When it comes to purchasing a home, there are several ways to go about it. Whether you plan to finance your dream property with a home loan or pay cold hard cash, there are a few things to know beforehand.
There are probably more types of home loans available to you than you think. So have a seat, grab yourself a cup of coffee and let’s get into it.
Conventional Mortgage Loan
Probably one of the most commonly heard types of financing is a conventional loan.
These home loans will be backed by either a bank, credit union, or mortgage lending company.
Conventional loans typically require at least a 3% down payment at closing, however, the typical amount most home-buyers put down is 20%.
These loans are broken down into either a 15, 20, or 30-year term, and interest rates can be both adjustable or fixed.
One of the biggest factors in qualifying for a conventional loan is your current credit score. Although the exact number will vary lender-to-lender, the range is somewhere between 620-660. Your credit score can have an impact on your interest rate, so the higher the better.
One form of a government-backed home loan is the FHA loan. This type of loan doesn’t require as high of a credit score, nor does it have as high of a down payment requirement. These options make FHA loans a great option for first-time home buyers.
Another perk of an FHA loan is that the closing costs, which typically run you about three percent of your total loan amount, can be rolled into your loan.
This is a huge benefit, considering the closing costs are paid on top of your down payment. This can add up to quite a bit out of pocket, so if you don’t necessarily have a huge amount of money saved, this is something to look into.
One of the biggest downsides of an FHA loan is the property qualifications. The property being bought must be your main residence, it must pass an appraisal by an FHA-approved appraiser, you must move into the property within 60 days of closing, and it must meet certain property standards during the inspection.
The inspector will look for red flags as far as safety goes including any missing or damaged handrails on staircases, chipped paint, asbestos, working home systems and appliances, and a good roof and foundation.
The bottom line – you won’t be able to use an FHA loan for a fixer-upper…
FHA 203 K
…or can you? If you are working with a knowledgeable lender, they may suggest an FHA 203K. This particular home loan requires even more work on the part of the home buyer, but it can be very beneficial for some.
The 203K loan allows homebuyers to finance the purchase as well as the cost to fix it up to required safety standards.
This loan requires the applicant to line up contractors and collect bids prior to receiving final approval for the loan. This means lots of advance planning! Safety hazards will need to be addressed first, followed by cosmetic upgrades if allowed by the budget.
Once everything is approved and the sale closes, there is a certain timeline that the projects must be completed. An appraisal will be done both before and after the improvements to ensure the money is going where you said it would.
Veteran’s Assistant Loans, or VA Loans, are specifically for members of the military community or their beneficiaries. These home loans do not require a down payment, have competitive interest rates and limited closing costs, do not require private mortgage insurance, and you can use them multiple times.
There are a few stipulations that go along with the purchase of a home with a VA loan. Although the loans can be used for most property types, you may have to shop around with different lenders depending on the home you are trying to purchase; not every VA lender will support the purchase of a condominium or manufactured home. And just like with an FHA loan, you must make the property you are purchasing your primary residence within 60 days of closing.
Credit score requirements will vary from lender to lender, as the VA does not have a particular number in order to qualify for the loan. While you’re shopping around for the right lender, ask about the down-payment requirement as well. This will vary depending on the lending company you use, so if you are looking for a 0% down payment (it’s a thing!), then be sure to ask that question upfront.
USDA loans are another type of government-backed home loan that is great for buyers with little-to-no down payment. There are, however, some specific parameters that the home buyer and the property must meet to qualify. There are certain income limits for the household that will vary depending on location and household size. The credit score requirements are typically lower, however, those with a higher credit score may experience a quicker process.
Perhaps the biggest factor that plays a role in being approved for the USDA loan type is location. The desired property must be located in a rural area – this means an area with a population of fewer than 20,000 people.
Homes being purchased with a USDA loan must also meet certain safety standards: they cannot be land-locked or inaccessible, all home systems (HVAC, electric, etc.) must be in working order, the home must be structurally sound with a quality foundation, roofing must be free from holes or leaks, plumbing and clean water must be easily accessible, and all doors and windows must be functioning.
If you come across a home that doesn’t meet these qualifications, there are some lenders that may still be able to work with you. Just know the renovation costs cannot be more than 10% of your loan amount.
Construction loans are a great option if you can’t find the perfect home on the market, however, they do require more work upfront. Along with a stricter timeline and generally higher interest rates, these home loans require a detailed timeline, construction plans, as well as a working budget.
As you are building the home or making improvements to an existing structure, you will submit receipts and invoices to the lender and they will pay you back as you go. During this time, an inspector or appraiser may also come out to ensure the project is being completed as you say it is and that it is on schedule.
In order to qualify for a construction loan, you will need to have a relatively high credit score and proof that you can and will repay the loan. There is also little-to-no leverage on the down payment, so you should plan on the standard 10 – 20% payment before closing costs.
If you happen to have the cash on hand to buy a home outright, then go for it! This is the easiest and quickest way to close on a home, and there are significantly fewer hurdles to jump.
If you pay cash, you’ll save money over time because you won’t be making interest payments and you won’t have lender fees tacked to your closing costs. Going the cash route also looks more attractive to many sellers because there isn’t the worry of a buyer not qualifying for financing. If title work is simple, it can also mean a quicker closing because there is no lending process.
Another perk to paying cold, hard cash? You can buy literally any type of property you want. Not every loan qualifies for land or different types of housing, so if you have the money in the bank, you are free to do as you please.
The downside to paying cash? Not everyone feels comfortable tying up such a large sum of money in real estate. So while you may have the money to pay cash, it may bring you more peace of mind to finance the purchase and pay it off when you feel comfortable.
There Is A Home Loan For Everyone
Regardless of where you stand, there is probably a home loan out there perfectly suited for your financial situation and needs. Obtaining financing is a crucial part of the home-buying process, but it can also be the most daunting.
Set yourself up with a knowledgeable Realtor that can help you through the beginning stages. Securing financing ahead of time will put you on the fast track to homeownership!