Are you tired of giving away a massive chunk of your monthly income in housing rents? If you’ve been dreaming of buying your own home house for long, you’re not alone. A house under your name will probably be your most valuable material possession. But if you’re like most Americans, you’re not enough financially stable to pay the full purchase price out of your pocket.
But there’s good news: you can still own a house under your name with the help of housing finance. You can pick the best financing option based on your needs, convenience, and circumstances.
Before we elaborate on the various home financing option, here are some questions you might want to ask yourself before buying a home.
Questions to Ask Before Seeking House Financing Options
How long are you planning to live in the new house?
If you are planning to relocate soon, we suggest not buy a home for a short-term stay. It will take a considerable amount of closing cost to buy the property, and it wouldn’t be wise to leave the property after investing a handsome amount.
Do you have a good credit score?
Your credit score will significantly influence your likelihood of obtaining a loan. No matter which financing option you choose to go with, if it has a minimum credit score requirement, it will affect your loan term and increase loan interest rates.
A low credit score will render you ineligible for getting a conventional loan. It may even keep you from leveraging other financing options with a credit score requirement.
How much mortgage can you afford to pay every month?
This is a very critical one. Make sure you can afford to make timely mortgage payments for your loan term, even when you are financially unstable. Select a longer loan term if you think a short-term loan with higher monthly payments will add to your financial stress.
We recommend our clients have an emergency fund or cash cushion to thrive through stormy phases. You can also establish a fund specifically for your home once the deal is closed.
How much amount can you put down (down payment)?
Your down payment availability will have a significant impact on the financing options you qualify for. For instance, a conventional loan usually requires a down payment of at least 20%. But some private lenders may offer it on a lower down payment, but with an addition of PMI.
Private mortgage insurance (PMI) is the insurance for the lender’s security if you default. We recommend avoiding PMI wherever possible because it can suck up thousands of dollars, making the loan substantially expensive than it originally was. Don’t forget to factor in mortgage insurance while creating your budget.
Would you prefer to go with an adjustable or a fixed-rate mortgage?
Fixed-rate mortgages are a popular choice among first-time homebuyers because they offer higher stability. You don’t need to worry about fluctuating interest rates, and it’s easier to establish your budget with fixed-rate mortgage payments.
If you choose to go with an adjustable-rate mortgage, your monthly interest payments will remain similar for the first half of your loan-term (5 years, typically). After that period, your interest rate will move with fluctuations in the market and economic activities.
Would you prefer a short-term or a long-term mortgage payment period?
Mortgage loans are typically offered a loan term of 15 to 30 years, but this can vary in different financing options.
If you go with a short-term mortgage, you should expect to pay higher monthly payments than a long-term mortgage, but your total interest expense would be significantly lower in a short-term mortgage.
While a short-term mortgage saves you more money and makes you a homeowner earlier, it can increase your risk of default if you can’t afford to make the payment in a financial hiccup.
Convenient Financing Options to Buy Your Dream Home
Now that you have gone through the basics of housing finance, here are some of the most convenient financing options we recommend to our clients.
- These loans are not backed by government authorities.
- You’ll need to make at least a 20 percent down payment to avoid private mortgage insurance (PMI). But some conventional loans require a lower down payment.
- Once you’ve reached 20 percent equity of the loan, you will no longer need to pay the private mortgage insurance.
- You need to have a credit score of at least 620 or higher to qualify for a conventional loan. If your loan amount is higher than $424,000 (jumbo loan), your credit score needs to be 720 or more.
- These loans are backed by the Federal Housing Finance Agency.
- If you have a low credit score and a down payment availability of lower than 20 percent, this loan is for you.
- You can pay a down payment of as little as 3.5% on an FHFA-backed loan.
- To be eligible for this loan, you must have a credit score of at least 500 or higher. However, if your down payment availability is 3.5%, you need to have a credit score of at least 580.
- If you can reserve a down payment of 10%, your credit score should be anywhere between 500 and 579.
- You need to pay private mortgage insurance for the full life of the Federal Housing Agency loan, regardless of your credit score and down payment availability. However, you can always later choose to refinance to a conventional loan in order to drop the PMI once you’ve reached 20 percent equity.
- Though these loans offer ease when it comes to down payments and credit scores, they can be more costly than conventional loans because of the PMI and long-term payment periods.
- The loans are provided by the Department of Veteran Affairs (VA).
- You can be eligible for this loan if you are currently serving the U.S. military, have served as a veteran, or a spouse of a veteran.
- You are not required to reserve any down payment for these loans.
- Though the government hasn’t established any minimum credit score requirement for VA loans, some private lending companies require credit scores of at least 620 or higher.
- You are not required to pay the mortgage insurance, regardless of your down payment availability. However, a closing fee may be assessed at the end of the loan tenure.
- These loans are ideal if you don’t have a good credit score or down payment availability. But if you do, conventional loans may be less expensive.
Rural Development Loan
These loans are backed by the United States Department of Agriculture (USDA). Rural development loans are geared toward low to middle income earning groups looking to buy houses in rural areas. These loans are available at 0% down payment and you must have a good credit score of at least 640 to qualify for this loan.
A downside is that you’re required to pay the PMI for the entire term of the rural development loan, along with a close fee at the end of the loan term.
They are usually more expensive than conventional loans, but less costly compared to FHA-backed loans.
If you’re struggling to choose the right financing option to buy your dream home, get in touch with Phillip Fehler, a well-reputed and highly experienced Fathom Realty broker in Fayetteville. He’s been offering unparalleled residential real estate services in Fayetteville for over 20 years.
We also offer reliable military housing services in Fort Bragg, NC.
Connect with us to seek the services of one of the best Realtors in Fayetteville, NC.