Nearly 68% of Americans are homeowners.
Homeownership is one of life’s major achievements. It brings a sense of satisfaction, freedom, excitement, and prestige. On the downside, the process can be financially overwhelming, considering that the price of houses has been escalating over the years.
Luckily, you can always turn to the available home loans to secure the house of your dreams if you don’t have ready cash. This guide will discuss the general types of home loans that you may consider.
The information will help you know your options, depending on your preferences and current condition. Read them to make an informed choice.
Table of Contents
Veteran Affairs (VA) Loan
You can get a VA home loan if you are a veteran. The loans are meant for the active military personnel in the United States and the veterans. Spouses of veterans who got injured or died at the military work can also qualify for the loans.
VA loans are government-backed. This means that the government settles all the remaining mortgages if the borrower dies or fails to repay as agreed.
The application process is quite simple, but you must show all the military documents to prove that you are a veteran, military, or the spouse of a deceased military.
VA loans come in many types, and the exact option entirely depends on your needs. If you need to renovate a home, then a rehab and renovation loan would be the best. You may consider VA refinance or VA purchase mortgage if you need to buy a ready home.
No down payments are required for VA loans. Plus, the interest rates are quite favorable because of government backing.
Note that the interest rates vary according to the lender; you must compare to get the best rates.
Federal Housing Administration (FHA) Loans
The Federal Administration body insures FHA loans. The loans are a bit stricter than the VA loans because they require a down payment of 3.5% and a credit score of more than 580. If your score is less than that, you should make a down payment of more than 10%.
FHA loans are ideal for first time home buyers who have little savings. The loan limit ranges from $331,760 to $765,600, depending on the applicant’s legibility and the lender.
You can get an FHA home loan from a bank, credit union, or any other financial institution. The interest rates are low because the Federal Housing Administration insures them. Should an applicant default, FHA settles the amount.
The main types of FHA loans that you may consider include primary home mortgages loan, construction to permanent loan, and the rehab mortgage, which is great for renovation projects.
To apply for this loan, you must meet the minimum requirements listed at the FHA. You should also have a debt to income of less than 50%.
USDA Mortgage
The U.S. Department of Agriculture finances USDA home loans. The loans can be accessed in all parts of the country, although they are designed for people living in rural areas and who can’t access the conventional loans.
The loans do not require a down payment. Also, most lenders do not consider the credit score provided that you meet the other eligibility criteria.
Since the Department of Agriculture backs the loans, the interest rate is always low.
There’s no pre-payment penalty for these loans, and also, you may apply for the loan with a co-borrower. The repayment period can go up to 38 years, which is longer than the regular 30 years.
Convectional Loans (Fixed-Rate Mortgage Loans)
Conventional loans are the regular loans that are not backed by any government agency. They are offered by banks, credit unions, and other financial institutions.
Lenders consider these loans risky due to the lack of government backing, and that’s why the interest rates can be high. Most lenders might also ask for a 3%, or more, as down payment and credit score rating of more than 680.
One great thing about these loans is that you can get a very high amount. Also, the repayment period can extend to up to 30 years. If your score is less than 680, you must provide a larger down payment or provide collateral to back the loan.
Conventional loans are great for people of all professions. If you are a nurse, you can get a great nurse home loan if you meet the requirements.
Interest-Only Mortgage
The interest-only mortgage loans are great for aspiring homeowners on a tight budget. As the name implies, the loans allow the borrower to pay only for the first ten years.
During that period, you only pay for the small interest percentage calculated by your lender. After that, you can now pay the entire loan amount just like the other conventional loans.
This loan can help you if you expect your new/renovated home to bring you income, which you can then use to repay the loan. You may also agree to indemnify the full amount if you regain your financial stability quickly.
Adjustable Interest Rate Loans
A mortgage that does not have a fixed interest rate is known as the adjustable interest rate loan. The interest rate is subject to change depending on the economic fluctuations.
The loans are considered riskier because of the fluctuations. Also, planning might be hard because you don’t know the expected amount you pay every month. Nevertheless, the adjustable interest rates offer higher loan amounts, and that’s why the loans are popular.
There are many types of adjustable interest rates loans, but they can be broadly classified into two groups. The first one is fixed- hybrid loans whereby you can pay a fixed interest rate for a specified period before you start to pay the adjustable interest rate.
For instance, you can pay the same rate for the first ten years before the rate starts to change. The second option does not have a fixed rate, meaning that the rate varies from day one to repayment.
Review the Available Home Loans
There are many types of home loans, although the above are the main ones. Before you choose any, it’s advisable to understand the pros and cons of each.
You should also check the eligibility criteria, interest rate, mode of repayments, and so on. Remember that a house loan is long term commitment, and you should not make mistakes. You may hire a financial expert to help you in choosing the best if need be.
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