Real Estate financing is continuing to change. With most property mortgages for residential locations often seeing long term commitments of 20 to 30 years, prospective purchasers truly need to be informed as to their capability to obtain a loan as well as their lending options. Loans are not all created equal as they vary in terms through different interest rates, upfront costs, rate terms (fixed or adjustable), and credit requirements, among other items. Just as you shop for a home, you should shop the market for the best residential mortgage.
Where you live, your planned occupancy timelines, money to spend today versus tomorrow, and other variables will assist in differentiating the right loan from the wrong loan. Choosing wisely will set a purchaser up for financial success for years. Choosing incorrectly can cost a seller financially and personally for years.
Most purchasers are aware of the standard conventional loan however many types of obtainable loans exist: Federal Housing Authority (FHA) loans, Veterans Affairs (VA) loans, fixed rate loans, adjustable rate loans, jumbo loans, and many more. Each difference involves a minor or major item such as down payment, fees paid, and interest.
The most common conventional loan is a fixed rate loan, which locks in a set interest rate at signing that will remaining for the life of the loan, regardless of if the loan is for a few years or thirty years. This avenue is popular as it provides a sense of security for buyers as they will know what they will pay day one for the entirety of the loan. This structure has become even more popular in today’s continually low rate environment. This loan is considered best for those with the intention to remain in their home for a long term commitment – the entirety of the loan term, or at least close to it.
Adjustable Rate Mortgages (ARM) offer lower upfront mortgages than a fixed rate mortgage, which is obtained through purchasers also taking on more risk as the interest rate will rise and fall in keeping with market conditions as time pass. If interest rates go up, the monthly rate goes up, and vice versa. This type of loan is typically obtained by owners with a shorter term mindset or those with credit issues as this loan is sometimes easier to obtain.
Typically, conventional loans require a 20% down payment structure, however, a variety of loan programs exist for those who look to obtain ownership but cannot access 20% of equity upfront. FHA loans are the mot popular of these loans. The loans are a fixed rate with down payment requirements as low as 3.5% for first time home buyers. Given that the lender is supposedly taking on more risk as the purchaser only has limited equity committed to the loan and the property, FHA lenders mitigate this risk by requiring purchasers to obtain mortgage insurance, which will be another monthly line item expense during a portion of all of the term of the loan term, depending on the specific loan. The FHA loans are all government backed, requiring more paperwork but more financially obtainable.
Veterans Affair (or VA) loans are an ideal alternative to conventional loans for veterans who meet certain time-served requirements. Application requirements are much more lax to support those who served our country. In addition, a qualifying veteran will have no down payment requirement.
United States Department of Agriculture (USDA) loans are another form of government backed loans which are designed for properties for families living in rural areas. Like the VA loan, the government will finance as much as 100% of the home price for USDA eligible homes. These homes are identified as eligible due to their location within certain geographic outlines determined by the USDA.
Another type of financing is driven by term and higher loan costs in exchange for lenders providing a riskier loan. These bridge loans, which are also known as gap financing, is an ideal option for these in unique situations such as acquiring a new home prior to selling an existing owned residence. These loans have a variety of structures, and can even uniquely allow a property owner / prospective purchaser to combine their current and new mortgage payments into one payment. Once the property is sold, the original mortgage will be paid off and refinanced.
Obtaining a second home location has a variety of lending options as well and all second homes are not considered the same in the eyes of a lending market. Specifically, rental homes are financed very differently from vacation homes. With any second home, financials are scrutinized much more significantly. To obtain a loan, all items ranging from credit score to debt to income ratios must be more favorable to the borrow. Generally the lending programs for this type of purchase are more often than not considered conventional. Non-conventional loan alternatives include leveraging the equity you have built in another home you own through a Cash-Out Refinance of that home or a Home Equity Line of Credit.
These options are the primary loan avenues for consideration, however in the event you have unusual circumstances such as being over 75, a widow, or anything else, our team of experts is here to point you in the right direction, allowing you to reach the home of your dreams while remaining financially responsible.