Buying a home involves many different elements. While choosing the right neighborhood, the home type, and floor plan are exciting steps in the process, it’s also equally important to learn about how you are going to finance your home. Here are some of the loans available to do just that:
Conventional mortgage loans are a popular option when most people consider how they’ll finance the purchase of their home. Featuring fixed rates, such a loan means that the homeowner knows exactly how much their monthly payment will be throughout the life of the loan.
Qualifying for a fixed-rate conventional loan requires meeting the credit score and debt-to-ratio requirements that are set up by the lender. In general, the minimum credit score is 620 points. Ideally, the debt-to-income ratio of the borrower should be equal to or less than 50 percent.
While a 20 percent down payment is standard for the mortgage industry, borrowers can get a conventional loan with just three percent down. Putting less than 20 percent down on a home means the lender will require the borrower to obtain private mortgage insurance (PMI).
Adjustable-Rate Mortgage Loan
While an adjustable rate mortgage (ARM) is a type of conventional loan, there are major differences between it and a traditional fixed-rate mortgage. At its beginning, an ARM offers the home buyer a fixed-rate of interest for a specific length of time. The specific length of this fixed-rate period differs depending on the type of ARM loan. Typically, it ranges from 5 to 15 years.
During the fixed-rate portion of an ARM mortgage, the homeowner enjoys an interest rate that is lower than the market rates. Once that period ends, though, the interest rate will “adjust” up or down to the current market rate. That is, the interest rate can increase or decrease, depending on the market.
An ARM also includes limits on how high the mortgage’s interest rate can increase or decrease over the life of the loan. In addition to a rate cap that is applicable for the course of the loan, there will also be a limitation for each year of the loan as well.
Obtaining an ARM means meeting the same income and credit guidelines required by a fixed rate mortgage. Such a loan could be an attractive option for a homeowner who wants to purchase a house when interest rates are exceptionally high or for one who plans to live there for only a few years.
A USDA mortgage is backed by the government, making them less risky to lenders. This type of loan is aimed at lenders who want to purchase a home in a suburban or rural area. Applicants for this loan benefit from less stringent credit and financial requirements.
Because a USDA mortgage allows the borrower to purchase a home with no down payment, there are certain standards that must be met. The homeowner’s credit score must be at least 640 points and they must meet the agency’s income standards. In addition, the property needs to meet the USDA’s livability guidelines.
A VA loan is similar to a USDA mortgage in that it is backed by the government. However, a VA loan serves only former and current members of the military, as well as certain surviving spouses.
This type of loan is very attractive because it allows the borrower to buy a home with zero money down. The homeowner can also avoid having to make PMI payments.
Another type of mortgage loan that is backed by the government is an FHA loan. FHA loans are backed by the Federal Housing Administration. FHA loans allow the borrower to put at least 3.5 percent of the home purchase price down as a downpayment. It also has a lower credit score threshold to qualify. A borrower can have a credit score of 580 points and still be able to purchase a home with an FHA loan.
When a borrower gets an FHA loan, they’ll pay a mortgage insurance premium (MIP). In addition, they will need to pay a monthly MIP payment for as long as the loan is active.
A jumbo loan allows a borrower to purchase a property that is above the loan limits imposed by conventional mortgages. This type of high-value loan typically offers interest rates that are comparable to more conventional loans. The difference is that they enable home buyers to purchase properties that are worth millions of dollars.
Knowing about the different loan types can help home buyers save money. Taking a little time to learn about the differences sets up potential homeowners with the knowledge they need to make the right decisions for themselves.
The best way to really understand mortgages that are a good fit is to talk to a mortgage expert. Feel free to reach out if I can help.