Learn About Loan Options
There are dozens of types of loans available for those who want to purchase a property. From first-time home buyers to investors, finding the right loan product can lead to more affordable rates and flexible terms. We will discuss the ten most common loan options so you can find the best fit for your personal situation.
For first-time homebuyers, FHA loans are often the best choice. FHA loans are general purpose loans that require a 3.5% down payment. Though it is named a first-time homebuyer loan, it’s actually intended to be a loan for those who haven’t purchased a home within the last five years and do not currently own a home. FHA loans are restricted to those who will be owner-occupants of the property and the loan may be recalled if the individual does not make a good faith effort to occupy the property.
It can be difficult to acquire a condominium with an FHA loan. To qualify for an FHA loan, the condominium must be both FHA approved and also above 51% in owner occupation. If the condominium dips below this owner occupancy rate during the process of completing your loan, your loan may be denied.
Veterans, active duty service members, and National Guard or Reserve members can qualify for VA loans. Veteran’s Assistance loans are designed to make it easier for veterans to acquire a home. Consequently, they have much lower requirements. Rather than having set requirements for income and credit, each loan application is considered individually.
VA loans are absolutely ideal for those who can qualify for them. They have favorable terms and lower eligibility requirements than average. VA loans can be used to purchase homes or condominiums, build a home, or purchase and improve a home. They can also be used to purchase a manufactured home or lot or to refinance an existing loan.
There are caps on the size of a VA loan purchase. These loans are set at a per state basis. Loans acquired through the VA do not need a deposit. Unlike many other types of loan, they also don’t require mortgage insurance.
Fannie Mae Loans
Fannie Mae offers a special loan program intended for those who are either purchasing a residence for themselves or an investment property. For those purchasing a residence, the down payment requirement is 3 percent. For those purchasing an investment property, the down payment required is 20 percent. Unlike other conventional loans, you do not need to pay private mortgage insurance.
Fannie Mae properties are foreclosures that have been renovated by Fannie Mae to be habitable, which means they are often offered at below-market rates. In addition to loans to purchase the property, Fannie Mae also offers loans to purchase and renovate and repair the property. However, these loans are limited to Fannie Mae’s inventory.
USDA loans are 0% down loans for those who are purchasing properties in rural areas. These loans extend to farmland and may include some suburban properties. The program involves a few different aspects, including a USDA guarantee program that guarantees low down payment loans (with mortgage interest). They also have direct loans offered through the program and renovations loans. This type of loan generally has very low interest rates, sometimes as low as 1%.
USDA loans are primarily designed to help those who do not have the income and assets to qualify for a traditional loan package. To qualify, applicants need to make enough that the housing payment will only be about 29% of their monthly income. They must have an acceptable credit history, dependable income, and be U.S. citizens. Metropolitan areas are excluded from this loan product, but there are suburban areas that may qualify.
Freddie Mac Loans
Freddie Mac loans are not loans, but instead a method of investing in many loans at once. Loans are repackaged and sold as investments. A Freddie Mac loan is a loan that is owned by the government and used to create a mortgage-backed security. Freddie Mac loans are not acquired directly by homeowners, though the company does offer substantial tools and programs designed to educate and inform.
Jumbo loans are loans designed for high credit individuals who are purchasing high-value properties. Nearly every loan product has a limit on how much money can be spent within it. These caps are set based on property costs in each state. Jumbo loans are loans that exceed these amounts. As of 2017, jumbo mortgages are defined in most areas as mortgages that are above $679,650.
Jumbo mortgages are considered to be riskier than other mortgages, as they are harder for individuals to pay and more difficult for the bank to sell if they are forced to foreclose. Luxury homes also tend to be more vulnerable to swings in real estate prices, leading to higher levels of volatility related to their value. However, jumbo mortgages are often the only option when purchasing luxury real estate or purchasing real estate in particularly expensive areas of the country.
In addition to the borrower meeting rigorous financial standards, the property itself may need to undergo multiple appraisals before the loan is completed. If the appraisals fall short, the bank may not fulfill the loan.
VA Jumbo Loans
There is no standard limit as to how much a veteran may borrow under the VA loan program. However, for most properties, the VA will only guarantee up to $453,100. In certain areas of the country that are more expensive, the VA may guarantee a larger amount. In San Diego, California, the amount is $649,750.
These are only the caps on the VA’s guarantee. A VA loan can be up to $1 million or more. When they go above the amount that the VA will guarantee, they become VA jumbo loans. VA jumbo loans have the advantages of a VA loan but some of the restrictions of a conventional jumbo loan.
VA jumbo loans are generally considered to be lower risk than traditional jumbo loans, as at least a portion of it is backed by the VA. If a borrower takes out a $750,000 jumbo loan to purchase a home in San Diego, $649,750 will still be guaranteed. Thus, the rates and fees are lower on VA jumbo loans than on conventional jumbo loans.
Reverse Mortgage Loans
If someone owns their own home, a reverse mortgage operates like an installment purchase. The reverse mortgage company will either pay a lump sum, interval payments, or a mix of both in exchange for their property. The homeowner will be able to continue living in their home until they pass.
Reverse mortgage homes are generally intended for the elderly and they are highly regulated. Often, a reverse mortgage is used to cover living and medical expenses. It essentially has the advantage of giving a homeowner profit from their property without having to move out of their property. Without the option of a reverse mortgage loan, many homeowners would have to sell their home and immediately purchase another home or pay for rent.
Refinancing is the act of buying out one loan with another loan. This usually done to change the term and rates associated with the loan. A refinancing can:
- Extend the term of a loan. If you are 25 years into a 30-year loan, you can refinance the loan for 30 years again. This reduces the monthly cost if the loan. Alternatively, you could refinance a 30-year loan into a 15-year loan to pay it off faster.
- Reduce monthly payments. If you want to reduce your monthly payments you can refinance for a lower interest rate. If your credit score has improved substantially, it’s likely that you can refinance your loan.
- Remove someone from the loan. If you took out a loan with another cosigner, you will often need to refinance the loan to take them off the loan. Most banks will not agree to do so otherwise as it’s not in their best interest.
When better loans are available, it can save a substantial amount to refinance the loan. Mortgage holders may want to periodically check on the new rates that they’re qualified for.
Home Equity Loans
If you have equity in your property, you can take out a home equity loan. Home equity loans are filed as liens against your property and operate very much like a mortgage, but with generally faster repayment rates and higher rates of interest. A home equity loan is commonly used to embark upon renovations, pay for college tuition, or even to invest in additional property.
If you owe $100,000 on a $250,000 home, you have $150,000 worth of equity to borrow against. The loan is secured with the value of your property, which makes the loan easier to obtain. However, if the loan isn’t paid, it can eventually lead to the foreclosure if the property.
There is a loan product for virtually every property and property owner. Doing due diligence on the above loan types will often pay off in the end.
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