If you've been finding it hard to choose a mortgage, you're not alone. Home loans…
Buying a home is an exciting endeavor. Whether you’re purchasing your first property or expanding your investment portfolio, one can’t help but feel a sense of accomplishment while obtaining a new property. It can also be costly. Unless you’re rolling around in a ton of money, you’ll need to get a home loan to finance your new home. Applying for mortgages can be nerve-wracking, especially for first-time homebuyers. That’s why borrowers need to do some research on various home loan options before signing the contract. The act of doing so can save you a lot of time and money. To help you better understand the world of home loans, this article will delve into what a home loan is and the different home loans available in the market.
What is a Home Loan?
A home loan, otherwise known as a mortgage, is a loan given by a financial institution such as a bank, credit union, or non-bank lending entity to purchase a home. The cash for home payment is lent to the borrower according to the agreed interest rate. The interest rate for mortgages would depend on what kind you apply for. There are adjustable rate mortgages and also fixed rate types of mortgages. Under the former, the interest rate for your monthly payment is subject to change according to the market. In the case of a fixed-rate mortgage, the interest rate remains the same throughout the loan’s entire life.
In a home mortgage, the borrower or homebuyer transfers the property’s title to the lender. This is under the condition that the title will be returned to the owner once the final payment has been made and all other terms of the mortgage have been met as agreed. A home loan is the most common type of debt, and it is also the most recommended. Home loans are considered secured debt, and there is an asset that backs up the loan. Before you apply for a loan, you need to understand the different refinance options. This will help you make the best decision for you to afford the home you’re qualified for, given its purchase price. It will also help determine what kind of payment scheme is within your reach.
- Conventional loans are the type of loans that are not guaranteed or insured by the Federal U.S department. These usually come in the form of fixed-rate mortgages or a loan with a fixed interest rate for the entire tenure of the loan. This means that homebuyers will have to pay a fixed-rate mortgage from beginning to end.
- To qualify for a conventional mortgage, there are a lot of strict requirements. You need to present a good credit score, make a hefty downpayment, and lower income-to-debt ratio. There is also a potential for a private mortgage insurance requirement.
- Conventional loans are defined as either conforming or non-conforming loans. In the case of a conforming loan, they comply with guidelines set by government-sponsored entities such as Freddie Mac and Fannie Mae. These lenders usually buy and package these loans and then sell them as securities on the secondary market. Loans sold on the secondary market must meet a specific set of guidelines for them to be classified as conforming loans.
- As of 2021, the conforming loan limit for a conventional mortgage is $548,250. However, loan limits are higher in designated high-cost areas. A loan made above this amount is referred to as a jumbo loan, which usually carries a higher interest rate. These loans entail more risk as they involve a higher loan amount, making them less enticing to the secondary market.
- In non-conforming loans, the portfolio lender or the lending institution underwriting the loan sets the guidelines for payments and like. In turn, non-conforming loans cannot be sold on the secondary market.
Federal Housing Administration (FHA) Loans
- The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), provides different mortgage loan programs for Americans. An FHA loan has lower down payment requirements. It has more detailed requirements than a conventional loan, which is why it is recommended to look into government loan programs before turning to traditional loans. If your credit score qualifies you for a conventional loan, you surely qualify for an FHA loan.
- This popular loan was established for more individuals to qualify purchase of a property. Most FHA loans are for people who would not usually afford financing plans under conventional loans.
- The FHA doesn’t provide the money for this type of loan. However, this institution guarantees the loan. In a way, the U.S department just makes sure all payments are made for an FHA loan. The bank or lending company serves as the mortgage lender for your monthly expenses.
- FHA loans are recommended for first-time homebuyers for a lot of reasons. In addition to having lower upfront loan costs and less strict credit requirements, you can even make a down payment for as low as 3.5 percent.
- It should be noted that all FHA borrowers are required to pay a mortgage insurance premium, which rolls into their monthly mortgage payments. Essentially, mortgage insurance is an insurance policy that shields the titleholder or lender if the borrower or the home buyer does not make monthly payments or is unable to meet the obligations of the mortgage agreement.
U.S. Department of Veterans Affairs (VA) Loans
- A VA Loan is a loan made possible through a U.S Department of Veterans Affairs or VA program. The VA sets the qualifying standards, determines the terms of the mortgage offered and guarantees a portion of the loan itself. However, the U.S. Department of Veterans Affairs does not finance the loan payment. VA home loans are provided by financial institutions such as banks and non-banking lenders.
- VA loans are usually easier to qualify for than conventional loans. Lenders, however, limit the maximum amount for VA loans as opposed to traditional loan limits. Before you apply for this type of loan, you need to request eligibility from the federal government. Only active service members, veterans, and surviving spouses of American veterans are qualified for this type of loan. Once you’re deemed eligible, you need to secure a certificate of eligibility. You need to present this to the lender during the process of the loan application.
- VA loans are not just for first-time homebuyers, though. The VA offers mortgages to help qualified families buy, build, repair, or adapt a home for their occupancy. This means you can purchase an old house with a VA loan. In addition to this, these loans can be reused and transferred to another qualified person.
- The terms of VA loans are pretty generous as opposed to other types of mortgage loans. Under this loan program, there is no need for a down payment unless required by the lender. It has no private mortgage insurance premium requirement, which means fewer payments for the buyers. Closing costs or payments are limited and may even be paid by the seller. Financial assistance is also available under this program for buyers to avoid payment default.
Finding the Best House Loans
Once you understand the general principles of different types of loans, you’ll better understand what kind you’re qualified to give your credit score, income, and other requirements to purchase a home. Before you apply for any type of loan, you need to take some time to analyze your financing situation. What kind of purchase price can you afford, given your income? What realistic payment amount are you qualified to pay for, given all your streams of income? While there’s nothing wrong with aspiring for the house of your dreams, you need to determine what kind of house you can pay for.
Aside from banks, you can turn to non-bank lending institutions such as Home Lending Pal. What’s great about companies like this is that they have many online tools for you to determine what home you can afford given the cash you have on hand, mortgages you’re qualified for, variable rate loans, aka monthly payment schemes, closing costs, and the like. In a way, you can canvass your different mortgage rates given other plans offered by the said company. You can even make payments for your home online. Whether you’re a single-family looking for your first home or a home investment looking for affordable mortgages, lower monthly payments, and the like, this kind of institution would be a great partner in making payment for your future home. Owning your own home requires a lot of cash, yes, but through a lending arm like Home Lending Pal, the dream of being a homeowner is within reach.