Home Buyer Loan Guide
Choosing the Right Home Loan in This Market
Everyone wants the right home loan when they purchase their home, but what is best for one person can be different for another. It is up to you and your loan advisor to review the options and your circumstances and choose the ideal mortgage for you. Fortunately, there are many attractive home loan options available to buyers in 2023. This article reviews the latest information on the best home loans for a variety of situations.
How Do You Know Which Home Loan Is Right For You?
Every home loan program in the US has features and benefits that are designed for certain kinds of buyers. You and your loan advisor should work closely to determine which is best for your finances and goals. Some questions to consider when reviewing the loan options are:
- Which home loan offers the lowest interest rate for the longest time?
- Which loan requires the lowest down payment?
- Which loan will cost you less in interest and fees over time?
- Which loan is best for your credit score?
- How does your income affect the loans you can get?
- What is your budget for buying a home?
- How long will you live in your home?
Answering these questions before sitting down with your loan adviser sill help you determine which loan option outlined below is best for your needs:
Conventional loans conforming to Fannie Mae and Freddie Mac standards are the most common mortgages for American borrowers. Conventional mortgages offer low rates, several down payment options, and fixed and variable rates. Most lenders across the country offer conventional mortgages.
Most lenders offering conventional mortgages require you to have a minimum 620 credit score for a conventional loan, and higher is better. If you have a weak credit history, qualifying for this loan could be challenging. Also, conventional loan rates are linked to your credit score: The higher your score, the better the rate. It’s best to have at least a 720 credit score to get the best conventional loan rate.
- You can put down as low as 3%
- No mortgage insurance fee upfront
- Available for any type of home, including primary residence, vacation home, and rental property
- Adjustable and fixed rates available
- Loan terms between 10 and 30 years
- PMI can be canceled when you have 20% equity
- PMI is required with less than 20% down
- Lower credit score means a higher rate
- Putting down less than 20% means a higher rate
- Debt-to-income (DTI) of up to 43% is possible, but 36% or less is preferred
- Not guaranteed by the US government
FHA loans are frequently preferred by today’s first-time home buyers and it is easy to understand why. These government-backed loans have low down payment requirements, low credit requirements, and flexible income standards. FHA mortgages have done a great deal to convert many renters into homeowners in the past several decades.
FHA loans are backed by the US government, so lenders can afford to take a higher risk with lower credit and income standards, and still offer a low rate. But you will need to pay upfront and monthly mortgage insurance.
- Only 3.5% down payment required
- Low credit scores allowed, with 580 the minimum for a 3.5% down payment
- Down payment assistance and gifts are allowed
- Flexible income qualification
- 15- and 30-year loan terms
- Variable and fixed rates available
- Homes up to four units allowed, so you can live in one and rent the others
- Monthly and upfront mortgage insurance is required, regardless of down payment
- Mortgage insurance is not canceled with 20% equity, but you can cancel it after 11 years if you put down 10% or more
- FHA loan limits are not as high as conforming loans – $472,000 in most part of the country
- You must live in the home; no investment properties or second homes
If you are a veteran or active military member, the VA loan backed by the Department of Veteran Affairs could be the ideal choice. VA loans are often considered the most desirable loans on the US market today. Rates are even lower than FHA loans, there is no mortgage insurance, and 100% financing is available.
- Lower rates than FHA loans
- No down payment
- No mortgage insurance every moth
- Flexible credit requirements
- 15 and 30-year loans available
- Adjustable and fixed rates available
- Up to four units allowed, so you can live in one and rent the other three
- Only available for veteran, active military, and certain surviving spouses
- Requires upfront funding fee that can range from 1.4% to 3.6% of the mortgage amount, but it can be rolled into the loan
- Your home must be a primary residence, and no vacation or rental properties allowed
- More likely to qualify with DTI under 41%
The Department of Agriculture backs USDA loans, which may be referred to as a rural development loan or single-family housing guaranteed loan. USDA loans are made for people with low to moderate incomes who want to live in rural areas and outside major cities. The program is designed to make owning a home more affordable by cutting the need for a down payment. USDA loans also offer lower rates and mortgage insurance costs.
- No down payment needed
- Low fees for mortgage insurance
- Low rates
- Qualify with a 640-credit score
- No limit on loan amount
- Home must be in a rural area designated by USDA
- Borrower has to meet income limits
- 30-year fixed rate is the only option
- DTI of 41% required for most borrowers
- Home has to be a single-family unit
Do you live in a high-priced area, such as Seattle, San Francisco, or New York City? Then you may need to consider a jumbo loan. Conventional loans only allow you to borrow up to $726,000 in many areas and even that is insufficient in many expensive cities where real estate values boomed during the COVID era.
You may consider a jumbo loan, which is a loan that does not conform to Freddie Mac and Fannie Mae standards. Some banks will offer jumbo loans for $2 million, $3 million, and more.
You could think that a jumbo loan would have a high rate, but rates can be similar to conventional rates. However, you need a high credit score and 10% to 20% down.
- Purchase luxury real estate or homes in expensive cities outside of Fannie and Freddie limits
- Adjustable and fixed rate loans available
- Down payments can be as low as 5% or 10%
- Competitive rates for high credit score borrowers
- Good credit is mandatory with most lenders wanting 680 or higher
- You may need large cash reserves
- Larger loan amount, so payments are higher
- Lenders can have different requirements, so the application process could be more complicated
FHA 203k Loans
Do you want to buy an older home and fix it up? This can be a great way to save money, but how will you pay for renovations? With the FHA 203k loan, you may be able to soon have the home of your dreams. This is an FHA loan that lets you purchase a distressed home with a mortgage and borrow money for rehab at the same time.
Many homes that went into foreclosure or short sale are in need of repair to make them worth their maximum value. These homes might not qualify for financing without major fixes, but you can’t fix the home before it’s yours, which is a catch-22. This loan lets you buy a home that needs repair and fix it, all in the same loan.
- Buy a home and rehab it with the same loan
- Save by buying a distressed property
- Save hassle and closing costs by covering both needs with one mortgage
- Borrow as much as $35,000 for repairs
- Low credit scores allowed
- DTI can be up to 43%
- Mortgage insurance required – upfront and monthly
- Loan must conform to FHA loan standards
- FHA has limits on the types of repairs – no luxury upgrades allowed
If you have a low credit score, undocumented income, or want to rehab a home, you may not be able to get traditional mortgage financing. Another option in these circumstances is a private loan, which may be called a hard money loan. These loans can be structured many different ways and may carry a higher interest rate. But they can be a good option if you cannot qualify for traditional financing.
A common private loan for the credit-challenged borrower is an owner-financed mortgage. This is where the owner is the bank, and you pay them a down payment and monthly mortgage to purchase the property. Many people consider this type of private loan when they have credit problems, which they later refinance into a traditional mortgage when their credit improves.
Clearly, you have many home loan options in today’s market. Even with elevated interest rates, there should be a loan option that is deal for your needs. After reviewing this home buyer’s guide, speak to your loan advisor about the best home loan for your needs, budget, and circumstances.