manufactured home and/or lot.

Eligibility Requirements for VA Home Loans
Servicemembers and Veterans
To obtain a COE, you must have been discharged under conditions other than dishonorable and meet the service requirements below:
 
Status Qualifying Wartime & Peacetime Periods Qualifying Active Duty Dates Minimum Active Duty Service Requirement
Veteran WWII 9/16/1940 – 7/25/1947 90 total days
Post-WWII 7/26/1947 – 6/26/1950 181 continuous days
Korean War 6/27/1950 – 1/31/1955 90 total days
Post-Korean War 2/1/1955 – 8/4/1964 181 continuous days
Vietnam War 8/5/1964 – 5/7/1975 *For Veterans who served in the Republic of Vietnam, the beginning date is 2/28/1961 90 total days
Post-Vietnam War 5/8/1975 – 9/7/1980 *The ending date for officers is 10/16/1981 181 continuous days
24-month rule 9/8/1980 – 8/1/1990 *The beginning date for officers is 10/17/1981
  • 24 continuous months, OR
  • The full period (at least 181 days) for which you were called or ordered to active duty
Gulf War 8/2/1990 – Present
  • 24 continuous months, OR
  • The full period (at least 90 days) for which you were called or ordered to active duty
Currently On Active Duty Any Any 90 continuous days
National Guard & Reserve Member Gulf War 8/2/1990 – Present 90 days of active service
  • Six years of service in the Selected Reserve or National Guard, AND
    • Were discharged honorably, OR
    • Were placed on the retired list, OR
    • Were transferred to the Standby Reserve or an element of the Ready Reserve other than the Selected Reserve after service characterized as honorable, OR
    • Continue to serve in the Selected Reserve

*If you do not meet the minimum service requirements, you may still be eligible if you were discharged due to (1) hardship, (2) the convenience of the government, (3) reduction-in-force, (4) certain medical conditions, or (5) a service-connected disability.

Spouses
The spouse of a Veteran can also apply for home loan eligibility under one of the following conditions:
  • Unremarried spouse of a Veteran who died while in service or from a service-connected disability, or
  • Spouse of a Servicemember missing in action or a prisoner of war
  • Surviving spouse who remarries on or after attaining age 57, and on or after December 16, 2003
    (Note: a surviving spouse who remarried before December 16, 2003, and on or after attaining age 57, must have applied no later than December 15, 2004, to establish home loan eligibility. VA must deny applications from surviving spouses who remarried before December 6, 2003, that are received after December 15, 2004.)
  • Surviving Spouses of certain totally disabled veterans whose disability may not have been the cause of death
Other Eligible Beneficiaries
You may also apply for eligibility if you fall into one of the following categories:
  • Certain U.S. citizens who served in the armed forces of a government allied with the United States in World War II
  • Individuals with service as members in certain organizations, such as Public Health Service officers, cadets at the United States Military, Air Force, or Coast Guard Academy, midshipmen at the United States Naval Academy, officers of National Oceanic & Atmospheric Administration, merchant seaman with World War II service, and others
Restoration of Entitlement
Veterans can have previously-used entitlement “restored” to purchase another home with a VA loan if:
  • The property purchased with the prior VA loan has been sold and the loan paid in full, or
  • A qualified Veteran-transferee (buyer) agrees to assume the VA loan and substitute his or her entitlement for the same amount of entitlement originally used by the Veteran seller. The entitlement may also be restored one time only if the Veteran has repaid the prior VA loan in full, but has not disposed of the property purchased with the prior VA loan. Remaining entitlement and restoration of entitlement can be requested through the VA Eligibility Center by completing VA Form 26-1880.

 

USDA Rural Development Loan Eligibility

Housing and Community Facilities Programs helps rural communities and individuals by providing loans and grants for housing and community facilities. They provide funding for single-family homes, apartments for low-income persons or the elderly, housing for farm laborers, childcare centers, fire and police stations, hospitals, libraries, nursing homes, schools, and much more. In partnership with non-profits, Indian tribes, state and federal government agencies, and local communities, HCFP creates packages of technical assistance and loan and grant funds to assist more rural communities and individuals. In the years to come, they hope to strengthen these partnerships as well as the relationships with borrowers and grantees. Together, we all can make rural America a better place to live.

To determine if your property is eligible for certain USDA Loan Programs, please visit this site.

 

Fixed Rate Mortgages

Fixed-rate mortgages give you the security of knowing your monthly principal and interest payment will not change. Wells Fargo Home Mortgage offers a variety of fixed-rate products, with loan terms ranging from 10 to 40 years. Fixed Rate mortgages offer predictable payments and protection. The monthly principal and interest payment are fixed over the life of the loan. Fixed rate protects you from rising interest rates. No matter how high market interest rates go, your mortgage rate remains the same over the life of your loan. Fixed rates are best for people who prefer regular payments with no surprises, are on limited or fixed incomes, plan to stay in their homes a long time and are buying a home at a time when interest rates are comparatively low.

 

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that is fixed for the first one to 10 years and then adjusts periodically based on financial market conditions. During the initial fixed period, an ARM has a lower interest rate than a comparable fixed-rate mortgage, so you’ll save on your monthly payments during the early years of your loan term. Because it offers lower upfront monthly payments, an ARM can help you:

  • Buy a more expensive home. Because your maximum loan amount is based on the initial monthly payments, you may be able to borrow more.
  • Manage your cash flow in a high-rate environment. If you are buying a home at a time when interest rates are comparatively high, an ARM can help you avoid making high monthly payments right away.
  • Plan for future income growth. An ARM can help you keep your payments low while your income increases during the loan’s fixed period.
  • Potentially improve your credit standing. The lower initial rate can make your payments easier to manage, helping you improve your credit and expand your financing opportunities if you make timely payments on your mortgage loan and other credit obligations.
  • Save money if you expect to move or refinance. If you plan to move or refinance before the end of the loan’s initial fixed period, you can take advantage of an ARM’s lower payments without worrying about future rate increases.

After the initial fixed-rate period, the remainder of the loan term is divided into adjustment periods of one year or six months, depending on the ARM product you choose. At the end of each adjustment period, the interest rate may change based on the loan’s:

  • Index: The interest rate on a publicly traded debt security that is used to calculate the interest rate on an ARM. Popular indexes for ARM loans are the one-year U.S. Treasury security and the London Inter-Bank Offered Rate (LIBOR).
  • Margin: A fixed percentage (usually two to three percent) that is added to the index at each adjustment period to determine the loan’s new rate.
  • Rate Cap: Typically the maximum amount your interest rate can increase or decrease at each adjustment period and over the life of the loan. This protects you from severe increases in interest rates.

 

ARM Options

Hybrid ARMs: ARM loans that have an initial fixed-rate period of more than a year are often termed “hybrid” or “intermediate” ARMs. A 5/1 ARM, for example, offers you the security of a fixed-rate loan through the first five years. Beginning with the sixth year, the rate is subject to annual adjustments through the remaining 25 years of the loan’s term.

Because they offer lower rates than comparable fixed-rate loans, hybrid ARMs can be a good choice if you’re fairly certain that you’ll be moving or refinancing before the initial-rate period expires. Wells Fargo offers 3/1, 5/1, 7/1, and 10/1 ARMs, all of which come with a 30-year term. The 5/1 ARM is also available with a 40-year term.

 

Interest-Only Loans

With a jumbo ARM, you can lower your payments even further by using the interest-only payment option. This feature requires no principal payment for the initial five-, seven-, or ten-year fixed-rate period. Repayment of your loan principal would begin when the loan’s rate is first adjusted. If you are looking for the lowest initial monthly payment, consider an interest-only payment* plan. Keep in mind that with an interest-only plan, our principal balance is reduced only when you make voluntary principal payments during the interest-only period. Make lower payments with the Interest-Only payment feature, which allows you to pay only the interest on your loan for an initial period. Key benefits include:

  • Control over how and when you build wealth. You can choose to direct your cash flow into equity-building principal payments or into higher-return investments based on your individual goals.
  • More buying power for homes in high-cost areas. Because of the lower initial payments, you may qualify for a larger loan.
  • Flexibility for non-salaried buyers. If you are self-employed, paid by commission, or a seasonal worker, the Interest-Only feature gives you the security of low monthly payments along with the flexibility to pay your principal as your cash flow permits.
  • A chance to move beyond credit challenges. If you’ve had financial difficulties in the past, lower Interest-Only payments offer an opportunity to build a solid payment history.
  • Control over the length of your Interest-Only period. You can choose from multiple Interest-Only periods depending on your financial needs. For example, on a 3/1 ARM, you can have an Interest-Only period of either three years or 10 years (a five-year period is also available on 3/1 ARMs with larger loans amounts).

While principal payments are not required with this feature, if your goal is to build home equity during the interest-only period, you can make voluntary principal payments in addition to the interest-only payments whenever you choose. Your interest-only payments will be recalculated based on the new balance.

Other Considerations

Like other mortgage options, the Interest-Only feature should be considered carefully. Keep in mind that:

  • Your monthly mortgage payment may rise significantly. When your Interest-Only period ends, your monthly mortgage payment will be recalculated to include full principal repayment over the remaining years left on the loan. The longer the Interest-Only period was, the larger your new monthly mortgage payment will be. Your payment may also rise substantially if you have an upward rate adjustment on an adjustable-rate mortgage loan.
  • Without making principal payments, you’ll be able to build home equity only through home price appreciation. The equity you have in your home is the difference between its market value and the amount you owe on loans secured by the property. Without paying down your outstanding loan balance, home price appreciation is the only way your equity will grow.
  • If your property’s value declines, you increase the risk of owing more than the property is worth. By not paying down the balance of your loan, there’s a greater chance of owing more on your property than you could sell it for if your home’s value depreciates.

 

80/20 Option

You don’t need a down payment to buy the investment of a lifetime. If you have good credit, you can finance the entire purchase price of your new home using our 80/20 financing option. This allows you to buy a home sooner, without waiting to accumulate a down payment and use your savings for other investments rather than on a down payment

The 80/20 option is best for:

  • First-time homebuyers who don’t have a down payment
  • Homebuyers who would rather not tap their investments for a down payment
  • Homebuyers who want to purchase now and use future bonuses, commissions or other income to pay down the secondary financing
  • Those looking to buy a second home without making a down payment

How it works – This option sets up two loans* to finance 100% of your new home’s purchase price:

  • A first mortgage loan for 80% of the home’s value
  • A secondary home equity loan or line of credit for the remaining 20%

For additional convenience, the first mortgage and the secondary financing can be closed simultaneously. With the 80/20 option, you may be able to avoid paying private mortgage insurance (PMI), which is usually required on primary loans that exceed 80% of the property’s value. And you can still select from a wide array of financing options for the first mortgage, including fixed-rate and adjustable-rate mortgages.