Home Loans: What are they and how the do I get one?
Whether it's a primary residence, an investment property, or a commercial property, figuring out the financing when purchasing real estate, can be quite overwhelming! Often times, a home purchase is the biggest financial decision a person will make in their lifetime. A good place to start in navigating this landscape, is understanding the different types of real estate loans available.
Here, we aim to shed light on the most common types of home loans and their unique features, including the minimum downpayment and basic limitations. We will look to cover unique financing strategies in a later post! Before we dive in, it should be noted that this is not financial advice. Eligibility for any of these programs will be dependent on the applicants unique credit, financial and professional positions. With that disclaimer out of the way, let’s begin!
Fixed Rate & Conventional Mortgages
Conventional mortgages are perhaps the most common type of real estate loan. These loans are not insured by the federal government and can be obtained from many lenders, such as a banks or a mortgage company. With a fixed-rate mortgage, the interest rate remains the same throughout the loan term, providing stability and predictable monthly payments. They typically require a down payment of at least 3% - 20% of the property's purchase price. If the down payment is less than 20%, the borrower may need to pay for private mortgage insurance (PMI) until the loan-to-value ratio reaches 80%. These loans can offer the best rates and overall terms if you have a strong credit score and 20% of the prurchase price available as a down payment. While the terms can be favorable, they can be the most difficult to obtain.
Federal Housing Administration (FHA) Loans
FHA loans are insured by the Federal Housing Administration. They are designed to help low-to-moderate-income borrowers who may not qualify for conventional mortgages. The benefit of FHA loans is that they require a lower down payment (as low as 3.5%) and have more lenient credit score requirements than conventional loans. FHA loans are easier to obtain and may have higher upfront costs and more rigid requirements for mortgage insurance. There are also more strict requirements on the subject property to be purchased and lenders may have property specific conditions to be addressed if something is flagged in the appraisal inspection. Depending on the competitiveness of the market, Sellers may see FHA loans as riskier if compared to a Buyer using a conventional loan due to the reduced qualification criteria and the potential for the lender to require ‘extra steps’ to get the deal done.
Veterans Affairs (VA) or USDA Loans
VA/USDA loans are exclusive to current service members, veterans, and eligible surviving spouses. The U.S. Department of Veterans Affairs guarantees these loans. USDA loans however are offered by the US Department of Agriculture, these are meant for rural and suburban homebuyers with low to moderate incomes. One of the biggest advantages of VA/USDA loans is that they offer 100% financing, which means no down payment is required, based on eligibility. Moreover, they don't require PMI, which can lower the monthly payment significantly.
Jumbo Loans
Jumbo loans are for properties that exceed the conforming loan limits set by government-sponsored enterprises like Fannie Mae or Freddie Mac. Because of the larger amount, jumbo loans can be riskier for lenders, and therefore, have stricter qualifications. Borrowers will need a high credit score and a low debt-to-income ratio. They also typically require a larger down payment that can vary from 10% to 30% or more.
Bridge Loans
Bridge loans, also known as gap loans or swing loans, are short-term loans that buyers typically use to cover the interval between purchasing a new property and selling an existing one. They are generally used in real estate to close deals quickly or to rescue a property from foreclosure. Down payment requirements are similar to those of conventional loans.
Adjustable-Rate Mortgage (ARM)
ARM loans have an initial fixed-rate period (often 5, 7 or 10 years), where the borrower may have the option to pay interest-only payment during the draw down period. After the fixed rate period or another period defined in the terms, principal and interest payment will be required to repay the loan and the draw down period ends. The interest rate will adjusts according to the terms after the fixed rate period, based on market conditions. If a borrower doesn’t intend to own the property for more than 5-10 years, ARM loans can be a good option. Down payment requirements are similar to those of conventional loans.
Reverse Mortgage
Available to homeowners aged 62 and older, reverse mortgages allow borrowers to convert a portion of their home equity into cash without making monthly mortgage payments. These are similar to Home Equity Lines of Credit(HELOCs ) or Home Equity Loan, where the borrower is leveraging the equity in there home to cover their payments. Because of this, down payments are not applicable for reverse mortgages.
So, now that you know some of the most common types of loans, the next question is: where do you get one? Worry not! We have listed some common places to investigate, below:
Mortgage Brokers
Mortgage brokers are intermediaries who connect borrowers with multiple lenders. They have access to a range of loan options from various lenders and can help you compare rates and terms to find the best fit for your needs. They earn a commission from the lender when a loan is finalized.
Banks
Large financial institutions, such as national or regional banks, offer mortgage loans directly to customers. They have in-house loan officers who can guide you through the loan application process and provide information about their loan products and rates.
Credit Unions
Credit unions are member-owned financial cooperatives that often offer competitive rates on mortgage loans. They typically provide personalized service and may have more flexible lending criteria compared to traditional banks.
Online Lenders
Online mortgage lenders have become increasingly popular in recent years. They operate entirely online, allowing borrowers to complete the application process electronically. Online lenders often offer competitive rates and may provide a streamlined and convenient experience.
Savings and Loan Associations
Also known as thrift institutions, savings and loan associations focus primarily on residential mortgage lending. They can offer various loan options, and their rates may be competitive.
Mortgage Banks
Mortgage banks specialize in mortgage lending and do not provide other banking services like traditional banks. They originate and fund mortgage loans, and may also service the loans they originate.
Government Programs
Certain government programs, such as those offered by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), provide loans directly or work with approved lenders to offer specialized loan programs for eligible individuals.
Selecting the right type of home loan depends on several factors, including your financial situation, the type of property you're buying, and your long-term plans. It's always advisable to consult with a financial advisor or a mortgage professional to understand which option is best suited to your needs. Ask friends and family that have been through the process who they recommend and why. A well-informed decision can save you time, money, and potential headaches as you embark on your real estate journey. Often times, a home purchase is the biggest financial decision a person will make in their lifetime.
