By Jordan Woods
If you are thinking about buying a home, there are some things you should understand before starting the process.
- Having a good credit score dramatically increases your chances of getting approved for a mortgage and securing a lower interest rate.
- Depending on your credit score and the loan you qualify for, expect your down payment to fall between 3-20 percent. Bigger down payments mean lower monthly payments and lower up-front fees.
The Buying Process
You’ll most likely finance your home through a mortgage. With almost every mortgage possibility, you are required to make a down payment that varies in amount depending on what type of home loan you’re taking on. Also, to secure certain types of home loans with a lower down payment you will have to pay for mortgage insurance. This protects the lender due to the higher risk involved with lower down payment loans. Knowing the difference between the different loans will help you decided which loans fit your best criteria?
Conventional Mortgages
Conventional loans are not insured by the federal government. There are two types of conventional loans: conforming and non-conforming.
- Conforming loans:
- Loans where the maximum loan limits meet Freddie Mac or Fannie Mae guidelines.
- The maximum loan limit for one-unit properties is $484,350 for 2019.
- Non-conforming loans: Loans that conform to guidelines set by Fannie Mae or Freddie Mac.
- Interest rates tend to be higher on a non-conforming loan.
3.Jumbo Mortgages: A type of non-conforming loan with a loan amount that exceeds the maximum loan amount set by Fannie Mae and Freddie Mac ($484,350 for 2019)
- These loans often have higher credit score and down payment requirements
If you have good credit and reliable income, a Conventional Loan may be a great option for you.
Government-Insured Mortgages
The government backs loans offered by the Federal Housing Administration (FHA loans), The Department of Veterans Affairs (VA loans), and the Department of Agriculture (USDA loans)
- FHA loans:
- Low down payment requirement of 3.5%
- Lower credit score requirements makes qualifying easier
- Slight Flexibility with the income to debt ratio
- VA loans: Provide low interest rate mortgages for both active duty and discharged members of the U.S. Military.
- 100% financing, $0 down payment
- VA loans do not require additional monthly mortgage insurance payments.
- An up-front funding fee is required to be paid and may be financed as part of your loan.
- USDA loans: Assist borrowers in the middle class and lower tax brackets buy a home in a rural area.
- 100% financing, $0 down payment
- Property must be in an eligible rural area.
- Household income cannot exceed limits set by USDA.
If you’re looking for a lending solution that allows for lower down payments and has less stringent credit and income requirements, a government insured mortgage may be for you.
Fixed-rate mortgages vs. Variable rate mortgages
- With fixed-rate loans you pay the same amount of interest over the life of the loan, while with variable (also called adjustable) rate mortgages, the interest rate fluctuates based on market conditions.
- Adjustable rate mortgages often save you money with a lower locked in rate for the first few years, but you could end up making higher mortgages payments later on in the loan depending on the state of the market.
Securing the terms of your mortgage is the biggest piece of the puzzle but there are many other things to consider. One important thing to discuss is the subject of refinancing your home. Refinancing means replacing your current mortgage with a new mortgage. You can refinance to get a better interest rate or to cash-out on some of the equity in the home. Keep in mind that there are costs involved with a refinance and you will want to ensure the transaction will benefit your situation.
There are costs of home ownership that go beyond just your mortgage payment. They include:
- Property taxes
- Repairs and maintenance
- Utilities
- Homeowners Association fees that go towards maintaining the properties in your area (if applicable)
In addition to these costs, when deciding whether to rent or own you may want to reflect on the following:
- Home-ownership is a long-term financial commitment that will surely benefit you in the long run.
- The down payment cost on a home purchase vs upfront costs for a lease or rental home may be in the end very similar.
- Home values typically increase. The equity you build could provide a nest-egg for your future.
- The potential tax benefits that come along with having a mortgage are an add plus during tax season.
When deciding between buying a home or renting, buying a home over the longer term is more beneficial to you because you will build equity into the property, all other things being equal.
First Independence Bank, Member FDIC, Equal Housing Lender