When purchasing or building a home, investors and individuals must carefully consider the range of available loan options. Mortgage products each have advantages and disadvantages—some loans have smaller fees and lower interest rates while requiring large down payments, whereas others have small upfront fees but will cost thousands more throughout its life. There are loans for expensive properties, executive homes, and Veteran-specific home loans. If you’re even casually thinking about purchasing property, it is essential to review your loan options. This will allow you to understand the real cost of your mortgage—both upfront and over time.
Department of Veterans Affairs (VA) Home Loans
VA loans are available to veterans who have little cash but a good credit score. There are no strict limits on credit eligibility or debt-to-income ratios for borrowers, and veterans will need to obtain a Certificate of Eligibility through their lenders or the VA Loan Eligibility Center. Most underwriting items are left to the discretion of the lender, meaning there may be some variability in these loans. This is an excellent financing option for veterans, but those considering this type of loan should continue to consider other options. If you have cash and great credit, you will likely be able to find a better rate with a conventional loan.
Federal Housing Administration (FHA) Loans
An FHA loan is a great choice for those new to the housing market who might have few funds and a lot of debt. An FHA loan is the most forgiving of credit problems and low credit scores. Borrowers can finance up to 96.5% of the cost of their home, and the fees lenders can collect are strictly limited. An FHA loan requires both a down payment and a monthly loan insurance premium payment. Borrowers will also need mortgage insurance, which will add to the overall costs of over the life of the loan. However, the upfront portion can be financed into the loan, lowering the initial borrowing cost.
These loans necessitate higher down payments, better credit, and a lower income-to-debt ratio than FHA loans. Borrowers with excellent credit may only have to pay 5% down, but historically, borrowers have needed to pay 20% down. Conventional loans aren’t insured, but homeowners with this type of financing will pay a monthly premium based on the loan amount and credit score. Mortgage insurance may be canceled after two years if the home value has increased to provide 20% equity. However, if you have bad credit and several monthly debt payments, this may not be the loan option for you.
United States Department of Agriculture (USDA) Loans
USDA loans provide the best deal of all available mortgage products. Unfortunately, not everybody lives in an area qualifying for a USDA loan. Rates are set by lenders, but they are low and do not always require a down payment. However, there are several qualifying characteristics borrowers must have. Their income cannot exceed 115% of the median income for the area, and the home must be in an area targeted for rural development—often very out-of-the-way places that may not have good infrastructure. Finally, the home must meet USDA’s exacting standards, which can be difficult. However, if you find that you qualify for this type of loan, it is undoubtedly the best choice for your money.
Jumbo loans are what you might expect—jumbo. These loans are used to purchase mansions and estates, which often exceed the borrowable amount through Fannie Mae or Freddie Mac. However, qualifying for this type of loan can be very difficult. A borrower’s credit score must be 700 or better, and the down payments are between 20% and 30%, which is meant to prove the borrower’s high income. There is no insurance for this type of mortgage, so lenders are often hesitant about providing this type of funding.
Mortgage choices should consider more than down payment and interest. Before making any decisions, utilize a mortgage calculator to determine if any of these choices is sustainable. Additionally, borrowers should understand that mortgage rates have been raising steadily for the past several months. Rates are rending in the high 4% range, and any rate under 6% is considered good, historically. However, both governmental and consumer behavior is only going to drive mortgage rates up. If you’re strongly considering purchasing a home soon, do it now—your rates will be lower, and your loan will accrue less interest over its lifetime, potentially saving you thousands of dollars.