Planning the purchase of a home for your future is not an easy task. This even includes applying for finance home loans to have some assistance in the financial needs of the process. However, home loans do not only come in one form. There is a variety of home loans to choose from and it is important to go over each one so that you can be able to properly choose the one that fits your needs and capabilities.
Below are the common types of loans to choose from when you buy a home:
Conventional Loans
One of the most common types of loans is conventional loans. These types have stricter regulations on the applicant’s credit score and debt-to-income ratio. They are also those loans that are not backed by the federal government.
It usually comes in two forms, one of which includes conforming loans that conform to the set of standards put in place by the Federal Housing Finance Agency (FHFA). The second type is non-conforming loans which do not meet the FHFA standard and instead, cater to borrowers looking to purchase more expensive homes or for individuals with unusual credit profiles.
Pros:
- It can be used for primary or second homes and on investment properties.
- Its borrowing costs tend to be lower than the other types.
- The sellers can contribute to closing costs
Cons:
- You would need a FICO score of 620 or higher.
- It needs a higher down payment.
- The applicant’s debt-to-income ratio should be no more than 20% of the sales price.
Jumbo Loans
When it comes to jumbo loans, these are the ones that fall outside the borrowing limits of FHFA. It is seen to be more common in areas with higher costs of living such as in Los Angeles, New York City, San Francisco, and Hawaii. The home prices in the mentioned places tend to be much higher as compared to those in the other states.
Pros:
- Enables you to expand the range of the sum to be borrowed for you to be able to purchase a more expensive home.
- These loans tend to have more competitive interest rates as compared to the other types of loans.
Cons:
- The downpayment in jumbo loans should be at least 10 percent – 20 percent.
- A FICO score of 700 or higher is a must.
- Requires more in-depth documentation for the applicant to be qualified.
Government Insured Loans
The government may not be a lender, but it still actually does play a role in making homeownership accessible to more citizens. When it comes to loans, the government has three agencies namely:
FHA Loans
Loans under here are backed by FHA itself. It has competitive interest rates that help make homeownership possible for borrowers without requiring a large down payment or pristine credit. Additionally, with an FHA loan, you get to be permitted to contribute to closing costs. In here it would still consider the applicant’s FICO score.
USDA Loans
USDA loans help moderate to low-income borrowers who meet certain income limits buy homes in rural, USDA-eligible areas. And usually, in here, it does not require a downpayment for the eligible borrowers. However, there would be extra fees that include the upfront fee of 1% of the loan amount and the annual fee.
VA Loans
Lastly, loans offered by the VA agency are more flexible and possess low-interest mortgages for the members of the U.S. military and their designated families. In here, there would be no minimum down payment allowing the borrower to have a seamless finance loan application process. In addition, it also does not have a minimum credit score requirement since the closing costs are generally capped and may be paid by the seller.
Pros:
- It helps you when your conventional loan has been rejected.
- Provides more relaxed credit requirements.
- They do not require large and heavy down payments.
Cons:
- Limits the potential inventory to choose from.
- The borrower is required to live in the property.
- Its application process would need more documentation depending on the loan type.
Wrapping it all up
Choosing the right finance housing loan is a really complex process. Just like in finance auto loans, as a borrower, you would need to properly search, understand and inquire as to what type, size, and kind of loan would work best for you. One that can help you slowly ease up and achieve your milestones and not the ones that would cause more hiatus in your life.
