Considering your financial situation and budget is the beginning step to looking at homes for purchase.
You’ll want to utilize a house payment calculator to figure out what you can afford. After that, seek out mortgage loans, of which there are many types.
Though the options may seem overwhelming, each can be easily defined so you can consider which is the right fit for you.
Conventional loans are best for buyers with good credit scores. These are not backed by the federal government and can be either conforming or non-conforming.
Conforming loans follow a set of standards put in place by the Federal Housing Finance Agency and include a range of factors about your credit and debt. These loan sizes can be quite large.
Non-conforming loans do not meet FHFA standards. Some are designed for buyers who have gone through major financial catastrophes such as bankruptcy.
These types of mortgages are great for consistency. They maintain the same interest rate over the life of your loan, which means your monthly mortgage payment stays the same.
The length of such loans typically comes in 15 or 30-year terms. If you plan on living in your house for at least 5 years, this could be the mortgage for you.
Some downsides to these loans are that you generally pay more interest with a longer-term loan, and these interest rates are usually higher than those on adjustable-rate mortgages.
ARMs are less stable, as the interest rates fluctuate with market conditions. The initial rate is fixed for a specified period, then adjusts periodically.
Initial low rates for these loans are appealing for home buyers and can result in saving money paid in interest over time. The uncertainty of changing payments, however, can be off-putting for those who prefer stable monthly payments in their budgets.
There are several types of loans that are backed by government entities.
A Federal Housing Administration (FHA) loan makes homeownership possible for borrowers who don’t have a large down payment saved up or don’t have stellar credit. Borrowers need a minimum a FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment.
A U.S. Department of Agriculture (USDA) loan helps moderate- to low-income borrowers buy homes in rural areas. No down payment is required on most properties, and home improvement loans and grants are also available.
A U.S. Department of Veterans Affairs (VA) loan provides flexible, low-interest mortgages for members of the military (both active duty and veterans) and their families. There is no down payment and mortgage insurance required. Closing costs are generally capped and may be paid by the seller.
Jumbo loans fall outside FHFA limits and are commonly available in higher-cost areas like Los Angeles, New York City, and other large metropolitan areas.
Since these loans offer such large amounts of money, it comes with more risk for the lender. Documentation for these loans is more in-depth.
They usually require a down payment of 10% or more, and a credit score of 700 or higher.