The Basics of Financing a New Home In This Economy
The funds used to purchase a home come from two sources: you and your lender. Conventional lenders impose two limits on lending amounts.
Loan-To-Value (LTV) limit represents the percentage of a home's value a lender will provide, varying based on credit history, employment, and loan program. Loan Amount Limit caps conforming loans; higher amounts are jumbo loans with different program structures. Lenders favor conforming loans because they're easily sold on secondary mortgage markets.
Mortgage interest rates generally follow bond market trends, so rates don't vary dramatically between lenders. Instead, differences appear in total loan costs, including origination fees, document review fees, and processing fees. To compare offers properly, borrowers need Good Faith Estimates from each lender to ensure an apples-to-apples comparison.
Lenders prefer borrowers with substantial down payments, sufficient income for monthly payments, strong credit histories, and cash reserves for emergencies.
Two ratios determine borrowing power: the front-end ratio (percentage of income for housing) and back-end ratio (percentage for all monthly debts including housing). Conforming loans typically allow 28% front-end and 36% back-end ratios, though individual lenders may exceed these if other compensating factors suggest the loan will be marketable.
Lenders profit through origination fees, interest rate spreads, and loan servicing fees. Borrowers may negotiate origination fees and interest rates, trading options like a higher rate with a lower fee versus a lower rate with more points.
