Finding a Home Loan That’s Right for You

Real Estate agent with customer making contract signature and analyzing valuation

Often when finding your next (or first home) to buy a million thoughts cross your mind. Which neighborhood has the best schools? How many bedrooms will I need? New construction or fixer-upper? While there are many important questions to consider when purchasing your home, one might perhaps be the most important. How will you finance the purchase of your home? No matter how perfect the floor plan or school district, no home sale is complete without the proper funding. It can feel overwhelming to navigate the world of finance and find a home loan that’s right for you. However, there are numerous options available to buyers in today’s market. With so many options, there is nearly a type of home loan for everyone. Here are a few types of home loans to consider for your next purchase.

Traditional Home Loan

The traditional home loan is perhaps the oldest and most common loan for purchasing a home. Often a traditional loan requires good credit and a down payment of at least 20% of the home’s purchase price. These loans are often offered by banks in which you work directly with the lender who issues the loan. Factors such as income, debt to income ratio, the home’s market value, and home inspection are critical to this type of loan. A traditional home loan is often beneficial to well-qualified buyers with the additional funds to make the 20% down payment. A larger down payment allows buyers to have nearly instant equity in their homes. However, a traditional home loan is not feasible for every type of home buyer. Luckily, there are other options available.

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FHA and USDA Home Loans

FHA and USDA home loans are non-traditional routes offered to buyers who may not have the required funds at hand for a larger down payment. These loans are government-backed or subsidized loans, thus have less stringent requirements than the traditional home loan. FHA home loans typically require a down payment of only 3.5% of the home’s purchase price. USDA home loans typically require no down payment on the home’s purchase price, making them an extremely attractive option for many buyers. The credit requirements are also often a bit more relaxed than traditional home loans. FHA home loans require, by most lenders’ standards, a credit score of at least 620. USDA home loans often require a slightly higher credit score at 640. However, it is important to note that in some special circumstances and with select lenders, some buyers may be able to still obtain a USDA or FHA loan with scores that fall under these thresholds.

FHA and USDA home loans, however, often have additional criteria that must be met versus a traditional home loan. For example, each of these loans has lending limits that are dependent upon the location of the desired home. Also, due to the small down payments, expect PMI (private mortgage insurance) payments to be included with your monthly mortgage payment. Finally, USDA loans have perhaps the most stringent criteria on the location of the home, amount of land, home features, and square footage limitations. Despite these small hurdles, these home loans are often an excellent option for many buyers and first-time buyers in particular.

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All in all, finding a home loan that is right for you doesn’t have to be overwhelming. The above loans are perhaps the most popular options for buyers in today’s market. However, if these do not fit your needs there are still additional options. A knowledgeable lender is always a wise choice for buyers searching for the perfect home loan. With a little effort and understanding, finding the right home loan for you can be right around the corner.