About one-third of the people who purchase homes these days pay for them outright with cash. If you're in a position to do this the next time you go to buy a home, you're more than welcome to do it.
But not everyone has enough money stashed away in the bank to make an all-cash offer on a home. If you fall into this category, you'll need to learn how mortgages work.
More specifically, you'll need to spend some time educating yourself on the different types of mortgage loans. It'll enable you to sift through the home loans available to you so that you can decide which one will work best for you. It'll also help you get access to the best mortgage rates around.
If you're trying to figure out how to finance your home at the moment, we're going to break down some of the most common types of mortgage loans for you. Continue reading to get more information on these home-buying options so that you can choose the best one of the bunch.
Of all the different types of mortgage loans that we're going to discuss, conventional mortgages are the most common. As long as you're able to qualify for one, it's probably the type of mortgage loan that you'll want to take out when you're buying a house.
There are thousands of lenders that specialize in providing people with conventional mortgages today. They include big banks, small financial institutions, and everything in between.
To qualify for a conventional mortgage, you will usually need to have a credit score of at least 620, though you might want to try to get your credit score even higher than that to get access to the best mortgage rates. You'll also need to prepare to put down a 20% downpayment unless you want to have to pay for private mortgage insurance or PMI.
The big benefit of going with a conventional mortgage is that it's often going to allow you to get the lowest interest rates possible. You will, however, be able to choose between either a fixed-rate or an adjustable-rate mortgage, and it's going to impact the interest rate on your home loan.
Fixed-rate mortgages will keep the interest rate on your home loan the same throughout its duration of it. You will stick with this rate as you spend the next 15 or 30 years paying down your mortgage loan.
Adjustable-rate mortgages, on the other hand, have interest rates that will fluctuate over time. Your interest rate will stay the same for the first 5, 7, or 10 years in most cases before it changes to a new rate based on the market interest rates.
If you aren't able to qualify for a conventional loan or if you just want to see what some of your other options are as far as mortgage loans are concerned, you might want to consider government-backed mortgages. Lenders often view these types of mortgage loans as being less risky since they have a government agency standing behind them.
There are several different kinds of government-backed mortgage loans that you might be able to get approved for. Let's take a closer look at each one to see what they can offer you.
FHA loans are mortgage loans that are backed by the Federal Housing Administration. They're designed to help those with credit scores that are on the lower side to buy houses. You should be able to qualify for an FHA loan with a credit score that is as low as 580, and some lenders will provide FHA loans to those with credit scores even lower than that.
FHA loans are also great choices for those who can't afford to put down a 20% downpayment on a home. You can typically put down a downpayment that is as low as just 3% to secure an FHA loan.
The catch is that you might have to also accept a higher interest rate than you would otherwise. But if you know you won't be able to qualify for a conventional loan, this could be an excellent alternative.
USDA loans are mortgage loans that are backed by the United States Department of Agriculture. They tend to have even fewer requirements than FHA loans do.
You will need to meet some basic income requirements to qualify for a USDA loan. You will also need to agree to purchase a home that is located in either a suburban or urban area.
But the big advantage of trying to get a USDA loan is that you may be able to do it without putting down a single dollar as a downpayment. It makes USDA loans a great choice for those who don't have enough cash to make a sizeable downpayment.
VA loans are mortgage loans that are backed by the Department of Veterans Affairs. As you might imagine, they're only for those who can meet certain requirements after serving in the Armed Forces or National Guard.
If you served your country in any capacity, you might want to investigate these types of mortgage loans. They may put you in a position to get a mortgage loan with a lower interest rate than the rates you'll find on other home loans. They may also allow you to buy a home without putting down a downpayment on it.
Of all the different types of mortgage loans listed here, jumbo loans are the most difficult ones to qualify for. But there is a good reason for that. They're the types of loans you'll need to take out when buying a home that's on the more expensive side.
To secure a jumbo mortgage, you'll need to have a very high credit score and a low debt-to-income ratio. You'll also need to have significant assets and enough money to put down a 10 to 20% downpayment.
You won't have to worry about trying to get approved for a jumbo loan if you're buying, say, a $300,000 house. But if you have your sights set on buying a million-dollar home, you will want to look into jumbo loans and what they can do for you.
Most people need to take out mortgage loans to purchase houses. If you're one of these people, you should consider each of the options listed here and select the home loan that will work the best based on your credit history and your current financial situation.
Would you like to read more about taking out a mortgage versus buying a home with cash? Check out this article as well as some of the other articles posted on our blog.