The housing market set a 15-year record in price increases in 2021. Prices hit stratospheric new heights with a 20% jump nationwide.
Luckily, experts expect prices to stabilize this spring. Still, with interest rates on the rise to combat crippling inflation, you won’t see those minuscule loan percentages that buyers locked into place during the pandemic.
So, what is a buyer to do? Well, knowing the different types of home loans and recognizing the one that best suits your needs is crucial in this hot housing market.
Jumbo loans, adjustable-rate mortgages, and fixed-rate mortgages are just some of your mortgage options.
In the following article, we’ll discuss the difference between these types of loans and how to choose the best one for you when buying a home.
Conventional Loans
With more rigid standards than some other types of loans, banks, financial institutions, and credit unions offer conventional loans. As a result, you’ll generally need a higher credit score, an appropriate DTI (debt-to-income) ratio, and money for a down payment.
Conventional loans are typically offered for 15-, 20- or 30-year spans. Moreover, a conforming conventional loan is often backed by Freddie Mac and Fannie Mae, the mortgage companies created by Congress to insure mortgages for American homebuyers.
Another type of conventional loan is tagged as nonconforming. These loans do not follow standard underwriting requirements. The Federal Housing Finance Agencies set these requirements. For example, nonconforming loans may eschew a 20% downpayment.
Conventional loans have a set interest rate. However, these rates fluctuate as the Federal Reserve sets borrowing limits to moderate the overall U.S. economy.
Find more info on the types here.
Jumbo Loans
These loans are classified as nonconforming since they do not meet federal borrowing guidelines. These loans are generally utilized by borrowers seeking to purchase a vacation home or investment property. However, certain borrowers may use jumbos for primary residences, too.
Borrows may find higher closing costs and need to produce a larger downpayment as jumbo loans carry more risk for lenders. The borrower will also need to produce in-depth financials like cash flow, taxes, and income information.
These loans work best for people with a high credit rating wishing to purchase a property beyond FHFA limits.
Adjustable-rate Mortgages
ARMs or adjustable-rate mortgages work best for people who don’t plan to own the property for an extended time or plan to refinance in short order.
The ARM loans have a low introductory interest rate, but that rate will adjust at a set date along with interest rates. However, even though protections are written into the loan to slow increases, people can get into trouble with ARMs.
If you don’t convert the ARM into a fixed-rate mortgage, you may not be able to afford the increases and risk losing your property.
Other Types of Loans
Due to special income or residential status, you may qualify for other types of loans.
For example, as a military veteran, you may find yourself eligible for a VA loan. Also, if you are in a lower income bracket, you may qualify for a USDA loan.
Suppose you are a first-time homebuyer; your loan might fall under the auspices of the FHA. Here, you might get a reduced interest rate or a lower down payment than a conventional loan.
More Info on Different Types of Home Loans
The best way to find more information on all the different types of home loans is to consult your bank or a certified mortgage specialist. They’ll be in the best position to evaluate your financial condition and which mortgage can help you achieve your goals.
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