Can you imagine a world with just one type of cookie? Whether you’re a fan of chocolate chips, shortbread, peanut butter, graham crackers, sandwich cookies, wafers, or something more exotic, the sheer number of possibilities for tastes and textures is part of what makes a trip to the cookie aisle in a store such an interesting experience. While home loans won’t offer the same sort of sensory feast, they do come with a fair amount of diversity. If you’re thinking about buying a home, it’s worth taking a little time to learn about the types of home loans available to you.
Types of Home Loans
Homebuyers come in all shapes and sizes, so it makes sense that the loans that they use to purchase their home do too. Exploring the different types of home loans allows you to feel confident about your choices as you work with your lender to select the home loan that is the best fit for your circumstances and needs. What are your options? As with cookies, there are almost too many variations to contemplate, but learning about a few foundational types of home loans can get you started.
Conventional loans are suitably named. After all, this common loan type is widely offered by most lenders, so it’s hardly shocking or unusual. In fact, its defining characteristic is the lack of government backing. According to NerdWallet, a conventional loan is a loan that is issued by a private lender without any insurance or guarantee from a government loan program. Borrowers typically need a credit score of at least 620 to qualify for a conventional loan, but you’ll need a higher score to secure the best interest rates. Although you may be able to get a down payment as low as 3 percent, making a larger down payment might get you better terms.
Several government agencies have programs designed to help people become homeowners. While the approaches vary, they typically work by having the agencies set rules that allow lenders to make the loans insured in part by the government. This reduces the risk for the lender and allows them to extend favorable loans to borrowers they might otherwise be hesitant to work with. As Experian reports, there are several types of government-backed loans:
Whether you opt for a conventional or a government-backed loan, you can choose a fixed-rate loan. What is it? A fixed-rate loan is a loan that has a single interest rate for the entire life of the loan. As Realtor.com explains, this is the most common type of home loan, and it offers a welcome level of predictability. With this loan, borrowers know exactly what they’ll pay every month, so it’s easier to plan and budget.
For brave souls who don’t mind a little uncertainty, adjustable-rate loans provide another choice. Available with conventional loans and some government-backed loans, adjustable-rate loans are more complex. As Realtor.com indicates, they offer low interest rates for a set period. Then, the interest rate adjusts with current interest rates, which means it could rise drastically if the market does. However, it could also fall if the market does. It’s a gamble, and it can be a smart one for people who plan to be out of the house or to refinance before the interest rates begin to adjust. It can also be nerve-wracking, especially if things don’t go as planned.
Every year, the Federal Housing Finance Agency sets the conforming loan limits. These vary by county, but they’re important for both banks and borrowers because they play a role in determining which home loans will be eligible for purchase by Fannie Mae and Freddie Mac, the entities that buy and securitize loans, providing lenders with a ready source of fresh cash. As Investopedia explains, loans that are for amounts greater than the conforming loan limits are called jumbo loans. They’re riskier for banks, so the application process tends to be more demanding. Borrowers will generally need a high credit score, a low debt-to-income ratio, a solid accounting of their income and assets, and a down payment of at least 20 percent.
When you’re searching for the home loan that will help you reach your housing goals, reach out to the loan experts at PrimeLending Dallas. We’re ready to assist you. Contact us today to get started.