A few years ago, my spouse and I embarked on one of the most satisfying journeys of our life together. Nope. Not marriage. We were already a few years into that particular adventure at the time. Nope. Not kids. We weren’t ready for that just yet.
I’m talking about buying our first home.
We found the process to be very daunting and even when we were being reassured that everything was going smoothly, we felt intimidated and overwhelmed a lot of the time. And we weren’t alone. With nearly 30% of all buyers reporting the process to be more difficult than they originally thought, it’s likely you might feel the same way.
There are a lot of steps to buying a home and a lot of information to wrap your head around. This post is not intended to be a comprehensive start-to-finish guide on home buying. Rather, we want to get you familiarized with the different kinds of loans out there. Different loans suit different needs, so knowing what works best for you is a great starting point.
Mortgage Loan Types
Mortgage lenders offer a variety of products. What follows is a list along with short descriptions to help you better understand the basics of each one.
Conventional loans: These are the most common type you will find. Offered mostly by private lenders instead of being backed by government programs, they do have loan amount limits: for most counties, it is $647,200, but can be up to $970,800 in more pricey areas. If giving less than 20% down, homeowners’ insurance will likely be required.
Jumbo loans: If the property you are looking at exceeds the limits set by conventional loans, jumbo loans may be what you need. In order to qualify, good credit and a sizeable down payment will be required.
FHA loans: These are loans backed by the Federal Home Administration. They protect the lender in the event of a borrower default. If the homeowner stops making payments, the FHA will pay off the balance on the mortgage. Because of this backing, rates tend to be lower, and as little as a 3.5% down payment is accepted.
VA loans: If you are a service member, a veteran, or an eligible surviving spouse, the VA loan might be for you. With features like competitive rates, and no requirement for a down payment or private mortgage insurance, VA loans are quite possibly the best option out there for some. Keep in mind, that a VA funding fee is required.
USDA loans: This type of loan is geared toward low-income borrowers in rural and some suburban areas. Like the VA loan, this option has competitive rates and no down payment requirement. The credit score requirements for this are more flexible than its conventional counterpart and the monthly mortgage insurance is low.
Reverse loans: For homeowners 62 and up, a reverse mortgage may be a good option to convert a portion of their home equity into cash without having to sell. As long as they continue to live in the home, they don’t have to pay the loan back. However, there are certain caveats, such as maintaining the property in good condition and having homeowners insurance. This product can be a bit more complicated to navigate and eligible homeowners may want to look into a home equity loan instead since the concept is similar with different repayment rules.
Local loans: Local banks and credit unions can be an interesting option, since they tend to have existing relationships with other local entities, such as realtors, appraisers, contractors, etc. Because of this, they can be helpful in obtaining services for your home that are not directly related to your mortgage process.
As stated at the beginning of this post, the idea here is to get you familiar with some basic information. Hopefully, this gets you asking the right questions in order to find out what works best for you.
Once you know what type of loan you think will work best for you, it may be a good idea to look into comparisons of different lenders. Luckily there are plenty of resources out there to help you come to the best decision possible for you.
Buying a home can be stressful, but hopefully, now it will be a little easier. Take it from me, the end result is well worth it.