Financing a home in Northern Virginia -- Tom Vesolich

How Much Home Can You Buy Lenders use various criteria to determine how much to lend people to buy a home.. Generally you can figure that you will be permitted to buy a home that costs around three times more than your gross annual income. This is a simple way of looking at it but there are several other factors that are also considered such as

Below is some information that will help get you started on understanding the process and demystifying this most important aspect of buying a home. Always keep in mind that the intent of these pages is to raise questions -- to give you information to enable you to ask more intelligent questions of lenders and realtor so that you have the ability to make better decisions for yourself.

Loan Qualification This will help you understand exactly how much of a loan you could qualify for. The loan amount plus how much you have available for a downpayment equals the price of a home you can purchase. The qualification tools are located at several different sites. Sample each of them to get as good an idea as possible as to what several sources are telling you you can borrow.

Types of Loans Following is a brief discussion of the most common loan types. There is much more to understand than what is presented here. But the idea is to give you an idea that you have choices and that you have to weigh and consider what your options are. This covers the highlights of most loan types -- hopefully enough to enable you to ask a lender the right type of questions. Keep in mind that the lenders want to be able to give you a loan. We tend not to think this way and get nervous as the time approaches to see a lender. Don't let the process intimidate you. If there is a way to try and help you get the loan, the lenders will generally work to find it.

*Conventional*	A conventional mortgage is the most commonly used type of loan. The interest rate is fixed over a long term, usually 30 years. The constant monthly payment of interest and principal remains unchanged for the entire length of the loan. So no matter what happens to interest rates after you loan is originated your payment will never change. There are many variations of a conventional loan -- more than can be covered here. Just know that you have options and be sure to ask what they are.
*Adjustable Rate Mortgage*	This is a loan for a fixed term but the interest rate will change at periodic intervals to reflect the lender's current money costs. The initial rate for these loan (ARM) is usually lower than the rates for conventional loans. It makes these types of programs more attractive to people who would like to have payments in the first few years lower than with a conventional loan. The interest rate can go up or down by a formula or calculation provided in the terms of the loan. The exact amount by which an interest rate can change at the prescribed time is determined when the loan is obtained. You will know what this amount is. Changes in the interest rate are allowed by the terms at fixed intervals which may be every 1, 3, 5, 7 or even 10 years. It will be up to you to decide which adjustment interval works best for you. The more frequent the adjustment period is, the lower will be the initial rate. Banks offer different options and one must shop for a mortgage as one shops for anything else. In most instances this type of loan has a feature that allows you to convert it at some point to a conventional loan.
FHA Loan	Click the FHA link* on the main financing page for a discussion on this type of loan.*
VA Loan	Click the VA link* on the main financing page for a discussion on this type of loan.*
Conforming vs. Non-Conforming Loans	In the various types of loan we are discussing here the are two broad categories to understand. The first one is a conforming loan. This is one in which the loan amount is $300,700 or less. The other type is non-conforming and often referred to as a jumbo loan. This is a loan of greater than $300,700. You can expect a jumbo loan to have a higher interest rate than a conforming loan.

Points A discount point is equal to 1% of the loan amount. These are additional charges to you in the loan process that serve to discount (lower permanently) the interest rate. Another way of looking at it is that you are paying interest in advance. Let's say that at the moment the market is dictating that a 30 year loan should command an interest rate of 7.5%. But at that interest your monthly payments are just a bit more than you are comfortable with or that at that rate you no longer qualify for the loan. By paying these discount points you could reduce the interest rate. To get an idea how discount points can impact the interest rate and what the equates to in monthly interest and principal payment look here. The paying of these points is part of the cash you will need at settlement. And normally the points are the single highest expense for settlement closing costs.

Buydown While the points paid in discount in the previous example is actually a buydown fee, because it is a permanent buydown fee, they are referred to as discount points rather than a buydown fee. The term, buydown fee, is commonly used in reference to a temporary buydown of a loan's interest rate. There are several different buydown plans available to borrowers. For purposes of this discussion, however, we will use the most common of these, the 2-1 Temporary Buydown, as an example.

The 2-1 Temporary Buydown reduces the interest rate on a mortgage by 2% for a certain period of time (usually the first year), followed by a reduction in the loans interest rate by 1% for a period of time (usually the second year). A 7.75% 30-year fixed-rate mortgage with a 2-1 Temporary Buydown will, therefore, typically have a first-year interest rate of 5.75%, and a second-year interest rate of 6.75%. The interest rate in years 3-30 will be the loan's face rate (7.75%).

Formulas for calculating the fee for various temporary buydown plans vary widely. With the simplest formula a 2-1 Temporary Buydown would result in a 3% buydown fee, and would cost $3,000 on a $100,000 loan.

Why might you want to use a buydown? Typically because it is the first few years of a loan or home purchase where buyers have some difficulty make making monthly payments. With this type of loan the payments for the first several years are lower. A drawback however is that from the third year on you may be paying higher payments because of the increase in interest.

How Much Home Can You Afford in Northern Virginia