The Different Types of Mortgage (And Which Is Right for You)
Home prices are skyrocketing across the country, yet mortgage interest rates are still very low. Inventory is limited, as few people look to sell right now. So competition is high and offers over asking price are common in many markets.
Is now a bad time to buy a house?
Many people think that the market is only going to continue rising. So if homeownership or new home purchase is in your plans for the next few years, now may be the best time.
There are different types of mortgage loans to consider, allowing almost anyone to buy a house, even in a competitive market. So even if you don’t have 20% to put down, you can still buy a home.
Want to know what the most common homebuyers loan options are? Keep reading below to see how you can acquire your dream home today.
When buying a home, most people use a conventional loan. These are the most basic type of mortgage loans available, offer the best interest rates, and have the tightest requirements for borrowers.
Traditionally, with conventional mortgages, you had to put 20% down to qualify. But today, you can get a conventional loan putting less than that down, often around 10%.
Most conventional loans are fixed-rate mortgages with a 30-year payment schedule. This keeps monthly payments relatively low, making it easy for most people to maintain homeownership over the long haul. Click for more information on conventional, 30-year mortgages.
But conventional loans are not flexible. Borrowers must fit into a strict set of requirements, or they won’t qualify.
This includes a good to great credit score. The better your score, the lower your interest rate. It also means having consistent employment.
Lenders will look at your last two years of tax returns to verify consistent employment and monthly income. Any discrepancies can cause issues.
Many self-employed individuals struggle to qualify for conventional mortgages. It’s not impossible, but you need to keep your finances organized, work in the same business for two years or more, and make a consistent profit. Even then, the requirements can be tricky to navigate, pushing business owners and the self-employed to other options.
VA home loans are one of the common government mortgage loan options. But the loan does not come from the government or the VA. Rather, the VA guarantees VA loans.
This guarantee gives lenders (banks, brokers, etc) reassurance when making a VA loan. If you can’t pay the loan back, the VA covers the lender so the lender doesn’t lose money.
This program is available to those currently serving, or who have completed military service. It’s also available to surviving spouses of veterans.
With a VA loan, there is no down payment requirement. And often, you can roll all or most of the closing costs into the loan as well, helping you get into a home without any cash upfront.
There’s no private mortgage insurance (PMI) which is common for any mortgage where borrowers put less than 20% down. And interest rates on VA loans are very low.
If you qualify, this is one of the best programs to take advantage of, even if you have money for a down payment.
Like the VA loan, the Federal Housing Administration (FHA) guarantees FHA mortgages. So regular lenders are able to offer these programs at low risk, as they are insured by the FHA.
This program acts as a first-time assistance loan. They are great for first-time homeowners as the credit score requirement are very flexible. And you can put as low as 3.5% down.
However, with FHA, you will need to pay PMI each month, until your equity exceeds 20%.
Housing selection with an FHA loan is a bit more strict. The program requires an FHA-certified inspector to inspect the property you are purchasing. If it isn’t up to spec, they won’t lend on the home. So fixer-upper properties usually won’t fly under the FHA program.
The programs above require clear, consistent employment over the past two years in order to qualify for a mortgage. But not everyone works a standard W-2 job these days.
More than 15 million Americans are self-employed, and they want to own a home too, so they can build their equity and long-term wealth. So many of them are turning to a bank statement loan.
These mortgages, offered by fewer lenders, don’t look at your tax returns. Tax returns are the enemy of the self-employed since they take every possible deduction that they can.
This lowers the amount of income that you have on paper, which is a red flag for conventional lenders.
With a bank statement loan, lenders look at your last 12 or 24 months of bank statements instead. They just want to see your incoming deposits, and don’t consider expenses or deductions taken.
You may have a slightly higher interest rate and a higher down payment requirement. But it’s worth it if it means getting a home versus not getting a home.
Other Financing Options
If you don’t qualify for a conventional mortgage, many times you can have a co-signer on the loan. A co-signer is someone with a higher income, or enough assets to qualify for the loan you need.
They won’t be listed on the title of the property. But if you fail to make payments, the co-signer will be liable to make them on your behalf.
Or you could try to find a home in which the seller would finance for you. You offer to make a small down payment and make mortgage payments with interest directly to them. It helps them to earn more over time since they are earning interest.
Types of Mortgage Loans That Are Right for You
If you can qualify for a conventional mortgage, these are the best options. Rates are lower and the loans are safer.
If you are a first-time homebuyer, FHA is often the best program, since your credit score might be low, and down payment requirements are low. If you’re self-employed, you should try both of these options first. If they don’t work, then go with the bank statement loan.
Becoming a Homeowner
It’s a good time to be a homebuyer. Not because of the competition and the rising home prices, but because of the different types of mortgage programs available.
Now, many more people can become homeowners. This is good for neighborhoods and cities, as homeowners will take more care of their property, raising the value of homes around them.
Looking for more homeownership tips? Head over to our blog now to keep reading.