When buying a home, individuals need to know their loan options. The choice of mortgage can make or break a home purchase. What types of mortgage loans are offered today? Which should a person choose? The answer lies in understanding the options and determining which loan will best enable the person to achieve their dream of homeownership and build a solid financial future.
Before comparing loan types for buyers, it is essential to know your credit score. This number determines the interest rate they will receive on a loan. Lenders also look at the borrower’s debt-to-income (DTI) ratio and down payment. People who wish to buy a home should try to improve their credit score, increase the amount they have for a down payment, and lower their DTI to receive more favorable terms.
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Conventional Loans
Many people choose a conventional loan for their mortgage. The government doesn’t back conventional loans, so they require a higher credit score. However, these loans are more flexible, and interest rates are lower for people with good credit scores.
FHA Loans
FHA loans are popular among first-time homebuyers because the down payment requirements are more lenient. People may find that they can pay as little as 3.5 percent down with this type of loan. However, they must have a credit score of 580 or higher to receive this low down payment option.
VA Loans
Active-duty service members and veterans are eligible for VA loans. No down payment is required with these loans, and borrowers are not required to have mortgage insurance. The interest rates are competitive, and closing costs are limited.
USDA Rural Development Loans
Homebuyers with low or moderate incomes may qualify for a USDA home loan if they are buying in an eligible rural or suburban area. They can finance 100 percent of the home’s purchase price rather than making a down payment. The low interest rate and favorable terms make this an attractive option for individuals buying in a rural area.
Jumbo Loans
When a home’s asking price exceeds Fannie Mae and Freddie Mac’s conforming loan limits, the borrower must obtain a jumbo loan. To purchase one of these properties, the borrower must have a credit score of 700 or higher, and most lenders require a down payment of at least 20 percent. They also charge higher interest rates because they are assuming greater risk.
Interest-Only Mortgages
Homebuyers may consider an interest-only mortgage if they plan to live in the house for a short period or expect their income to increase significantly before the interest-only period ends. Most loans of this type allow the borrower to pay interest only for five to ten years before beginning principal payments. However, the loan balance remains unchanged during the interest-only period. The borrower could end up owning more than the home is worth.
Balloon Mortgages
A balloon mortgage is a financial product that allows individuals to lower their monthly payments over the loan’s term. When the loan comes due, typically in five to seven years, they must make a large lump-sum payment or refinance the loan. A person who plans to reinvest or sell during the five to seven-year period may choose this option.
Borrowers should consider all options to find the one that best fits their situation. A financial advisor may be able to assist in making this determination. Regardless of which product is selected, the borrower must ensure they can make payments as agreed. Doing so will help them build the strong financial future they desire.
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