Buying a home is one of the most exciting things the average person will do. You spend a lot of time finding the perfect place to call your own, raise your family, and watch the world go by. You’ve probably visited countless homes, done a ton of research online, investigated neighborhoods, and driven countless miles checking out curb appeal before making the decision to, first take a look inside, and finally to buy.
Now it’s time to decide on the right kind of loan for your needs when buying your home, whether it’s your first or your fifth home. This guide is to help you understand some of the home loan options to available to consider including FHA loans, VA loans, and more.
An FHA loan is one that is insured by the Federal Housing Administration (FHA) to shield lenders from financial risks if buyers are unable to repay the debt. The FHA places strict restrictions on the types of loans that qualify as FHA loans as well as the types of homes that qualify for this particular type of loan.
Borrowers are not exempt from responsibilities with these types of loans either. If you want to be considered for an FHA loan you must meet certain standards of creditworthiness. The upside of these types of loans, though, are numerous and well worth considering. They include things like:
- The ability to pay a much smaller down payment. You may be able to put as little as 3.5 percent toward your down payment to purchase a home with an FHA loan.
- You do not have to have perfect credit to get an FHA loan either. This is huge for young families who are just starting out or those who have struggled in the past as it gives them an opportunity to enjoy the benefits of homeownership sooner than with most conventional mortgage loans.
- You may be eligible for FHA loans even if you’ve had foreclosures or bankruptcies in the past that would prevent you from receiving mortgages from other lenders.
There are some drawbacks to consider with FHA loans as well, including the fact that you must continue to pay mortgage insurance premiums even after you’ve reached what would be an appropriate amount of equity in your home with other lenders. Another consideration, one that should not be dismissed lightly, is the fact that you’ll need to pay a higher interest rate than with traditional mortgage loans.
The purpose of the FHA program was to stimulate the housing industry by allowing lenders to take on riskier borrowers giving more people opportunities to experience the joys of home ownership and stabilizing at-risk communities by bringing more homeowners into them.
As part of the Servicemen’s Readjustment Act (commonly referred to as the GI Bill), veterans enjoy access to federally guaranteed home loans with no down payments. They do have to meet certain credit and income criteria, but there are many assistance programs available to help veterans achieve the dream of home ownership.
Who is eligible for a VA loan?
Veterans only need to have served 90 days of active duty during wartime and 181 continuous days of service during times of peace with an “other than dishonorable” discharge from military service if their service began prior to September 7, 1980. The requirements for veterans serving after 1980 are different requiring two years of service for eligibility.
The VA guarantees up to 25 percent of home loans in amounts up to $113,275. The point of the loan is to serve instead of the down payment that is generally required for home buyers to gain more favorable interest rates and loan terms. It expands eligibility and opportunities for many of the men and women, not to mention their families, who provide military service to their nations.
Fannie Mae Loans
The term “Fannie Mae Loans” can be somewhat confusing. It’s not a loan you can go out and apply for to pay for your home. Instead, Fannie Mae, a nickname for the Federal National Mortgage Association (FNMA), guarantees mortgages made by a variety of lenders, including:
- Credit Unions
- National Banks
- Other Financial Institutes
Because the Fannie Mae programs invest so heavily in the mortgage market, it keeps it liquid so that these lending agencies continue to offer mortgages, especially to people who would not otherwise qualify for mortgages, such as low- to moderate-income Americans.
In certain rural areas of the country, the USDA offers homebuyers the opportunity to purchase homes with a zero down payment mortgage. These loans are typically reserved for buyers who have little wealth and are unable to qualify for traditional mortgages.
While this little-known loan can make the dream of homeownership a reality for many families, thanks to offering low interest rates and no down payments, most people are shocked at how accessible this type of loan happens to be.
This particular government program works in multiple ways. First, it guarantees loans for buyers, so they can qualify for bank loans without down payment and with reduced interest rates. Additionally, the USDA offers some direct loans, with interest rates as low as one percent thanks to a variety of subsidies available to low and very low-income households. Finally, the program offers home improvement grants and loans, for amounts of up to $27,500 to help rural borrowers make upgrades to their homes and/or repairs.
While this particular program prefers credit scores of 640 or higher, the following are some of the other requirements for consideration:
- You must be U.S. citizens or permanent residents.
- Your monthly payment cannot exceed 29 percent of your total monthly income and your total other monthly debts may not exceed 41 percent of your total monthly income.
- You must have a dependable income for a period of at least 24 months.
- You must have no collections within the previous 12 months.
Of course, the home must also qualify for USDA loans. To do so, the home must be 2,000 or fewer square feet in size and have a value below the local market limit. Finally, the home must be located in an eligible area for this type of special financing.
Freddie Mac Loans
Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC), like Fannie Mae, is a government-sponsored enterprise. The purpose of this organization is to stimulate lending. It accomplishes this by buying mortgages then packaging them into mortgage-backed securities.
One of the ways these types of loans are particularly beneficial to consumers is by reducing interest rates. When that happens, loans are available to more people, which means more people are able to purchase homes.
Unfortunately for many potential home buyers, Freddie Mac doesn’t offer home loans, as an organization. They only work to help keep the housing market stimulated enough to spur new home sales and the building of homes in many markets.
For the most part, the term “jumbo loan” refers to any loan in excess of $453,100. This is the “conforming” loan limit for most conventional loans. People who have relatively low debt-to-income ratios, less than 45 percent, and exceptionally high credit scores, often 740 or higher, often find jumbo loans to be the right choice when purchasing homes that exceed the limits of conventional conforming loans.
For a property to qualify for a jumbo loan, its appraised value must support the higher purchase price for the home. Many borrowers find jumbo mortgages popular because interest rates remain low and they may deduct up to one million of interest on their loans when tax time comes around.
VA Jumbo Loans
The standard VA loan limit in most areas of the country reflects conforming loan limits of $453,100. In some counties throughout the country with higher costs of living, the VA allows loans of up to $679,650. It is important to point out, though, that there are no upper limits on the loans veterans can receive, only on the amount the VA will guarantee.
However, when veterans borrow more than the standard limits in their counties, they may require VA jumbo loans. When this occurs, veterans will need to make down payments for the gap between the maximum amount the VA will guarantee and 25 percent. It is still substantially less than a full 25 percent down payment allowing veterans to do more with their money. More specifically, to buy more house, with their money.
You may be required to meet certain additional standards to qualify for a jumbo loan of this nature. Even so, the down payment guarantee provided by Uncle Sam, in this case, is a huge benefit to veterans hoping to experience the dream of home ownership.
With so many loans to choose from, selecting the right loan for your needs can make a world of difference when it comes to the amount of money you have to pay as a down payment and, ultimately, how much money you will pay for your home. Depending, of course, on how the loan you receive impacts your interest rates.