Several variables come into play when looking at the type of real estate loan that’s right for you on the path to homeownership. How long you plan to live in the house, where you live, how much of a down payment you have, and what your credit history looks like are just a few of these variables. There is no one-size-fits-all mortgage, so it’s essential to determine which type of real estate loan works best for you.
A conventional loan is not guaranteed or backed by any government agency. These types of loans usually have to meet the income and down payment requirements set forth by Freddie Mac and Fannie Mae. Conventional loans also observe loan limits determined by the Federal Housing Finance Administration (FHFA). These loans have a fixed interest rate and a fixed term, typically 10, 15, 20, or 30 years.
Typically a credit score of 620 is required to qualify for a conventional loan, and a score over 740 will get you better rates. A minimum down payment of 3% is required, and a larger down payment will equal a lower interest rate. A down payment of less than 20% will probably result in you having to carry mortgage insurance. There are two types of conventional loans:
- Conforming loans. Guidelines set up by Freddie Mac and Fannie Mae, such as the size of the loan, are followed by conforming loans. In 2021, the loan limit for a single-family home in the continental United States is $548,250. Alaska and Hawaii have a loan limit of $822,375.
- Non-conforming loans. A non-conforming loan does not follow the guidelines set by Freddie Mac and Fannie Mae. These guidelines that are not followed could include the loan limit, poor credit, or homes with a high loan-to-value ratio. Loans that ignore the loan limit are often referred to as jumbo loans. You can usually expect to have higher interest rates on non-conforming loans.
Adjustable Rate Mortgages (ARMs)
As suggested by the name, adjustable-rate mortgage loans have variable interest rates. These loans still have a fixed term, and the interest rate adjusts at a predetermined rate, anywhere from a month to ten years. You will pay the same interest rate for the predetermined term, and then it will adjust automatically once that term has been reached. Lower interest rates tend to go along with shorter adjustment periods. The initial interest rate is typically below the market rate of a conventional mortgage and can rise as time passes. Important terms to know about adjustable-rate mortgages:
- Adjustment frequency. Amount of time between adjustments to the interest rate.
- Adjustment indexes. The benchmark that the interest rate is tied to on an adjustable-rate mortgage.
- Margin. The rate you agree to pay at the signing that’s a certain percentage higher than the adjustment index.
- Caps. Limits on the interest rate increase during an adjustment period.
- Ceiling. Highest possible interest rate allowed for the adjustable-rate mortgage.
For a lower monthly payment, you may consider looking into an interest-only loan for your mortgage. These loans require you to pay the interest only on your mortgage for a set period, typically five or ten years. After that, you will begin to pay both interest and principal. Interest-only loans are often set up as 3/1, 5/1, 7/1, or 10/1 adjustable-rate mortgages. The first number is the number of years you will pay interest only, and the second number means that the interest rate then adjusts once a year based on a benchmark.
Interest-only loans utilize rate caps much like the traditional adjustable-rate mortgage. In addition, they also have lifetime caps, which are typically 5% above the initial rate. Once your interest-only time is up, your loan payment will be based on the new interest rate and the repayment of your principal over the remaining time on the loan.
Government Insured Loans
A government-insured loan reassures the lender by protecting them if the homeowner can’t repay the loan. Government-insured loans are issued by the United States Department of Agriculture (USDA), Department of Veterans Affairs (VA), or the Federal Housing Administration (FHA).
To qualify for a USDA loan, you must live in a rural, USDA-eligible area. These loans may or may not require a down payment based on your income level. Mortgage insurance on USDA loans is 1% plus a 0.35% annual fee added to your monthly payments.
Loans through the Department of Veterans Affairs are reserved for those who have served in the United States military. VA loans do not require a down payment or mortgage insurance. You must have served a minimum of 90 days during wartime, 180 days during peacetime, or six years in the reserves. The property must also be your primary residence and meet the VA’s minimum property requirements for you to qualify for a VA loan.
If you’re a prospective homeowner without the requisite 20% down payment, you may want to look at FHA loans. These loans don’t require a large down payment because the government backs them. You may be able to put down as little as 3.5% as a down payment on an FHA loan. The FHA provides fixed-rate mortgages for either 15 or 30 years, with a maximum loan amount of $417,000. Homeowners must pay mortgage insurance, which is typically about 1% of the cost of your loan.
If you’re looking to move into a new home yet still have a loan on your first home, a bridge loan may be just the help you need. Bridge loans are known as gap loans because they combine your new mortgage and your first mortgage into one loan. Once you sell your initial home, the loan will be refinanced after the first mortgage is paid off. Bridge loans are limited to 80% of the combined value of the two houses and available to homeowners with low debt-to-income ratios and excellent credit.
If you’re looking for a loan to finance your real estate purchase, reach out to the knowledgeable team at Titan Funding. We’d be happy to look at your options and discuss which real estate loan best fits your needs.