Ffinding the right property is only half the battle unless you can buy it entirely with cash. The other half is determining which mortgage is right for you.
Since you’ll be paying off your mortgage over a long period of time, finding a loan that meets your needs and fits your budget is key.
When you borrow money from a lender, you enter into a legally binding agreement to repay the loan over a specified period of time.
Mortgages come in different shapes and sizes. Although the 30-year fixed rate mortgage is the most common, it is by no means your only option.
Your lenders will tell you about your income, credit history and the type of home you want to buy. They will then use this information to suggest loan options that are right for you.
Although the United States government is not a lender, it does guarantee certain types of loans that meet strict income, loan limit, and geographic area requirements. Here is an overview of the different types of mortgages available.
A loan that is not guaranteed by the federal government is called a conventional loan. Borrowers with good credit, a stable employment and income history, and the ability to make a 3% down payment can generally qualify for a conventional loan backed by Fannie Mae or Freddie Mac, two government-sponsored companies that buy and sell the majority of conventional loans. mortgages in the United States.
Borrowers generally require a 20% down payment to avoid having to pay for private mortgage insurance (PMI).
Conventional loans with low down payments and no private mortgage insurance are also available from some lenders.
Maximum lending limits set by the federal government apply to conforming loans. These restrictions differ depending on where you live. The Federal Housing Finance Agency has increased the basic conforming loan limit (CLL) for single-unit properties to $647,200 in 2022.
In some parts of the country, however, the FHFA sets a higher maximum loan limit. Indeed, home prices in these high-cost areas are at least 115% higher than the base lending limit.
Due to loan size or underwriting guidelines, Fannie Mae and Freddie Mac are unable to sell or buy non-conforming loans. The most common type of nonconforming loan is the jumbo loan.
Since loan amounts usually exceed conforming loan limits, they are called jumbo loans.
Since these loans are riskier for a lender, borrowers generally need to have more cash, a 10-20% down payment, and excellent credit.
Government-Insured Federal Housing Administration (FHA) Loans
When low-to-moderate income buyers can’t qualify for a conventional loan, they often turn to loans insured by the Federal Housing Administration (FHA). Borrowers can pay as little as 3.5% of the purchase price of their home.
Credit score requirements for FHA loans are less stringent than those for conventional loans. The FHA, on the other hand, does not lend money directly; instead, it guarantees loans made by FHA-approved lenders.
FHA loans have a downside. Throughout the life of the loan, all borrowers pay an initial and annual mortgage insurance (MIP) premium, which is a type of mortgage insurance that protects the lender against borrower default.
Government Insured Veterans Loans (VA)
Homebuyer loans are backed by the US Department of Veterans Affairs (VA) for qualified military personnel, veterans, and their spouses.
Borrowers can finance the entire loan amount with no down payment required. Other benefits include lower closing costs (which the seller can cover), better interest rates, and no PMI or MIP.
A finance charge, which is a percentage of the loan amount, is charged for VA loans to help offset the cost to taxpayers. Financing fees are determined by your category of military service and the amount of your loan. Funding fees are waived for the following service members:
- Veterans Receiving VA Benefits for a Service-Related Disability
- Veterans who would be eligible for VA compensation for a service-related disability if they were not receiving retirement or active duty
- Surviving spouses of veterans who died in service or from a service-related disability
- A service member with a proposed memo or memorandum stating eligibility for compensation due to a claim prior to release
- A service member who received the Purple Heart
VA loans are ideal for active military and veterans, and their spouses, who want highly competitive terms and a mortgage product tailored to their specific financial needs.
United States Department of Agriculture (USDA) government-insured loans
The United States Department of Agriculture (USDA) supports loans to help low-income buyers in rural areas access homeownership. As long as the properties meet USDA eligibility rules, these loans require little to no money for qualified borrowers.
USDA loans are best for homebuyers in eligible rural areas who have low family income, little money set aside for a down payment, and who otherwise cannot qualify for a conventional loan.