You have a lot of different home loans [ew1] to choose from when buying a new place. Of course, most homeowners want flexible terms and low-interest rates, which isn’t always plausible. If you want to qualify for the best mortgages, you’ll need a high credit score and solid financial history. However, a fair or reasonable credit score won’t destroy your chances of getting your dream home. There are various avenues to take, including financing your property with a mortgage backed by the United States government.
Whether you’re planning on buying a new home next month or in five years, it’s always an excellent idea to start to understand your financing options. Getting a head start enables you to pay down other types of debt and improve your credit score, increasing your chances of getting a better interest rate. Let’s explore some of the different home loans available to you:
Fixed-Rate Mortgages
Fixed-rate mortgages are inarguably one of the most popular financing options. As the name implies, this mortgage’s interest rate never changes. You essentially “lock-in” the interest rate when you receive a fixed-rate mortgage. Many home buyers favor fixed-rate mortgages because they’re able to predict their monthly payment throughout the 15 or 30-year term. The downside to fixed-rate mortgages is that you’ll continue to pay a predetermined interest rate even if the federal funds rate drops. Therefore, it’s extremely common for fixed-rate borrowers to refinance their homes when the federal fund rate drops below their loan’s interest rate.
You can get a fixed-rate mortgage from traditional banks, credit unions, and lending companies. A credit score of 740 or higher will help you get the best interest rates.
Adjustable-Rate Mortgages
Another widely-used financing option is an adjustable-rate mortgage – the opposite of a fixed-rate mortgage. The critical difference between these loans is that an adjustable-rate mortgage’s interest rate changes over the loan’s term. Many borrowers start with a low interest during an “introductory” period between three to ten years. After the initial period ends, the mortgage’s interest rates either increase or decrease, depending on the market state.
Since the bank or credit union can mitigate risk inflation by charging you more interest, you’re probably wondering why borrowers choose adjustable-rate mortgages. Adjustable-rate mortgages are often less risky for the lender because the financial institution can raise the interest rate as inflations increases. Lenders typically raise the interest rate using an index as a benchmark. Individuals who only plan to stay in a home for ten years or less could benefit substantially from the introductory interest rate. However, those looking for their “forever home” might see more benefit from a fixed-rate mortgage that’s more predictable.
Jumbo Mortgages
Are you in the market for a $900,000 home and don’t have the funds to pay in cash? If so, you’ll need to get a jumbo mortgage. Financial institutions offer these loans to enable homebuyers to finance costlier purchases. Lenders must issue a jumbo mortgage when the financing amount exceeds the maximum amount for a conforming loan set forth by the Federal Housing Finance Agency (FHFA). The maximum conforming loan maximum amount depends on your county but is typically $647,200. Note: the FHFA changes the maximum amount frequently but maintains a comprehensive list for each calendar year.
Generally, the higher the loan amount, the more risk the bank. Individuals typically need a very good or exceptional credit score to qualify for a jumbo mortgage. Not only that, but many lenders require that the home buyers make a larger down payment (10% – 20%) to qualify for a jumbo mortgage. Many mom-and-pop lenders don’t offer jumbo loans because of the risk; however, you can get one of these loans from a larger bank such as Wells Fargo and Chase.
FHA Mortgages
Many first-time homebuyers don’t have an established credit history or enough cash to make a sizeable down payment often required by larger lenders. Federal Housing Administration (FHA) loans are a go-to choice for first-time homebuyers that don’t meet the requirements to qualify for a conventional loan. FHA loans come with various benefits, including lower down payment requirements and reduced closing costs. These loans are a bit unique in that the U.S. government backs them, and the FHA insures them. The most notable advantage of an FHA loan is that those with a FICO score of at least 580 only have to make a 3.5% down payment.
VA Loan
Current U.S. military servicemembers, veterans, and servicing spouses may be eligible for a VA loan that the Department of Veterans Affairs backs. It’s essential to note that private lenders issue VA loans – not the Veterans Affairs. VA loans come with some of the most significant benefits in the industry – no down payment, low-interest rates, and reduced closing costs. The only slight downside to a VA loan is that sometimes it takes longer to close (approximately 50 to 55 days) due to stricter inspection requirements. Nevertheless, VA loans are a great option to explore if you meet the requirements.
USDA Loans
Depending on your household income and where you want to purchase a home, you might qualify for a USDA Loan. The various qualifications required to get a USDA loan include a fair credit score, stable income, and the ability to repay the loan. Moreover, you must intend to use the home as your primary residence. It has to be located in a qualified rural area. USDA loans come with a handful of irresistible benefits – no down payment requirements, lower interest rates, and flexible lending guidelines, to name a few.
Use Chunk Finance on Your Homebuying Journey
We understand that there’s a lot of information to absorb when you’re in the market for a new home. Using Chunk Finance can gauge how much you can afford using our useful spending visualizations. You can also use our credit card utilization ratio calculator[ew2] to boost your credit score and get a lower interest rate in the future. Our platform serves as a robust monthly finance tracker[ew3] and so much more. We’re here to help, no matter where you stand on your homebuying journey.
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