Buying a Home in 2012? Discover the Mortgage Basics

If you’re looking to buy your first home, or if you’ve purchased before, there are a number of things you need to know about a down payment, asset reserves and other matters. First, you’ll likely have to obtain a conventional or a Federal Housing Administration (FHA) mortgage.

If you’re looking for a conventional mortgage, you’ll typically be looking at putting down between 5% and 20%. It will depend on what your credit looks like, because most conventional mortgage holders will have credit scores above 720. Scores below that will have some type of premium associated with them and make for a more costly loan.

Conventional mortgages require a minimum of two months of asset reserves as well as mortgage insurance on purchase transactions with less than 20% equity.

FHA mortgages require a minimum of 3.5% down and, depending on the lender, will allow you to have a credit score in the 640-to-660 range.

Unlike conventional mortgages, there are no asset reserves that are required. However, monthly mortgage insurance is always required, regardless of the amount of down payment.

The greatest difference between conventional and FHA mortgages lies in what is called up-front mortgage insurance. Up-front mortgage insurance is basically a onetime premium that is paid by you, at closing, to the lender. The premium can be financed.

Being that the FHA is allowing lower credit scores and lower down payments than conventional mortgages are, there is more risk in lending the money. Lenders offset this risk with more coverage for themselves.

The Ins and Outs of Home Mortgage Insurance

When buying a home it’s important to understand the basics of mortgage insurance.

What is it? How does it work? What does it mean to you as a home buyer or homeowner?

First, mortgage insurance is taken out by the lender to provide protection against you defaulting on your mortgage. However, you usually pay the premiums on this insurance each month, as opposed to your lender paying them.

When most people think of mortgage insurance they think of it on a property that’s being purchased or refinanced where there’s less than 20% equity. This is true for conventional mortgages but slightly different for Federal Housing Administration (FHA) mortgages.

On conventional mortgages, the monthly premium will vary based on factors such as down payment, credit score, etc.

Borrowers with riskier credit and a lower down payment will pay more than someone with great credit and a larger down payment will.

If you get an FHA loan, the mortgage insurance works slightly differently. In addition to the monthly premium that is in place – as is the case with conventional mortgages – there is also an up-front premium. This premium can be financed into the loan itself.

Most FHA mortgages, regardless of the down payment, require both up-front and monthly mortgage insurance.

While insurance for FHA mortgages is a bit pricier than for a conventional mortgage, there are two advantages to the FHA mortgage borrower.

The first is that the credit requirements for insurance for FHA mortgages are more lax than they are with conventional mortgages.

The second is that a buyer can often put down less money on a home with an FHA mortgage and still qualify.

Ask your mortgage professional for more details.