Homebuyers looking for homes may be overwhelmed by mortgage rates, down payments and the ins and outs of home loans. There are dozens of options available to consider, and picking the best mortgage can feel like a challenge. Home loans are complicated, but most interested homebuyers need one to complete the purchase.
Understanding mortgage rates, eligibility requirements and what affects monthly payments can be a challenge. Potential homebuyers should research the mortgage options available to them before committing to a lender. Shopping around can save thousands of dollars in short- and long-term expenses. The sections below describe the most common loan options available and their differences.
Conventional loans are standard mortgages that are not backed directly by the federal government. As a result, buyers have to meet higher eligibility standards to qualify for these. However, buyers may save on the cost of the home in the long run. Typically, bankers want higher credit scores and larger down payments for these mortgages. In exchange, buyers have lower monthly payments. Buyers usually need a 20 percent down payment if they want to avoid paying mortgage insurance.
There are two kinds of conventional loans: conforming and non-conforming. Conforming means a loan conforms to the requirements set by Fannie Mae and Freddie Mac. Fannie Mae home loans generally have lower interest rates than non-conforming loans. Buyers should therefore keep the conforming loan requirements in mind when considering the size of the loan they want to request. The Federal Housing Finance Agency sets the limits on the maximum size loan that Fannie Mae or Freddie Mac will purchase.
For most of the country, the Fannie Mae home loan limit is $424,100. A few high-cost counties have a higher limit of more than $600,000. Jumbo loans are loans that exceed the size loan limit. These loans may require larger down payments or asset collateral. They are therefore better suited to homebuyers with ample cash and additional properties.
The Fannie Mae HomeReady mortgage program enables low-income homebuyers to access loans with less stringent financial requirements. This is aimed at homebuyers with low to moderate income, limited cash for a downpayment and a credit score of at least 620. Additionally, homebuyers are free to produce cash from multiple sources, including gifts or grants, without a personal fund requirement. Finally, this option will take into account boarding or rental income that potential homebuyers may rely on.
Borrowers using the Fannie Mae HomeReady loan can cancel the required mortgage insurance once they reach 20 percent equity in the home. This can save them thousands of dollars in mortgage insurance payments in the long run. Therefore, the HomeReady option may be best suited to low-income homebuyers who plan on earning rental income and want to save on insurance expenses.
VA home loans are available to military members and veterans seeking a home. These loans have more favorable terms than a standard loan does, including a limit on closing costs and and no down payment in most cases. Additionally, no mortgage insurance is required and no penalty fee is imposed for paying the mortgage early. Finally, VA mortgage rates are more attractive than those offered by private lenders. One downside of VA loans is that many private homeowners may find the terms less favorable. As a result, homebuyers with a VA loan may struggle to find sellers willing to agree to the terms of the loan.
Even with the potential difficulties, VA home loans can help veterans and their families purchase homes at a lower cost. To qualify, individuals must have served for at least 90 days during wartime or 181 days in peacetime. Alternatively, individuals who have accumulated six years in the National Guard or Reserves may qualify. Finally, the spouses of individuals who died in combat or due to service-related disabilities are eligible for a VA home loan.
Individuals can get mortgages backed by the U.S. Department of Agriculture, also known as USDA home loans. This option is available for low-income individuals who have trouble getting a traditional mortgage and lack decent housing. It can be used in suburban and rural counties but not urban centers. The USDA mortgages available are:
The Federal Housing Administration (FHA) offers an FHA home loan with favorable terms for homebuyers. This is a popular choice for first-time homebuyers because of the low down payment and low qualification requirements. An FHA loan allows homebuyers to put down as little as 3.5 percent to purchase a home. In addition, individuals have to prove a less stable income history than is required for a conventional loan. Homebuyers can have credit scores as low as 500, although a larger down payment would be required in this case.
There are some restrictions on FHA mortgages. The loan must be used for a primary residence, and borrowers must not have any recent foreclosures or bankruptcies. Additionally, the home must meet certain appraisal requirements. Individuals using an FHA mortgage for a fixer-upper may have to place additional cash in an escrow account for the purpose of making repairs. Nevertheless, despite the downsides FHA home loans remain one of the most popular products today because of their accessibility and favorable terms.