Buying a house is an important life decision and there are important factors to understand before you dive into the process. Whether you are buying your first home or your 5th home, it’s easy to get overwhelmed due to the many different home loans available.
The more knowledge you gain about the process, the easier it will be to choose the right loan.
To make your stay in your new house peaceful and fulfilling, you should opt for a mortgage that is easy to pay, matches your needs, and works best for you. The most common loan types people typically come across are the following:
· Conforming Home Loans
· VA Loans
· Fixed Interest Rate vs Adjustable Interest Rate
By comparing the pros and cons of each you can decide which one works best for you. If you feel confused and are making the purchase for the first time, feel free to contact us at 1st Financial Inc. Fort Lauderdale so we can consult you on the process.
Conventional loans are non-government backed loans that you can purchase easily if you have a good credit score. The traditional down payment requirement is 20% but you can pay as little as 3% of the down payment. You also typically need a credit score of at least 620.
The conventional home loans are less complicated as compared to the government offered FHA loans. Conventional loans are the most popular mortgage loans if you are looking for great credit and want to live in the house you are buying for a longer period of time.
Conventional loans can allow you to mortgage the house if the property has security issues when the FHA home loan does not.
Conforming Home Loan
Conforming loans abide by the funding criteria of Fannie Mae and Freddie Mac, hence the name conforming loan. Both of these standards are government sets and have the highest loan limits. For mortgaging a single-family home, the highest loan limit is $484,350 in most residencies. While for localities with high property costs, the highest loan limit is $726,525.
The least required down payment is usually 5% while in some cases it can be as low as 3%.
Low down payment can be an attractive feature for people who have less money upfront to mortgage the house.
Conforming loans come with some clear-cut requirements. You should have a credit score of 620 or higher and must have a debt-to-income ratio of 36% or less to qualify for the loan. Although in some cases, they allow individuals with a debt-to-equity ratio of 50% to mortgage houses.
Government Insured Mortgages
For certain home buyers, a government-insured mortgage works best because they have special features and eligibility requirements. There are three types of loans in the market: FHA, VA, and USDA loans that have similar requirements. For purposes of this article, we will review FHA and VA loans.
The credit score requirement is usually 580 and a down payment of 3.5% is required for an FHA loan. These type of loans are an excellent option if you are finances aren’t top notch. FHA loans are also government insured, meaning the lender won’t lose its money if the borrower defaults.
While these are helpful for people that may have subpar credit, the negative is you are required to pay an upfront mortgage insurance premium in addition to the down payment. Because FHA Loans are capped at a certain number, you will have limited buying power.
For VA home loan there is no fixed down payment or credit score requirement. For USDA loans, there is no down payment requirement but you will be required to have a credit score of 580. These loans have great interest rates but sometimes the preapproval can be more challenging.
The mortgage may take around 5-10 years to pay off. Some loan requirements, procedures, and fees may differ from state to state; therefore, it is advisable to consult a broker.
Reverse Mortgage Loans
This type of loan is a special type of home loan specifically for buyers who are over 62 years old. The amount the buyer owes goes up over time and the loan may be required to paid back sooner.
There are quite a few other requirements, including living in the home as your primary residence, any existing mortgage must be paid off from the money you receive from your reverse mortgage, and remaining current on property taxes, among other items.
Fixed Interest Rate vs Adjustable Interest Rate
Two other common mortgages people choose are fixed interest rate and adjustable interest rate mortgages. A fixed interest rate is as it sounds – you will have the same rate for the length of the loan.
As for an adjustable interest rate, you will have a lower interest rate than a traditional rate at first. However, that rate will change over time. As the interest rate goes up so will your monthly mortgage payment.
Overall, it is important to asses what loan works best for you and your family. You may prefer long term stability or prioritize predictable interest rates. Regardless, you can use this as a guide in making your decision for what type of mortgage is right for you.
Contact us with any questions!