Home Loans: Do You Know Your Options?
Whether you’re getting ready to buy your first home or your fiftieth, there’s one aspect of buying property that never seems to get any easier: figuring out finances. If you’re lucky, you or your real estate agent will have a trusted lender that can work with any lending situation — but it’s a lot more likely you will need to shop around for lenders every time you buy a new property. After all, your financial situation will be different each time, and it’s important to find the right loan to match up. The good news is that there are a whole host of different loan options to help you find the appropriate financing help to bring your property dreams to fruition.
The Conventional Loan
This is the loan you’ve almost certainly heard of before. It’s the category of loan most of us think about when thinking of a mortgage. Generally you can expect to find a 30-year or 15-year term with a fixed interest rate, though variable interest rates are also an option if that works best for your financial needs.
A conventional loan is often (but not always!) the best option for the widest variety of financial situations — which is why this is the type of home loan most of us think of first. The 30-year fixed rate mortgage is typically the option that offers the lowest monthly payment, while a 15-year mortgage is better for anyone looking to pay off the loan faster, or to build up equity more quickly before refinancing. Adjustable interest rate mortgages are a better option if you don’t plan to have the loan for long (i.e. you’re flipping the home to sell again in a couple of years, or can pay it off quickly), or you anticipate the rates going down in the future.
This is the loan for you if: You have a down payment and good credit.
The Value of Shopping
The other big thing to note about conventional home loans is that it is important to shop around! You don’t need to settle on the first loan for which you qualify. Talk to multiple lenders, since you may find a lender who has a special offer for first-time buyers, or other benefits. Look at both local lenders and national, talk to mortgage brokers and direct lenders; this will give you a better scope of what lenders can offer for your financial situation. And it’s always worth asking your real estate agent if they have a lender or two they recommend, since we talk to a lot of lenders as an everyday part of our jobs.
Exploring Alternative Options
The conventional loan options give enough flexibility that this category of home loan can fit a great many needs and financial situations, whether this is your first home or your fifteenth. However, there are a few different circumstances in which the conventional home loan is not the best choice. If you fall into one of these categories, you could qualify for a loan
While this loan is only for military service members and veterans, it’s a pretty spectacular option if it’s available to you. The VA mortgage works similarly to a conventional home loan; the big difference is that the Department of Veterans Affairs backs the loan, so you don’t need to worry about a down payment, and you won’t have to deal with mortgage insurance. You will need to take care of the VA funding fee, which is based on a few different factors.
Using a VA loan to finance your home purchase is ideal in most situations, as long as you’re eligible to use it. If you want to know more about eligibility or using your VA loan benefits more than once, you can check out the Department of Veterans Affairs website, or connect with a real estate agent who specializes in military relocations.
This is the loan for you if: You are a military service member or veteran and you’re eligible.
If you’re dealing with a home-buying budget that you might describe as “modest,” an FHA loan might be an option to help you finance your purchase sooner rather than later. The FHA loan is insured by the Federal Housing Administration and is designed specifically to help lower-income households finance a home purchase. The FHA loan is great for lower-income households specifically because you can qualify for a loan with a down payment of as low as 3.5%. It’s also a solid option for people with poorer credit, as you can qualify with a credit score as low as 500.
They can offer these terms since the loan is backed by the federal government. However, the tradeoff comes in the form of a couple of restrictions:
- You will pay mortgage insurance, regardless of down payment amount.
- There are limits on the size of the loan, though the limit depends on your region’s housing market.
- The property will need to meet certain appraisal standards that are more strict than those of a conventional loan.
- You can only use an FHA loan for the purchase of a primary residence, not an investment/vacation property.
So, if you have lower credit or don’t have a huge house budget, the FHA loan might be the best option for you. Just be prepared to jump through a few hoops to get that financing — but don’t worry, an experienced real estate agent can help you through that process.
This is the loan for you if: You have low credit and/or a small down payment, and will be purchasing a more modest home.
Do you have dreams of living out in the country, miles from the nearest neighbor? Or maybe you’re already out in the country, but your home needs some major renovations. In either case, a USDA loan could be the answer to make it happen. As you might have guessed, the USDA mortgage is backed by the U.S. Department of Agriculture, and their aim is to help out more rural buyers and homeowners. The big boon of the USDA loan is that you can qualify with no down payment, or a very low one. It can also be used as a loan (or possibly grant) for home improvement if your rural home needs work. In exchange for the no or low downpayment, however, you can expect to pay mortgage insurance.
The big restriction that comes with a USDA loan, however, is that it can only be used in certain areas. The aim of the loan is to help people in rural and suburban areas find livable housing, so you’ll be hard pressed to qualify for this loan if you’re looking in metropolitan areas. The other big restriction is the cost of the house. USDA loans only cover homes that are 2,000 sq. ft. or less, with a price below the local loan limit — which essentially means the loan amount varies by region. More costly rural areas, like Hawaii or California, will have a higher limit than, say, rural Iowa. You can find the loan limit for your area on the USDA loan webpage.
This is the loan for you if: You are/will live in a rural area in a modest home, or you need to do some big renovations on your rural home.
If you’re dreaming of getting out of the rat race in Colorado Springs and enjoying a multi-million dollar getaway in rural Colorado, a USDA loan isn’t going to be able to help, but a Jumbo loan can. This loan is specifically designed to help cover the financial side of the more high-end and high-cost homes. The amount of a Jumbo loan will depend on your region. In many areas, it starts with loan needs over $500,000, but in higher-cost areas, a Jumbo loan may not kick in for loans under $700,000.
So what do you need to qualify for a Jumbo loan? A few things. Since a Jumbo loan is above the limits of a conforming (conventional) mortgage, you will need to be able to give lenders a reasonable certainty that you can handle that amount of loan. Typically, you will need to have:
- A credit score over 650.
- More cash reserves and less debt.
- A larger down payment, possibly higher than the traditional 20% asked for by conventional loans.
- A second appraisal (possibly), to be sure the home is worth what you’re asking.
- Additional fees as part of the closing process.
The good news is that many lenders can offer an interest rate that is comparable to, if a bit higher, than what you can expect from a conventional loan.
This is the loan for you if: You have the savings and are buying a higher-budget home.
Other Home Financing Options
In addition to all of the options listed above, there are a range of different grants and other financial help that may be available in your area. For example, many urban and suburban areas offer down payment assistance programs or other grants for low-income households and first-time buyers. It’s worth doing a quick search online to see if your state or local governments offer guidance. If you’re not feeling up to an online adventure, it’s also a good question to ask your real estate agent. Most experienced agents keep up with those sorts of programs in their area and can give you a solid starting point.
Here at Holly Quinn & Associates, we don’t want to just facilitate your home buying and selling needs. We want to provide you with all the resources to make the best decisions for your needs. Do you have questions? We’re happy to provide guidance and education about the Colorado Springs market, home buying and selling processes, and any other related queries you have. Give our team a call or drop us a line with our contact form and our team will get in touch soon!