Finding the Right Fit: Purchase Loan Options
Summary: Borrowers in the market to purchase a home have a vast number of loan options for all their financial needs. From a wide range of loan types like conventional, jumbo, FHA, VA, and USDA to loan terms such as adjustable-rate, fixed-rate, and flex term, purchasing power is at the buyer’s fingertips now more than ever.
Purchasing a home is an exciting investment and a monumental step towards financial confidence. A pool of scenarios produces different loan types for different borrower’s needs.
There are three types of loan terms: fixed-rate loans, adjustable-rate loans, and a flex term. Being aware of the loan terms and having a preference can make choosing a loan type simpler down the road.
- Fixed-Rate Loans
- Fixed-rate loans have set interest rates over the life of the loan. The locked in interest rate on the closing disclosure does not adapt or change based on the housing market. Fixed-rate loans are great for borrowers who see themselves residing in the home for five or more years and want the same payment throughout the entirety of the loan. The only situation that can alter the payments is if homeowners’ insurance or taxes fluctuates.
- Adjustable-Rate Loans
- Adjustable-rate loans have changing interest rates. The interest rate locked during the closing disclosure is fixed for a designated time—this time is decided and agreed upon by both the borrower and mortgage lender. Once the designated period is over, the interest will periodically reset to the market’s value. Adjustable-rate loans are great for borrowers who do not plan to stay in the home for a long time.
- Flex Term Loan
- A flex term mortgage allows borrowers to customize the length of their loan, between 8 to 30 years, with a fixed interest rate. Borrowers can use a flex term mortgage on FHA, VA, and all conventional loans. The flex term, however, is not available on jumbo loans.
- Flex terms offer borrowers more flexibility and control; they are great for borrowers eyeing loan limits beyond the traditional 15-year and 30-year terms.
There are a variety of loan options to fit all types of borrower’s needs.
- Conventional Loans
- There are two forms of conventional loans: conforming and non-conforming. Conforming loans follow a set of guidelines regulated by the Federal Housing Finance Agency (FHFA) such as credit score, range of debt, size of the loan, and more. Non-conforming loans do not follow such guidelines or standards set by the FHFA.
- Regardless of the loan being conforming or nonconforming, conventional loans can be used on a primary, secondary, or an investment property purchase. There are certain requirements conventional loan applicants need to meet like a debt-to-income ratio (DTI) of 43% or lower. Click here to learn more about the steps, qualifications, and benefits of a conventional loan.
- Jumbo Loans
- A jumbo loan is a form of a non-conforming conventional loan. Jumbo loans are non-conforming due to higher credit score, down payment, and debt-to-income ratio (DTI) requirements. Jumbo loan applicants need a credit score of at least 700, a DTI ratio of 45% or lower, a down payment between 10 – 20%, and significant assets either in cash or in saving accounts.
- Jumbo loans are great for borrowers wishing to purchase a home beyond the price range of conforming loan limits. Click here to dig deeper into the world of jumbo loans.
- ARM Loans
- An ARM (Adjustable-Rate Mortgage) is a loan option with a set interest rate for a fixed period. Once the fixed period is over, the interest rate will periodically reset to the current rates. Borrowers can set the starter period (when the interest rate is fixed) to three, five, seven, or ten years. The starter period term is chosen and agreed upon by both the borrower and mortgage lender. An ARM loan may not fit certain borrower’s mortgage agendas, but it is a great option for borrowers who see themselves in flexible life situations.
Government Based Loans
Government based loans are additional loan options available to borrowers. Each loan caters toward a set of diverse needs based on distinct qualifications and requirements.
- Federal Housing Administration (FHA)
- FHA loans are government-supported loans backed by the Federal Housing Administration and used on primary home purchases only. The loan expands homeownership by giving homebuyers more flexibility with lower credit limits and higher debt-to-income ratios—allowing homebuyers to become homeowners while staying within their means.
- Depending on the mortgage lender, most borrowers can put as little as 3.5% down on the home with a credit score of 580. If the credit score is lower than 500, borrowers may be eligible for an FHA loan but with a 10% down payment. Due to the low credit score requirement and smaller down payment contributions, FHA loans require two mortgage insurance premiums: one paid upfront, and the other paid annually for the life of the loan. The loan program also places a limit on the loan amount. Click here to read more about FHA loans.
- Veterans Affairs (VA)
- VA loans are backed by the U.S Department of Veterans Affairs, and are available to current military members, veterans, and qualifying surviving spouses. The program provides no down payment, no private mortgage insurance, no prepayment penalties, and low-interest mortgages to qualifying members.
- To qualify, applicants need a certificate of eligibility (COE) before they can start the loan process. The COE has a list of qualifying requirements detailing eligibility conditions. Applicants can apply for a COE or have their mortgage lenders apply on their behalf. To learn more about the requirements, qualifications, and benefits of VA loans, click here.
- A USDA home loan is backed by the United States Department of Agriculture. The home loan helps moderate to low-income borrowers purchase homes. The loan is designed to both expand homeownership and improve the quality of life in rural America. Areas with a population of 20,000 or less—35,000 or less in special cases—qualify as rural areas.
- To receive a USDA home loan, the home must be in a USDA-eligible area and the borrower must meet certain income limits. Once the borrower meets income requirements, locates a home in an eligible district, and fulfills the additional qualifications set by the mortgage lender, they can finance up to 100% of the home loan.
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