The Different Types of Real Estate Loans Available to Home Buyers
A real estate loan, also know as a mortgage, helps you finance a house. Here are the different types of real estate loans available to home buyers.
Who can afford to pay cash for a house?
Though there are some benefits to paying cash for your home, the reality is that few people can afford to. Real estate is quite expensive. Depending on where you live, even a modest home could be worth half a million dollars!
Not many Americans have that kind of cash stuffed under the mattress.
This is why many buyers, especially first-time buyers, take out a loan to make the purchase. There are many types of real estate loans so buyers have plenty of options. Let's learn about some of the most common ones.
Fixed-Rate vs Adjustable-Rate
First, you'll want to decide whether you want to take out a fixed-rate or adjustable-rate loan.
A fixed-rate loan has one interest rate that you'll pay for the life of the loan, either 15 or 30 years in most cases. The big benefit is dependability. Your mortgage payment will stay the same month in and month out.
An adjustable-rate loan works like a fixed-rate for a predetermined amount of time, usually 5 or 10 years. After that, the interest rate will adjust (usually yearly) according to market conditions. That means your rate could go up — or it could go down, causing your monthly payments to go up or down.
Adjustable-rates typically start out with a lower interest rate than fixed-rate loans. Thus, if you don't plan to live in the house for many years, an adjustable-rate mortgage can be a good way to save money.
But if your plans change and you end up staying after the fixed-rate period has ended, be prepared for changes in your monthly payment.
It used to be that conventional loans required a 20% down payment from the buyer. Now there are some conventional loan products that allow for a downpayment as low as 3%.
However, if you put down less than 20% you'll have to pay mortgage insurance. The good news is that this insurance drops off automatically once you reach a 78% loan-to-value ratio.
Conventional loans can be harder to get for those who don't have a solid credit score. If your score is lower than 620, it's unlikely you'll qualify. However, those who have good credit scores can save on the loan as the higher your score, the lower the rate you'll qualify for.
FHA loans help buyers purchase a home when they have neither a large down payment nor a good credit score. The loan is backed by the government, which reduces a lender's losses if you default.
You can pay as little as 3.5% down with a credit score of 580 or higher. If your score is lower (500 or higher) you may still qualify with 10% down.
If you put down less than 10%, you'll have to pay mortgage insurance. Unlike conventional loans, this doesn't drop off. You'll have to pay it for the life of the loan or refinance somewhere down the road.
Can a VA home loan benefit you? It's possible!
VA home loans are an excellent option for anyone who is active military, in the reserves, or is a military veteran. These government-backed loans allow for 0% down and don't even require you to pay mortgage insurance, though you do have to pay an upfront funding fee. Credit requirements are fairly lenient and the interest rates are low.
However, they can only be used for purchasing a primary residence. They also can take a few extra days to close, which can be a disadvantage if there are several offers on the table. The seller may choose an offer that can close faster.
The USDA does more than just inspect meat, they also offer home loans in rural areas to people with moderate income. Moderate income is defined as either 115% of the U.S. median family income or 115% of the state's non-metro family income median or state-wide median, whichever is greater.
If there are more than 4 people living in the home, the income limit jumps to a higher level.
USDA loans also offer 0% down, but you will have to pay mortgage insurance. The interest rate is quite competitive, but you'll need at least a credit score of 620 (640 or higher is preferred) to qualify.
This loan is limited to single-family homes no larger than 2,000 square feet.
Fannie Mae and Freddie Mac are two government-controlled financial entities. They fund loans by buying them from lenders and then selling them to investors on Wall Street.
Larger loans represent a higher risk. Thus, these corporations have set a limit to the loan value they will purchase. The limit varies depending on the market but can range from just over $500,000 to over $750,000.
What if you need a larger loan? Enter the jumbo loan.
Jumbo loan requirements can vary from lender to lender as they have more discretion with these high-risk loans. Generally, you'll have to provide a higher down payment, sometimes 25% or even 30%.
You'll also need to have a good credit score although, again, these lenders have more discretion. This means that your lender may be more willing to accept alternate factors such as a higher income or large assets to augment your credit profile.
Many Types of Real Estate Loans
You need a loan to buy a home? That's okay, most people do. The good news is that there are many types of real estate loans available. If one lender turns you down, move on to the next one.
As long as you have some kind of positive financial profile, it's likely you'll find a loan product that will work for you. Or at least a lender willing to work with you.
Looking for more real estate tips and advice? Check out more posts on our blog! With a little hard work and determination, you'll have the home of your dreams before you know it!