Buying a house is a big deal—and a big expense. Many Americans don’t have a casual $200,000 or more saved in their bank account to buy a home right on the spot. To afford a home, applying for a loan is the best way to finance a house. However, there are numerous loan types you can choose from. Each loan has different specifications, such as interest rates, FICO scores, and income requirements, which is why it’s important to know your options so you can choose a mortgage that meets your financial needs. Below, we outline 4 types of home loans you should consider when buying a new home!
1. Conventional Loan
A conventional loan or a conventional mortgage is a common option for many homebuyers. If you’re taking out a loan for a home and have a FICO score over 620, a conventional loan is a good option. With a conventional loan backed by Fannie Mae or Freddie Mac (two government agencies), you can put as low as 3 percent down on loans and can cancel your private mortgage insurance once you gain 20% equity.
Conventional loans are a good option for primary homes and secondary homes, or rentals as well. So, if you’re trying to dip your toes into the real estate market to buy rental homes, opt for a conventional loan that has lower borrowing costs than other mortgages, or consider getting a hard money loan. If you’re looking to invest in real estate, download the many real estate mobile apps to get started!
2. Reverse Mortgages
Are you over the age of 62 and looking to increase your cash flow? A reverse mortgage is a great way to stop monthly loan payments and actually get paid every month for your home. While a typical mortgage requires you to make monthly loan payments that build your equity, a reverse mortgage does the opposite.
This type of financial product converts the equity you have in your home into cash you can use for whatever you please. If you’re interested in this type of loan, use a reverse mortgage calculator to get an estimate on how much you’ll receive based on your age, home value, interest rates, and current mortgage. Reverse mortgages also help if you need to make expensive home repairs but have a more limited income due to retirement.
3. Jumbo Mortgage
If you’re following the housing market trends for millennials, you’ll notice many young Americans wanting to live close to cities. What does this mean? High demand areas will have more expensive homes. If you’re looking for a more expensive home, a jumbo mortgage is the way to go. A jumbo loan is a type of conventional loan but has non-conforming loan limits. Jumbo loans are a valuable option for those looking to live in high-cost areas, but require more documentation in order to get approved since more money is on the line. Need ways to save money for an expensive home? Use services that save money when you spend that rounds up transactions to the nearest dollar. These little payments will add up in the long run and help you get a cheaper loan!
4. Government-Issued Loan
The U.S. government has three major agencies that issue loans: The Federal Housing Administration (FHA), Veterans Affairs (VA), and U.S. Department of Agriculture (USDA). Each of these loans serves different purposes for different people. Here’s a breakdown of each type of government-backed loan:
FHA Loans: These loans are great for people who do not have a lot of money saved up to make a down payment. If you have a poor credit score, an FHA loan will help you get a mortgage so you can buy a home.
VA Loans: VA loans are low-interest mortgages for members of the U.S. military and their family. They do not require a down payment or private home insurance and are an extremely affordable option for veterans and active duty personnel to secure a home.
USDA Loans: USDA loans are mainly for those living in rural areas who are medium to low income and are looking to secure a home. To qualify for one of these loans, you must live in an approved USDA area and have a certain income level.
The Bottom Line
Overall, there are numerous loans you can choose from when buying a home. You can even decide on fixed-rate or adjustable-rate loans that either offers a set mortgage every month that makes financial planning easier or adjusts with market values over time. Whatever the case may be. Taking time to research different types of loans will help you secure a mortgage that meets your financial needs.