Buying a home is one the biggest investments anybody can make. Therefore, it’s best to consider a number of financing options once you’ve found the home you wish to buy. Seldom do homebuyers pay off their home quickly, meaning you’re entering into a long-term investment.
Because of the duration and obligation of a mortgage, homebuyers should thoroughly examine several options before choosing a mortgage.
Loan Options
Loan types fall into two categories: government-backed loans and conventional loans. No two homebuyers have identical financial histories, savings or credit scores. These three factors are crucial in picking a mortgage, as are other things.
Some loan options cater to first-time homebuyers more than repeat homebuyers, and vice versa. Read below to find out what VA loans, FHA loans and conventional loans have to offer.
VA Loans
As arguably the most borrower-friendly loans, VA loans come with a guaranty from the Department of Veterans Affairs. Certain veterans and active-duty personnel qualify for this program; it is not available to non-military homebuyers. The VA backs up to one-quarter of each loan amount, but the VA does not issue these loans.
Only VA-approved lenders issue these loans, and because of the guarantee they incur less risk. Consequently, VA loans tend to come with slightly lower interest rates than traditional mortgages. For active-duty borrowers, the VA caps interest rates. While low interest rates lead to smaller monthly payments, there’s an even better perk to VA loans.
Qualified borrowers won’t pay anything down to finance 100 percent of their home. Even when military homebuyers do make a down payment on a VA loan, it’s often nowhere near the traditional mortgage standard of 20 percent. VA loans are ideal for military homebuyers—first-time or repeat—who do not have the scratch to make a large down payment. In most parts of the country, the VA loan maximum is $417,000 but soars higher in more expensive markets.
Due to a high volume of minimal down payments, the VA does charge a funding fee of 2.15 percent to first-time homebuyers who pay nothing down. The fee simply keeps the program afloat and allows others to take advantage of their VA home loan benefit, too. But another monthly saving through the VA loan program is the absence of private mortgage insurance (PMI), a common monthly cost in conventional loans that amounts to thousands of dollars during the life of a loan.
The aforementioned benefits of a VA loan combined with no prepayment penalties, interest rate reducing refinancing options and sellers covering a percentage of closing costs make the program an ideal choice for service members fresh out of duty. Qualifying terms are less strict than those of conventional loans. For more information on VA loans, contact a VA-approved lender.
FHA Loans
Loans backed by the Federal Housing Administration (FHA) are well-designed for first-time homebuyers, but are available to anybody. FHA loans’ down payments go as low as 3.5 percent, and can be paid through gifts received by non-profit organizations, friends and/or family. There’s a chance borrowers pay zero percent down if they combine their FHA loan with another loan type.
Your income-to-debt ratio—that is, the amount of money you owe in comparison to how much you make—can be as high as 55 percent and you may still qualify for an FHA loan. The VA loan program looks for ratios of 41 percent and lower. Lenders aren’t likely to issue conventional loans to borrowers with debt ratios higher than 38 percent.
Much like the VA loan program, the FHA insures loans to protect lenders against borrowers who default. Also, the FHA comes with an initial funding fee of 1 percent and a small monthly fee during the life of the loan. This monthly fee could be higher than the PMI of a conventional mortgage though.
Interest rates on FHA loans fluctuate within 0.125 percent of conventional loans. Just like VA loans, FHA loans do not immediately rule out borrowers who have a bankruptcy of foreclosure in their past. Credit standards for both of these government-backed programs are more lenient than conventional loans. The FHA is less concerned with borrowers’ credit history and focuses more on the borrowers’ ability to pay back the loan.
On another note, there are some people who swear by using FHA loans to buy investment properties. Check out that post to find out more!
Conventional Loans
Conventional loans, or traditional loans, come with down payments as high as 20 percent. As a result, these loans suit homebuyers who saved a significant amount of money. The upside to large down payments is competitive interest rates, assuming your credit history is excellent.
Paying down 20 percent or more of the loan may eliminate PMI. Prepayment penalties are another cost that may come with a conventional loan. Borrowers should talk with lenders before agreeing to a loan in efforts to eliminate prepayment penalties. Or, you could negotiate for a shorter prepayment penalty period meaning you’d only be penalized in the first few years instead for the entire life of the loan if you make payments early.
Another important decision for homebuyers is choosing an adjustable-rate mortgage (ARM) or a fixed-rate mortgage (FRM). The former usually come with a fixed-rate period, but interest rates fluctuate with the market thereafter. FRMs tend to be more popular and come with an interest rate that never changes regardless of how the market acts. Borrowers must pick between a 15- or 30-year mortgage.
Ready to Choose a Mortgage?
The decision to buy a home is a lot more complex than what loan to choose. You obviously need to choose neighborhood, price range, features you need, features you want, and features you can live without, etc.
However, understanding what financing options you have available will better prepare you for the (sometimes) lengthy process of a real estate transaction.
I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.
February 2nd, 2011 at 10:32 pm |
I was just looking at some foreclosed properties in my neighborhood today. I don’t have the cash to purchase so I read your whole FHA loan post. Do you know if you can use it for foreclosures or homes that are facing foreclosure like a short sale?
Sandy @ yesiamcheap´s last [type] ..Tenant from Hell- Did She Pay
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February 3rd, 2011 at 11:42 am |
@Sandy
While technically you could use an FHA Loan to buy a short sale property, there are problems associated with this practice. Here is a similar question posed on Trulia. You may find some of the answers useful: http://www.trulia.com/voices/Home_Buying/Can_a_buyer_using_a_fha_loan_buy_a_short_sale_-43814.
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August 20th, 2011 at 10:00 am |
A friend of mine has bought 3 foreclosure properties in Florida and plans to rent them out. He got them for a very low price there are condo’s bought for around 50,000.00 each. The main problem is the unexpected out of state taxes and a high condo fees. It is not looking like such a great buy any more.
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August 30th, 2011 at 10:01 am |
This article is nice. I have always stressed to potential Loan borrowers the major need to do things to improve their credit which in turn helps them to qualify for better interest rates. Now is the time more than ever to snap up a home before the values go back up again. Can anyone say instant equity?
Melinda Mack´s last [type] ..Apply
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October 21st, 2011 at 4:16 pm |
The financial benefits of home ownership haven’t changed and neither has the math.Here are a few basics to consider:Waiting could be costly. A further decline in real estate prices might occur but may come with a price tag in the form of higher interest costs.
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October 23rd, 2011 at 8:37 pm |
Looking for funds to consolidate debt? Start a small business? Remodel your kitchen? But find you lack the property or other collateral that some banks might require for such loans?
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