You’ve found it — your dream home. Screenshots saved from the Zillow listing, plans for furniture, and the Christmas tree in mind, you want this home for your family. As exciting as the moment is, it’s time to get down to the business of finding a home loan that fits your budget so you can make an offer as a qualified buyer.
Your financial status will determine what types of home loans you can obtain. To get the process started, gather your recent bank statements and pay stubs and look to a trusted mortgage broker to not only get pre-qualified for a loan but also to learn about the home loan that will best suit your family and budget.
Here Are the Most Common Types of Mortgages to Consider
Conventional Mortgage
A conventional mortgage is a loan that is not affiliated with a government program. These loans tend to cost less over time but can be more difficult to obtain. If you have a credit score of 620 or higher, a DTI (debt-to-income) ratio of 43% or lower, and you can make a down payment of at least 3%-5%, then a conventional loan may be the best loan for your family. Your financial health will be rewarded with a lower, fixed interest rate that will not change over the term of your loan. If your conventional loan term is 30 years, right now, you can plan for an interest rate just above 6%. If you reduce that term to a 15-year mortgage, your interest rate could drop by half a point down to 5.5%.
One important point to make about a conventional loan is if your down payment doesn’t reduce your loan balance to 80% or less of the original loan amount, you will have to pay private mortgage insurance, known as PMI. PMI protects the lender—not you—if you stop making payments on your loan. As you pay down your loan, you can talk to your bank about refinancing your loan to remove PMI.
FHA Loans
FHA loan requirements make it easier for borrowers with a questionable credit history and lower credit scores to qualify. Backed by the Federal Housing Authority, FHA loans are available to borrowers who have debts or even a recent bankruptcy. If your credit score is 580 or higher, you can get an FHA loan with as little as 3.5% down. If your score is between 500-579, you can still get a loan if you can make a down payment of at least 10%.
It is important to note that FHA loans do have limits in terms of the price of the home. To find out if your dream home falls within these limits for purchasing in your county, check out the latest from the U.S. Department of Housing and Urban Development.
USDA Loans
If you seek to live in a rural, smaller town with a population of 35,000 people or less, a loan through the U.S. Department of Agriculture might be an option for your family. These loans won’t cover just any home, though. To be eligible, the single-family house must be 2,000 square feet or less. These loans are designed to help families get affordable housing in areas where adequate, sanitary rental housing is not available.
The term for a typical USDA loan can be anywhere from 30 to 38 years for some lower-income applicants. And, within that term, the USDA will guarantee 90% of the loan if you struggle to pay your house payments and default. To learn more about the eligibility requirements for a USDA home loan, go here.
VA Loans
If you’re a Servicemember, Veteran, and or a surviving spouse of a Servicemember, you might consider a VA loan to purchase your home. VA loans are made possible by the U.S. Department of Foreign Affairs to help veterans purchase homes affordably. The benefits of a VA loan include no minimum credit score, no down payment, and no PMI. VA loans also offer limited closing costs and competitively low interest rates. Further, in the unfortunate case the loan holder should pass away, a surviving civilian beneficiary can assume VA loans.
While the VA loan approval process may not consider your credit score or require a down payment, the underwriters will review your full financial profile to ensure you can repay the loan. This audit includes looking at your payment history and confirming you have a consistent income stream. Other factors that could impact whether or not your VA loan might be out of your control but are worth knowing ahead of time as you shop. These factors involve a more scrupulous home inspection and require the home to appraise at or above market value. Here are all the details on what it takes to get a VA home loan.
There’s a loan out there for you, and there are houses waiting for your family to personalize and call home. The process of getting your home loan will be fast and painless if you come to your lender prepared. So keep the listing that caught your eye in mind as you contact a trusted lender to get you approved for the loan that will make your dream of home ownership a reality.
Links
https://www.hud.gov/programoffices/housing/sfh/lender/origination/mortgagelimits
https://www.rd.usda.gov/programs-services/all-programs/housing-programs