Buyer’s Guide to Home Loans

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Are you in the market for a new home? If so, you’ll likely need financing to make your dream a reality. A home loan is the most common way to finance a real estate purchase, but it can be tricky to navigate the waters of home mortgage loans. This buyer’s guide will give you all the information you need to choose the right home loan for your needs.

Conventional Home Mortgage Loans

A conventional home mortgage is the most common mortgage used to buy a house. To qualify, buyers need a down payment of 20%, a credit score of at least 620 or higher, and a debt-to-income ratio (DTI) that falls within the 28/36 rule. 

The DTI is the total amount of your monthly debt payments divided by your gross monthly income. For example, if your monthly debt payments are $1,000 and your monthly income is $4,000, your DTI would be 25%.

Your DTI must be 36% or less to qualify for a conventional loan.

The 28/36 rule means that no more than 28% of your monthly income should go towards your housing payment (mortgage, insurance, taxes). No more than 36% of your monthly income should go towards all your debt payments (housing payment + any other debts you may have).

With a conventional home mortgage loan, you’ll also pay closing costs. Closing costs are typically 2-5% of the total loan amount. They can include fees such as home inspections, appraisals, and title insurance.

FHA Home Loans

If you don’t have a 20% down payment or a high credit score, you may still be able to qualify for a home loan through the Federal Housing Administration (FHA). 

The FHA home loan program was created to help first-time homebuyers or those with limited credit history get financing. FHA loans are insured by the government and have more flexible qualification requirements than conventional home mortgage loans.

To qualify for an FHA loan, you’ll need a credit score of 580 or higher. You’ll also need a lower DTI than with a conventional home loan. The maximum DTI for an FHA home loan is 31-43%.

No more than 31% of your monthly income can go towards your housing payment. No more than 43% of your monthly income can go towards all your debt payments (housing payment + any other debts you may have).

Like a conventional home mortgage loan, you’ll also pay closing costs with an FHA home loan.

VA Home Loans

If you’re a veteran or active military member, or the spouse of one, you may be eligible for a home loan through the Department of Veterans Affairs (VA). 

The VA home loan program was created to help veterans and active military members get financing. VA home loans are guaranteed by the government and have more flexible qualification requirements than conventional home mortgage loans.

Your credit score is not a factor in qualifying for a VA home loan. Instead, the VA looks at your debt-to-income ratio and your employment history.

You’ll need a DTI of 41% or less to qualify for a VA home loan. No more than 41% of your monthly income can go toward all your debt payments (housing payment + any other debts you may have).

You’ll also need to have a steady income and employment history. The VA requires that you’ve been employed for at least the past 12 months and have a reasonable expectation of continued employment.

There is no down payment required for a VA home loan. And, unlike with a conventional home loan, you won’t have to pay for private mortgage insurance (PMI).

USDA Home Loans

If you’re looking to buy a home in a rural area, you may be eligible for a home loan through the U.S. Department of Agriculture (USDA).

The USDA home loan program was created to help buyers in rural areas get financing. USDA home loans are guaranteed by the government and have more flexible qualification requirements than conventional home mortgage loans.

To qualify for a USDA home loan, you’ll need a credit score of 640 or higher. You’ll also need a DTI of 41% or less.

You’ll also need to have a steady income and employment history. The USDA requires that you’ve been employed for at least the past 12 months and have a reasonable expectation of continued employment.

There is no down payment required for a USDA home loan. And, like with a VA home loan, you won’t have to pay for private mortgage insurance (PMI).

Jumbo Loans

A jumbo loan is a home mortgage loan that exceeds the conforming loan limit. 

The conforming loan limit is the maximum loan amount that Fannie Mae and Freddie Mac will insure.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that purchase home loans from lenders, package them into securities, and sell them to investors.

Jumbo loans typically have higher interest rates than conforming loans.

You’ll need a credit score of 680 or higher to qualify for a jumbo loan. You’ll also need a DTI of 43% or less.

You’ll also need a sizeable down payment. Most lenders will require that you put down 20% of the home’s purchase price.

Bridge Loans

A bridge loan is a short-term home loan that gives you the financing you need to purchase a new home before selling your current home. 

Bridge loans are typically interest-only loans with a term of six months to one year.

You’ll also need equity in your current home to qualify for a bridge loan. Most lenders will require that you have at least 20% equity in your home.

Bridge loans can be expensive. You’ll need to factor in the cost of interest and any fees charged by the lender.

Conclusion

There are a variety of home loan options available to homebuyers. The type of home loan you choose will depend on your financial situation and goals. 

Be sure to compare different home loan options and speak with a lender to find the best home loan.

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