Is owning a home a dream for you? About 40% of home purchases don’t require a mortgage, while about 60% do.
Getting a mortgage adds to the stress of buying a home. You need to learn the types of mortgages, decide which one is right for you, and get approved.
It’s a long process, and if you get the wrong kind of mortgage, you could find yourself in financial trouble over the years.
What are your mortgage options and how can you make sure you get approved? Keep reading to learn about home mortgages so you can get into the home of your dreams.
1. Fixed-Rate Mortgage
A fixed-rate home loan is one of the more common kinds of mortgages. A fixed-rate mortgage is defined by the type of interest rate that comes with the loan.
The interest rate on a fixed-rate loan stays the same during the repayment of the loan.
You might hear a lender say, “let’s lock in this loan now.”
That means if you get that rate before it increases, you get to pay a lower interest rate during the 30-year life of the loan.
2. Adjustable Rate
An adjustable-rate loan also refers to the interest rate of the loan. This is one of those home loan options that you should consider when interest rates are high.
The interest rate fluctuates while you’re repaying the loan. One month, you might have a lower mortgage payment, and a higher payment on the next.
The reason why you want to get this loan when interest rates are high is that the interest rates will drop, and your payment will drop with it.
3. Government Guaranteed
Home loans guaranteed by the government mean that the federal government insures the loan. The insurance protects banks if a homebuyer defaults on the loan.
The most well-known government program is the FHA home loan. This is a loan from the U.S. Department of Housing and Urban development to make it easy for first-time homebuyers to make a purchase.
FHA home loans ask homebuyers to have a down payment of 3.5% to 10% of the purchase price of the home. It’s possible to get approved with a credit score of only 580.
If you do have a lower credit score, you’ll need a higher percentage of a down payment.
USDA home loans are another type of government-back loan. These loans are funded by the U.S. Department of Agriculture to help people in rural areas get the funds they need to purchase a home.
There are a few requirements to get a USDA home loan. The main requirement is where you purchase the home. It has to be in a rural area as defined by the USDA.
This doesn’t mean that you’ll live in the middle of nowhere. The USDA’s definition of rural is actually pretty lenient and includes many suburbs.
The best part of the USDA home loan is that you don’t have to have a down payment. You can finance 100% of the purchase.
Since the home loan doesn’t require a down payment, there is a higher credit score minimum. Buyers have to have a minimum credit score of 640.
The Veteran’s Administration has its own home loan program for military veterans and their families.
4. Conventional and Nonconforming Home Loans
You’ll often hear the terms conventional and non-conforming loans. A conventional loan means that a loan isn’t backed by a government agency.
There are two government agencies that exist to give lenders enough cash on hand to continue to operate. Freddie Mac and Fannie Mae buy conventional loans from lenders so they can keep lending money.
A lender might only have $50 million in cash for mortgages. Let’s say that they approve 100 mortgages for $500,000.
They’re out of cash, so they can’t approve more home loans until those loans are paid up. The lender can sell some of those mortgages, which gives them cash on hand.
There are certain limits on the types of loans Freddie Mac and Fannie Mae can purchase. For instance, there’s a maximum loan amount for a conforming loan.
In 2021, the loan limit is $548,250.
A non-conforming loan is a loan that falls outside of Freddie Mac’s and Fannie Mae’s requirements.
5. Jumbo Loan
Are you buying a home and need to borrow more than $548,250? Since it’s larger than the maximum amount of a conventional loan, it’s called a jumbo loan.
Keep in mind that the limit changes every year. Some lenders are getting ready to increase the maximum amount to $625,000.
That’s a significant jump in response to the increase and demand in the real estate market.
How to Get Home Mortgages
Getting a home loan is a long process. You should start planning a year or two before you buy a home. This gives you enough time to save up for a down payment and fix your credit score if you need to.
Obtain a copy of your credit report to see what your credit score is. You’ll see if there are errors on your credit report. Fix these as soon as possible.
Be sure to keep your credit utilization rate around 30% and pay your bills on time.
The one thing that most people don’t know is that job changes or credit requests impact your ability to get a home loan. Lenders need to see financial stability, and any sudden changes are red flags.
Look at the home loan options and decide which loan is right for you. You should work with a lender or mortgage broker who can advise you on the best options.
The Different Types of Mortgages
There are many different types of mortgages and terms to know before buying a home. Your mortgage options let you get a home for little money down or you can get a home loan to take advantage of low interest rates.
Now that you know the kinds of mortgages, you’ll need financial tips to save up for a down payment. Check out the blog for more financial insights.