What Type of Home Loan is Right for Me
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Whether you’re a first-time homebuyer or looking to sell your house and buy a new one, you’ll come across many different types of mortgage loans. Understanding the most common types of home loans can help you decide which option is best for you so you can finally purchase the home of your dreams. Not everyone is eligible for every type of home loan, and the loan you choose will depend on a variety of factors, including credit score, debt, income, and down payment. Here’s how to decide which home loan is right for you.
Learn About the Common Loans
Whether you want to buy a rental property to become a landlord or you’re looking for a new primary residence, you’ll likely need to take out a loan. If you want to become a landlord, you might look into multifamily properties, such as apartment buildings, but you’ll also need to factor in the other financial obligations, such as taxes, insurance, and marketing. If you’re buying your primary residence, you’ll need to factor in your personal expenses. Here are the common types of home loans.
Conventional loans are the most common type of home loan. If you have a stable income and a good or better credit score, your lender will check to see if you qualify for a conventional loan first. Conventional loans come from private lenders like a mortgage company or bank, and it’s not backed by the government. Conventional loans typically require a good credit score and a large down payment, typically around 20% of the value of the home.
Conventional loans are best for people with good credit who can afford a large down payment. They also come with low-interest rates and a less complicated process.
FHA Loans are a great choice for first-time homebuyers because they have more flexible requirements. FHA loans are insured by the Federal Housing Administration, which can help you qualify for a home loan you may not have been able to get. However, not all FHA applicants are approved, even though they may qualify for a 3.5% down payment. While FHA loans can be a good option to help you break into the market, they’re typically more expensive in the long run. Additionally, you’ll be expected to pay mortgage insurance if you decide to put less than 20% down on the home.
VA loans are insured by the U.S. Department of Veterans Affairs and have flexible requirements for veterans and their surviving spouses. Even with help from the government, you’ll still need to meet the lender’s standards to be eligible. While there’s no set minimum credit requirement, lenders will look at your finances to ensure you can repay the loan.
These are just three of the most common types of home loans. Depending on your situation, you may qualify for another type of loan, such as a bank statement loan. If you’re not sure which loan is right for you, talk to a lender who may be able to point you in the right direction.
Figure Out How Much You Can Afford
There’s no use applying for a home loan if you can’t afford to buy a home. Homes are large, six-figure purchases at the very least, so you need to know how much you can afford based on your current debt obligations, income, and savings for a down payment. You can find a simple calculator online that can determine how much house you can afford. If you have a good or better credit score, lenders will give you a better interest rate, and you can typically afford to spend more on the house.
Figuring out how much you can afford will not only impact your ability to get a loan, but it may impact which loan or loans you’re eligible for. For example, if you’re self-employed, getting a conventional home loan can be difficult. Because you write off expenses on your tax returns, your taxable income is much lower than how much money you’re really bringing in. Additionally, lenders might view you as a higher-risk borrower because you don’t have what they consider a steady income.
The amount you have saved for a downpayment can also impact what type of loan you can get. For example, many conventional loan options allow you to put less than 20% down. However, you can expect to pay mortgage insurance, which will increase your monthly mortgage bill by at least a few hundred dollars.
Other circumstances will affect your loan options. For example, veterans may be eligible for a VA loan that requires no down payment, while first-time homebuyers can be eligible for the FHA loan.
Understand Interest Rates
How much you pay to borrow money for a home is called the interest rate. Knowing how interest rates work can help you choose the right loan for you. Interest rates change throughout the day, but you can lock in your loan’s rate when you apply and are approved for a home loan. You can also let the interest rate move around with the market and adjust once per year.
A fixed-rate mortgage loan may start higher than an adjustable-rate mortgage (ARM) loan. However, a low ARM rate resets every year after the first three, five, seven, or ten, depending on the terms of your loan. These rates can be higher or lower, making predicting your monthly payment more difficult.
If you plan to stay in the home for many years, it might be best to get a fixed-rate mortgage so you’ll know how much your mortgage will cost you every month for the life of the loan. However, if you plan to move or pay off the mortgage before the rate expires, an ARM could be a good option.
What Type of Home Loan is Right for Me
Not everyone will qualify for every type of loan, so a lender can help you understand what your options are after you apply for loan pre-approval. To get pre-approval, you’ll apply to your preferred lender, and they’ll give you an estimate of how much house you can afford, along with the type of loan that works best for you. If you’re not ready to take that step, though, you can still talk to a mortgage lender about what your options are based on your unique circumstances.
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Julia Olivas graduated from San Francisco State University with her B.A. in Communication Studies. She is a contributing writer at 365businesstips.com where she loves sharing her passion for digital marketing and content creation. Outside of writing, she loves cooking, reading, making art, and her pup Ruby.
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