Types of Home Loans
There are several types of loans you can choose from for your first-time home purchase including:
Conventional home loans FHA loans VA loans USDA loans Jumbo home loans
Conventional Home Loan
A conventional home loan is a good option if you have good credit and a substantial down payment. Conventional loans are offered by private lenders such as banks and credit unions. Many conventional loans are also “conforming loans” and must observe the loan limits set by the Federal Housing Finance Agency (FHFA) as well as other requirements set by Fannie Mae and Freddie Mac, the government-sponsored entities that purchase most mortgages originated in the United States. A non-conforming conventional loan does not have to adhere to these limits and requirements. You may be able to put as little as 3% down on a conventional home loan. A down payment of 20% or more will allow you to avoid paying private mortgage insurance (PMI). This insurance protects the lender in case the borrower defaults. If your down payment is less than 20% of the sales price, you’ll have to pay a PMI premium each month until you reach an 80% loan-to-value (LTV) ratio.
FHA Loan
Insured by the Federal Housing Administration (FHA), an FHA loan is worth considering if you don’t have a large down payment or the best credit. You can take out an FHA loan with a minimum FICO score of 580 as long as you put 3.5% down. If you have a down payment of at least 10%, a score of 500 is acceptable. Although they don’t require a large down payment, FHA loans come with two mortgage insurance premiums. You’ll pay one upfront, which is equal to 1.75% of the loan’s value, and the other on an annual basis. The annual premium varies depending on the length of the loan, the loan amount, and your down payment.
VA Loan
If you’re part of the military community, a VA loan is a great way to purchase your first home. VA loans are created for active-duty and veteran military members and their families. The greatest benefit of a VA loan is that you don’t have to put any money down or pay mortgage insurance. You will, however, have to pay a funding fee, which is between 1.4% and 2.3% of the loan amount for first-time homebuyers. VA loans offer the following benefits:
Better terms and interest rates than those offered by private lendersAllow you to borrow up to the conforming loan limit without a down payment (and more, if providing a down payment)Don’t carry a premium or require private mortgage insuranceNo penalty fee for paying off the loan early
USDA Loan
A loan either directly from or insured by the U.S. Department of Agriculture (USDA) might be a good fit if you’re a low- to moderate-income borrower and interested in buying a home in a rural area. To pursue a USDA loan, your home must be in a USDA-eligible area. You’ll also need to meet certain income limits, which vary by county. While some USDA loans don’t require a down payment, you can expect an upfront fee and an annual fee.
Jumbo Loan
If you hope to buy an expensive home and have a high credit score and large down payment, a jumbo loan is likely your best bet. Jumbo loans are loans that fall outside of the FHFA limits ($647,200 in most areas of the U.S.). Because they carry a greater risk to lenders, the cost of borrowing is often higher for jumbo loans. However, in some areas of the country where housing prices are high, such as New York City and San Francisco, they may be your only option.
Fixed-Rate vs. Adjustable-Rate Loans
Fixed-rate mortgages keep the same interest rate over the life of your home loan, so your mortgage payment will always stay the same. Adjustable-rate loans have fluctuating rates that can go up or down depending on the market. Many of them have a fixed rate for a few years, then change over to an adjustable rate for the remainder of the term. An adjustable-rate loan may be a smart option if you want smaller payments early on, or you will only live in your home for a short period of time. A fixed-rate mortgage should be on your radar if you’ll likely stay in your home for a while or have a tight monthly budget and don’t know if you’ll be able to afford higher payments in the future.
How To Choose the Best Loan for Your Home
There are a number of factors to consider when trying to determine the ideal loan for your situation, including:
Potential home cost: The cost of your home will play a vital role in your mortgage payments. Ask yourself what type of place you hope to buy. Is it a fixer-upper in a low-cost-of-living area, a forever home in an expensive city, or something in between? Remember: Unless you’re using a VA loan, if you put less than 20% down, you’ll have to pay a monthly insurance premium.Your finances: Your credit as well as the amount of money you have saved up for a down payment can affect your loan options. If you have good credit and a large down payment, for example, you might choose a conventional or jumbo loan. You may opt for a government-backed loan such as one from the FHA, VA, or USDA if you’re strapped for cash and have fair or poor credit.Your future plans: Circumstances like your career or life events such as getting married or having a baby will influence how long you stay in your home. Decide whether you wish to live in your new home for a few years or a few decades.
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