You’ve decided it’s time to ditch the rental and buy your own home. Maybe you’re ready to upgrade to a larger home and expand your family or downsize for retirement. No matter your reasons for real estate investment, the road ahead may seem complicated and obscure. It doesn’t have to be. We’ll break down everything you need to know about your financing options so you can make the most educated decision. Before you know it, you’ll be at the closing table, getting the keys to the home of your dreams.
First step? Find a licensed Realtor who can help you navigate the home buying process. You’ll be glad you did.
Now is the Time to Buy a Home.
If you’ve been on the fence, trying to decide whether or not it’s the right time to purchase a home, now is the time to buy. Interest rates have been at historic lows for several years as America recovered from the Recession. Now, the Fed is raising interest rates in hopes of stimulating the economy. The longer you wait, the more you’ll pay in interest over the term of your mortgage. Your best bet is to lock in your interest rate now before they go up again.
Conventional Loans: Choosing a 30-Year or 15-Year Term.
Conventional home loans are the most popular route for most homebuyers. These loans are fixed-rate loans made through a mortgage lender. Your monthly payment will never increase or decrease (though fluctuations will occur in your overall payment thanks to insurance and taxes).
Conventional loans are not insured by the federal government, meaning buyers must meet stricter guidelines to qualify. Typically, you’ll need at least 20% of the home’s value as a down payment to be eligible for a conventional loan. It is possible to qualify if you have less than 20% down, but you’ll likely need to carry private mortgage insurance, an added fee to your monthly payment.
When choosing a conventional home loan, you’ll be able to decide on a term for the mortgage, typically 30 or 15 years, though some lenders offer 20-year, 10-year, and other options as well.
What’s the difference between 30-year and 15-year mortgages?
- In one word: Over the life of your loan, you’ll pay an incredible amount in interest. For instance, if you purchase a $300,000 home on a 30-year mortgage, put 20% down, and never pay extra towards your principal, you will have spent over $230,000 just in interest over the life of your mortgage. That same loan in a 15-year mortgage (which also offers a lower interest rate) will cost you $85,000 in interest over the life of the loan. You’ll have higher monthly payments, but you’ll save tens of thousands in the long run.
- While a 15-year mortgage will save you thousands in interest, a 30-year loan is the way to go if you’re looking for a lower monthly payment and a larger tax deduction.
FHA Loans for First-Time Homebuyers.
Many first-time buyers believe they need to have a large down payment before they can buy a home. If you have a credit score of about 580 or higher, you can qualify for an FHA loan with as little as 3.5% of the home’s value available as a down payment. (Lower credit scores may still be eligible for FHA loans with a higher down payment. Consult with a mortgage professional in your area).
FHA loans are insured and backed by the Federal Housing Administration (the FHA, thus the name). These loans are designed specifically for first-time homebuyers to make financing attainable. While they’re an excellent option for buyers who don’t have a high credit score or much of a down payment, keep in mind an FHA loan comes with steep mortgage protection insurance fees. Depending on your loan amortization schedule, these fees might cease over time depending on your specific lender’s program.
How to get FHA Approved:
- You’ll need to visit the FHA website to find an approved lender and apply for an FHA loan.
- Go over your finances. Typically, lenders will approve you for a monthly payment that is no more than 30% of your annual gross income. Your total overall debt is factored into this loan as well. If you have a lot of outstanding debt, consider paying this off before applying for an FHA loan.
- Check your credit score with a website or app that won’t impact your score. If your credit score is less than 580, you’ll need to have a higher down payment. Knowing exactly how much you need to put down will avoid any unwanted surprises.
The downside of FHA loans? They’re less attractive to sellers. If you find a home that has multiple offers, you’re less likely to win the bidding war. But don’t let that deter you from trying. Real estate is a worthwhile investment. Plus, the mortgage protection insurance makes for a steeper monthly payment. If you’re able to save up 20% for a down payment, you’ll be able to pursue a conventional loan without the burdens of mortgage protection insurance.
VA Home Loans
If you’ve served in the armed forces, you’re eligible for a 0% down VA Loan, insured by the Department of Veteran Affairs (VA).
Unlike an FHA loan, lower down payments do not require you to carry private mortgage insurance. You can put down as much or as little as you’d like towards your down payment without penalty. You may still be required to pay a VA funding fee, which can roll into your overall mortgage.
Another great benefit? You can qualify for a VA Loan even if you’ve used it before. You are allowed to use this benefit over and over again, making home buying a much simpler process for veterans.
What you need to know about VA Loans
- Being a veteran doesn’t automatically qualify you for a VA Loan. You must still meet specific service, credit, and earning requirements to qualify.
- Putting 0% down on a home means you’ll have a more substantial monthly payment. If you have money to put towards a down payment, it’s wise to do so and lower your overall monthly payment.
- While you can use this benefit multiple times, restrictions apply. Check with your local VA-approved lender for specific details.
Other Financing Options
Conventional, FHA, and VA loans are the most popular lending programs for homebuyers, but they’re not the only options out there. Here are a few others you might consider:
- Adjustable Rate Mortgages. Your rate starts lower than conventional loans but rises annually after a period of time (usually 5-10 years). This is a popular option for borrowers with poor credit or homebuyers who intend to move relatively soon.
- USDA Loans. USDA Rural Development Loans make homebuying easier for those living in rural communities. Restrictions apply, so talk to your lender or real estate agent for more information.
- Improvement Loans, also known as “K” loans, allow homebuyers to purchase and renovate a property that is currently in disrepair. There are lengthy requirements on this type of loan, so check with your lender.
Once you’ve decided which option is best for you, it’s time to get your financing in order. Check out several lenders, get recommendations from local real estate agents, and find a lender that works with your budget and your requests.
Next, it’s time to hire a licensed Realtor and get to work finding your perfect home.