Finding the right home loan can be a complex process, even for an experienced home buyer. The process can be even more daunting if it is a buyer’s first time seeking a loan. Below are descriptions that detail different types of loans offering a variety of features and benefits.
Conventional Loans
Conventional loans are the most common type of home loan. They’re available through private lenders such as banks, credit unions or mortgage lenders. They’re not guaranteed or insured by the government but typically have fixed interest rates (though these rates may be a little higher than an FHA loan). Just as with any loan, borrowers are expected to produce a variety of documents, financial statements, credit history, and undergo a hard credit check. So when is it beneficial to opt for a conventional loan? If you have good credit, a low debt-to-income ratio, and are able to put more money down, a conventional loan may be the best option for you.
Conventional loans don’t require mortgage insurance, assuming the buyer can make a down payment of 20%. If your credit is excellent, you may also receive a much lower rate than someone opting for an FHA loan. If you have your heart set on buying a fixer-upper, the provisions for qualifying for a conventional loan are much more flexible than a standard FHA loan.
FHA Loans
If you’re a first-time home buyer, then an FHA loan might be a great option for you. An FHA loan is insured by the Federal Housing Administration (FHA), and is “aimed at helping low-to-moderate income borrowers.” However, that wording can be a little misleading. Getting an FHA loan has little to do with how much money you’re making. Instead, the regulations for FHA loans focus primarily on details like a borrower’s debt-to-income ratio. In fact, FHA loans aren’t just given to individuals who are buying their first home. Anyone who meets the requirements of the loan may be eligible for this type of assistance.
As of 2020, a borrower may receive up to 95.5% of the value of the home if they opt for an FHA loan. That means that a buyer would only need to make a down payment of 4.5% when they come to the table at closing. For numbers like these, you’ll need to have a certain credit score. If your credit score dips beneath the desired threshold, you may still be eligible, but your down payment will be closer to 10%. An experienced loan officer can review your credit score and help you find ways to improve it if needed.
Finally, FHA loans require that a borrower pay an Upfront Mortgage Insurance Premium (UFMIP), and an Annual Mortgage Insurance Premium (Annual MIP). These premiums ensure that the lender is protected should the borrower default on their mortgage payments. These payments can be handled at the time of closing, or simply rolled into the price of your mortgage.
Types of FHA Loans Include:
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Traditional - (standard)
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203(k) - (great for those interested in a fixer-upper project)
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Home equity conversion - (for homeowners aged 62+)
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Energy efficient - (geared at optimizing energy efficiency)
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Section 245(a) - (graduated mortgage payments for a shorter term)
Veterans Loans
Veteran Loans (VA loans) are a $0 down mortgage option available to veterans, service members, and, in some cases, their spouses. They’re privately issued loans but are partially backed by the Department of Veterans Affairs, which gives lenders the security and confidence to help veterans finance their dream home. A VA loan can be used to buy a new home, or even refinance an existing home loan. This sort of loan also requires no PMI, has competitive interest rates, and is simple to qualify for.
Types of VA Loans
Getting Preapproved
Getting preapproved goes a long way toward instilling faith in your seller. Having a letter of preapproval means that your lender is ready to give you a loan based on a series of criteria. It also ensures that your mortgage rate is locked in for a period of 90 days. During preapproval, your finances get looked at under a lens, so make sure you have your paperwork in order. Anticipate being asked for bank statements, other lines of credit, employment, pay stubs, and for a hard credit check. All of these factors will help get you preapproved for your mortgage loan and will give sellers and their agents the confidence they need to negotiate with you seriously.
Where to Apply
Finding the right lender may seem like a daunting task. There are many from which to choose, and finding the right one will determine what kind of rates and conditions you ultimately receive when you finally purchase your dream home. The good news is that even if you talk to one, you don’t have to commit to their terms unless you’re satisfied with them.
Your primary bank is a great place to start when shopping for mortgage rates. You’re already a customer with them, and they have a good idea of what your spending habits are like. Your REALTOR may also have suggestions when it comes to lenders with whom they like working. Ideally, your real estate agent will have gone through this process with many other clients and can give you a decent idea of what to expect, as well as turnaround times on underwriting and other critical steps in the mortgage application process. There are typically benefits to using a local mortgage company that knows the local market and has a solid reputation for providing good customer service.
No matter who you go with, make sure to research at least 3 different lenders to ensure you’re getting the best rate for your financial situation. Whoever you choose will be with you for the long term, so do your homework!