Financing your home can be tricky territory. If you’re a first-time home buyer, chances are you’ve never had to navigate different loan products before. You’ve got a lot of options, and it’s daunting. There’s a whole new language to learn and so many products on the market, you might not even know which questions you should be asking. A good question to start with is “What are the differences between my loan options?” We’ll get you started.
Guidelines for conforming loans are set by Fannie Mae and Freddie Mac, two of the major federal agencies. Conforming loans typically have more liberal qualifying guidelines, but the amount of loan you can get may be lower. The limits are determined yearly by the economy and home prices in the area you are trying to buy in.
If the loan you are looking for falls under the maximum limit that conforming loans allow, this might be a good choice for you. If the home you want exceeds that limit, you might want to consider a jumbo loan.
Sounds scary, but all it means is that the loans are for a higher amount than would be allowed under standard conforming loan terms. If you’re shopping for a high-end home, a jumbo loan may be necessary since the cost of the house will likely exceed the average cost in the area
Typically with a jumbo loan, higher down payments are required because you don’t pay private mortgage insurance. Qualifying for a jumbo loan is harder and will require applicants to have higher credit scores, more cash reserve and a lower debt to income ratio than for conforming loans.
FHA loans are insured by the Federal Housing Administration, a government agency within the U.S. Department of Housing and Urban Development (HUD). When you get this type of loan, you must pay private mortgage insurance (PMI) to protect the lender in case of default on the loan. Because they have insurance, lenders offer loans with lower interest rates and more flexible qualifications. FHA loans tend to be popular with first-time home buyers because they require lower down payments.
Different FHA lenders will have varying requirements and qualifications. Credit score is only one factor considered when deciding a borrower’s credit worthiness. Even if you have filed for bankruptcy, you may still qualify for an FHA loan. If you’re looking at an FHA loan, be sure you understand what stipulation and rules are involved.
Probably the most attractive loan option out there, VA loans are offered to a very restricted group of active servicemen and veterans of military service and their spouses. VA loans are guaranteed by the U.S. Department of Veterans affairs and often allow borrowers to get loans with favorable terms and often without a down payment.
Veterans Affairs does not make loans, but they will issue eligible veterans a certificate to present to lenders when applying for loans. If you’re a veteran or active in the service looking to buy a home for your personal use, VA loans may be the best option for you.
Each lender is going to have their own versions of these products, but keep in mind, they are likely to all be a little to a lot different. When looking for a mortgage, shop around. There are a lot of options. Don’t be intimidated; ask questions if you don’t understand something. When it comes to one of the largest purchases you’ll make in your life, be picky and only go with the product you are comfortable with and a lender you trust.
If you’re not sure where to start, your real estate agent should have suggestions for good places to start shopping; they work with a lot of different lenders and can get you pointed in the right direction.