Buying property is one of the most rewarding moments that an individual or family can experience but is also one of the largest risks AND investments that anyone can make in their lives. Finances are one of the main reasons that prevent people from buying property. Luckily, there are several types of loans available to buyers that can help you achieve home ownership.
Government Funded Loans
One of the more common types of loans for those looking for a lower down payment are government funded mortgage loans such as FHA Loans, USDA Loans or VA Loans.
FHA Loans help make homeownership possible for those who cannot afford a large down payment. These loans only require a minimum credit score of 580, however credit scores of 500 are acceptable if you’re planning to put 10% down on the home. This loan type also has two insurance premium options which can be paid upfront or paid annually if you put less than 10% down on the property.
Another type of government funded loan is a USDA Loan. Buyers looking to purchase using a USDA loan must purchase the home in a USDA eligible area. The minimum credit score required is 460 and the home that is being purchased must be your primary residence. Some other requirements include being in-good standing with all federal programs and meeting income requirements.
VA Loans are another mortgage type that is US Veteran exclusive. The veteran must be active duty or have received honorable discharge. They must also have served at least 90 consecutive days during wartime or 181 consecutive days during peacetime. If you’re the widow/widower of a veteran who died in the line of duty, you can also qualify.
Aside from government funded mortgage loans, there are also privately funded mortgage loans available to buyers. The most popular type of private home loan among first time homebuyers is known as a conventional loan.
A few quick facts to know about conventional loans are that there are confirming and non-conforming conventional loans. Conforming means that the loan amount falls into the maximum limits set by the Federal Housing Financing Agency or the FHFA. A conforming conventional loan can be used to purchase a primary, secondary home or investment property. A minimum credit score of 620 is required for this type of loan. If you are placing a 20% down payment on the property, you are wont be required to pay for private mortgage insurance. This will be required if you’re placing a down payment of less than 20% but you can ask your lender to cancel the private mortgage insurance once you’ve reached 20% on the home.
Non-Conforming, most commonly known as Jumbo loans. This type of conventional loan does not follow the guidelines created by FannieMae and FreddieMac. Like the name suggests, jumbo loans are meant for properties that require hefty mortgages. The requirements to meet for a jumbo loan include placing a down payment of 20% but in some cases, they can fall between 10%-15% as well. A minimum credit score of 700 is preferred although some lenders accept credit scores of 660 as well. The borrowers cannot have a debt-to-income ratio above 45% and they must show that they have at least 10% of the loan amount in assets and/or cash.
Jumbo loans are generally designed for more affluent borrowers looking to buy or invest in properties that are over $1 million, but don’t want to make the full payment in cash. These loans also come in-handy in high cost areas, like New York City or even San Francisco. In these cases, jumbo loans are the only option that an average borrower has available to them.
Fixed Rate vs. Adjustable Rate Mortgage
The final loan options are fixed rate and adjustable rate mortgages. Your comfort level with risk when it comes to purchasing your home plays a big role on whether you choose fixed or adjustable rate mortgages. Fixed rate mortgages keep the same interest rate over the life of the loan while adjustable rate mortgages have fluctuating interest rates depending on market conditions.
Adjustable rate mortgages have a lower-fixed interest rate in the first few years of homeownership, which can help you save considerably in the beginning. This can prove helpful if you don’t plan to live in a home for more than a couple of years. Adjustable rate mortgages don’t cap how high an interest rate can go so whenever the loan resets, you run the risk of being in financial trouble if you’re not expecting to make higher interest payments for a significant period of time.
Fixed rate mortgage interest rates remain the same and your monthly mortgage payments won’t fluctuate while paying off your loan. This can prove beneficial while budgeting month-to-month expenses. They can also take a lot longer to pay off and it takes a longer time to build equity on your home.
Whether you’re a low, moderate, and/or high risk taker, having this knowledge can help you best determine which mortgage option seems best for you. Here at the DV Real Estate Group we pride ourselves on helping you achieve financial success and security through real estate. We want to provide you with the team, resources and information needed to make you a homeowner or investor. Work with our team of top real estate agents in Jersey City and let the DV Real Estate Group help you find the home of your dreams.
If you are looking to buy or sell a home in New Jersey contact our team at DV Real Estate Group.
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