You’re ready to buy a house, but do you know what kind of loan you’ll need to get into it? After all, you’re finding the right loan to meet your needs. Unless you have the funds to buy the home, it can be quite tricky. So how do you find a loan that meets your budget and your needs?
Not to worry, we’re here to help you. There are numerous types of mortgage loans, each with its own set of benefits. But before we head there, let’s take a look at key takeaways in choosing the best home loan.
Key Takeaways to Consider When Choosing the Best Loan to Buy a House
- Obtaining a mortgage is an important step in purchasing your first home. There are several factors to consider when deciding on the best one.
- Your creditworthiness and ability to repay will be assessed by lenders based on your income, assets, debts, and credit history.
- When selecting a mortgage, you must decide whether to go with a floating or fixed rate, the number of years it will take to pay off your mortgage, and the size of your down payment.
- Conventional loans are mortgages that the government does not insure.
- Depending on your circumstances, you might be able to get better terms with an FHA, VA, or another government-guaranteed loan.
Fixed-rate Conventional Loans
This is for homebuyers with a strong financial background who want a consistent and predictable monthly payment. This is also one of the most common types of home loans. Unlike other types of mortgage loans, a conventional mortgage can be used to purchase almost any type of residential property. Conventional loans have more stringent credit scores and debt-to-income ratio requirements. To qualify for the loan, you must have a credit score of at least 620 points and a DTI ratio of less than or equal to 50%.
Many home buyers believe that a 20% down payment is required to purchase a home with a conventional loan. This is not true; it is possible to obtain a conventional mortgage with as little as a 3% down payment.
If you put less than 20% down on your loan, your lender will require you to pay PMI (private mortgage insurance). It is a type of insurance that protects your lender but not you. The good news is that you can stop paying PMI once you reach 20% equity.
Fixed-rate conventional loans have a fixed interest rate for the entire loan term. Once you secure your interest rate, it will not change, regardless of whether market rates rise or fall. This also means that your monthly installment will remain consistent.
Government-insured Federal Housing Administration (FHA) Loans
If you’re a low-to-moderate-income buyer who cannot qualify for a conventional loan, you can typically turn to loans protected by the Federal Housing Administration (FHA). Borrowers can put down as little as 3.5% of the purchase price of a home.
Credit-score requirements for FHA loans are less rigorous than those for conventional loans. The FHA does not directly lend money. Instead, it guarantees loans made by FHA-approved lenders. There is one disadvantage to FHA loans. For the life of the loan, all borrowers pay an upfront and annual mortgage insurance premium (MIP), which is a type of mortgage insurance that protects the lender from borrower default.
Anyhow, FHA loans are ideal for borrowers with low-to-moderate income who cannot qualify for a conventional loan or cannot afford a large down payment. FHA loans allow for a FICO score of 500 to be eligible for a 10% down payment and a FICO score of 580 to qualify for a 3.5% down payment.
Jumbo loans are for people who wish to purchase a property that exceeds conventional loan limits. They are known as non-conforming mortgage loans because their amounts typically exceed conforming loan limits.
A jumbo loan is a high-value loan that surpasses conforming loan limits. However, jumbo loans typically have interest rates that are comparable to conforming loans. The amount you can acquire with a jumbo loan varies by lender. For example, a jumbo loan from Quicken Loans allows you to borrow up to $2.5 million for your home purchase.
Jumbo loans pose a significantly greater risk to lenders than conforming loans. The amount of down payment required will vary depending on the loan amount and credit score. To qualify, you may need to put down 10.01%.
Conforming Mortgage Loans
Conforming loans are restrained by the federal government’s maximum loan limits. These boundaries differ depending on where you live. The Federal Housing Finance Agency (FHFA) set the baseline conforming loan limit (CLL) for one-unit properties at $548,250 for 2021.
However, in some areas of the country, the FHFA establishes a higher maximum loan limit, like in New York City or San Francisco. This is because home prices in these high-cost areas are at least 115% higher than the baseline loan limit.
Government-insured Veterans Affairs (VA) Loans
This loan is for former and current military personnel seeking to purchase a home with a lower down payment. A VA loan qualifies you to buy a home with no money down and avoid paying PMI. When you get your loan, you’ll have to pay a small VA funding fee, but certain veterans may be eligible for a fee waiver. In addition, VA loans have lower interest rates than comparable government-backed loans, making them even more affordable.
You must meet service requirements to be eligible for a VA loan. Before you can get a VA loan, at least one of the following statements must be true:
- You’ve served 90 days of active military duty in a row during a war.
- Service of 181 days of active military duty in a row during peacetime.
- A member of the National Guard or Reserves for at least six years or service of 90 days under Title 32, at least 30 of which have been four consecutive.
- You are the survivor of a service member who died in the line of duty or as a result of a service-related injury.
To secure a VA loan, you or your spouse must move into your new home within 60 days of closing. There are some exemptions to this, such as if you are deployed and unable to move in during that time. You must also use your loan to purchase a primary residence. A VA loan cannot be used to purchase a second home or investment property.
There are various mortgage loans. Choose the best one above from the list that appears to be the best fit for you. Make sure to look at the rates, requirements, upfront fees, and long-term costs before choosing one.