Purchasing a home is a huge moment in practically every person’s life. For the average person, purchasing a home is the largest financial commitment they’ll ever make. It’s also the acquisition of the place they’ll call home for decades to come. As such, selecting the right financing option is absolutely key. It’s the difference between having a smooth home-buying process that is enjoyable, and potentially losing your preferred property or having major complications closing it.
It’s not just a big deal for buyers, though. Sellers have to worry about the type of loan being used for the purchase, too. Some loans, in certain situations, can create issues with accessing funds from the purchase, force the price down, or otherwise damage the seller’s return on their investment.
Because of both those situations, we’re going to go over a variety of home loan options you have at your disposal, talk about what they’re used for, the drawbacks of certain loan types, and more to help you make good financing decisions during such an important part of your life.
1: VA Loans
This is a great option if you’re a veteran, but there are some restrictions in place that you should know of before you decide to go with a VA loan.
First, you have to meet service requirements with a branch of the US military before you qualify for this type of home loan. In general, that means that reservists have to have six consecutive years of service, peacetime veterans have to have 180 days of consecutive service, and wartime veterans have to have served 90 consecutive days.
The good part about this loan type is that you don’t have to have a down payment, and mortgage insurance isn’t necessary. The VA takes care of everything you need to get into your new home.
However, that doesn’t mean it’s perfect.
First, Veteran’s Affairs requires that any home purchased with a VA loan meet strict requirements. This means that you can’t buy a cheap home with problems with the hopes of fixing it up. It has to be ready to go and up to date before you buy it. This can put pressure on sellers to fix problems and meet sale requirements and might keep you out of some of the best markets.
2: FHA Loans
If homeownership seems out of your grasp due to your financial situation, an FHA loan might be the solution for you. This is a government loan program that reduces your down payment to a low 3.5%, and it provides up to $417,000 worth of funding. This can help someone who is a first-time homebuyer, or someone who just doesn’t have a lot of money, to purchase a home without sinking into a giant financial hole.
However, there are multiple drawbacks. You have to buy mortgage insurance, your borrowing amount is limited, and the loan is fixed at a 15 or 30-year model. That removes a lot of the flexibility most other borrowers enjoy, and it can create problems for both buyers and sellers.
3: USDA Loans
If an FHA loan sounded optimal, but you live in a more rural area, take a look at your USDA loan options.
A USDA loan is essentially the same financing program as an FHA loan, but it’s targeted at rural citizens. This removes all of the down payment requirements and the government-backed. However, you do need to purchase mortgage insurance, and a USDA loan is limited by your income. Typically, your overall debt cannot exceed 41% of your income for you to qualify for a USDA loan.
That can limit the homes you’re eligible to purchase with such a loan dramatically.
4: Bridge Loan
If you already own a home, but you’re trying to sell it and move into another place at the same time, a bridge loan is a solid option.
This is a loan that is meant to streamline your mortgage payments while you own two homes. Essentially, it will finance the new home, combine both your mortgage payments, and then when you sell the home and pay off the first mortgage, you get to refinance the mortgage on your new home to account for the lower payments required.
A bridge loan is optimal in many situations, but you can’t require more than 80% of the combined value of both homes. This can make it difficult if you haven’t owned the initial home for long and the mortgage is practically brand new.
This is also a traditional loan. So, you won’t enjoy low down payments or government backing like you would with some of the other loans we’ve mentioned.
5: Fixed-Rate Loans
A fixed-rate loan is likely what you’re used to thinking about when it comes to financing a home. You go to a lender, usually a bank, and you get a loan. You typically pay 20% of the financing amount as a down payment, and you set up a payment program for a fixed 15 or 30-year period.
Obviously, these are more costly loans, and they aren’t easy for those in lower income brackets to access, but they are traditional loans that are more or less very reliable.
The main issue is the lack of flexibility. While a fixed-rate loan prevents a lot of changes from happening to your payment plan, it’s also not easy to adjust when you need to.
6: Adjustable-Rate Loans
Adjustable-rate loans are similar to fixed-rate loans. You need 20% for a down payment, you have a loan period of 15 to 30 years to repay the loan, and it’s great if you’re going to stay in a home for a long time.
However, it differs from a fixed-rate loan, because your interest rate only stays fixed for a set period. This is usually ten years. After that, your interest rates will be adjusted annually to reflect the current standard for interest rates. If it goes up, you pay more. If it goes down, you pay less.
This is the best option for those with less than optimal credit scores, because it’s not as limiting as a government loan, and it allows for lower initial rates, but it can become problematic later on.
If you want more guidance on financing your next home purchase, contact our team at Hardeep Home Loans.