Whether you’re a first-time homebuyer or looking for a new place to call home, exploring home financing options can seem a bit confusing. Taking time to research the fundamentals of home loans can save you time and money. You’ll also feel more prepared when you speak with lending professionals. Let’s look at some home loan basics and which is the best option for you to finance a new home.
Getting preapproved for a home loan is an important first step in the home buying process. A preapproval demonstrates that you are financially capable of borrowing money for a home up to a specific dollar amount. It also shows real estate agents, home sellers, and new home builders that you are a serious potential buyer.
A home financing center will consider your assets, income, and debt to determine whether you qualify for a home loan and for how much of a loan you can qualify for. A three-bureau credit report is generated that details your credit history. When you are preapproved and know how much you can afford to borrow, you can focus exclusively on houses in your price range.
When you know how much you can comfortably pay for a home, you can consider the different types of home financing options. A conventional loan is any type of homebuyer loan that is not offered or secured by a government entity. Conventional loans are available through private lenders, including banks, credit unions, and mortgage companies. In some states, the loan instrument may be called a deed of trust, which is similar in most aspects to a mortgage.
If you can afford to put a 20% down payment on a new home, a conventional loan for paying the balance may be right for you. It can save you a lot of money by not requiring you to pay mortgage insurance on the borrowed money.
The U.S. Department of Housing and Urban Development offers FHA loans that are designed to help first-time home buyers purchase homes. FHA loans let qualifying home buyers make as little as a 3.5% down payment on a home. Plus, you may be able to qualify for an FHA even if your credit history is imperfect.
The U.S Department of Veterans Affairs guarantees VA loans to those who serve or have served in the U.S. armed forces. VA loans require no down payment and no monthly mortgage insurance.
The U.S Department of Agriculture offers USDA rural loans that don’t require a down payment. However, USDA loans are limited to designated areas with relatively small populations. Unlike VA loans, USDA rural loans have monthly mortgage insurance requirements.
Home builders and developers may offer attractive financing incentives and buying opportunities. Plus, their interest rates are often below those of traditional financing centers. They may offer incentives such as first-year mortgage payments, up to 95% financing, deferred mortgage payments, payment of closing costs, and cash incentives.
There are also construction loans available to those who are building a home themselves as a general contractor or working with a custom home builder. Construction loans provide short-term funds designed to financially help you through the building stage. The loan is then converted into a long-term loan.
Check into home loans that may be offered by your state, local government, or other organization. Most states offer 100% to 103% financing, including closing costs with specific requirements. Some even waive the first-time homebuyer requirement when the house purchased is in a specific area. HUD offers information about state-specific requirements and programs.
There may be several home financing options available for your next home. Professionals can help you determine the best one for you.