Choose The Ideal Home Financing with These 7 Types of Mortgage Loans
Whether you are a first-time home buyer or a real estate investor, home loans are essential for building a successful real estate portfolio. Understanding the different types of real estate loans will help you determine a budget, calculate a down payment, and discuss loan options with a lender.
Meriah Druliner sat down with Jan Paulsen of Guaranteed Rate to discuss the lending and approval process from a hard money lender:
Basic Real Estate Loans
1. Conventional Loan / Fixed Rate Mortgage
Conventional loans are not guaranteed or insured by the government. These are typically fixed in terms (10, 15, 20, 30 & 40 year) and rate. There are two types of conventional loans; conforming and non-conforming loans. Conforming loans fall within the maximum limits of set by the government i.e. less than about $700,000. Anything above the limit may be considered a “Jumbo Loan” and thus, non-conforming with government limits. These typically have higher rates and require more hoops to jump through for qualification.
Conventional loans are ideal for people with a good credit history, stable income, and at least 3% of the down payment. You will likely pay mortgage insurance if your down payment is less than 20%.
2. Government Insured Loans
Three government agencies help buyers with mortgages: The Federal Housing Administration (FHA Loans), the U.S. Department of Agriculture (USDA Loans) and the U.S. Department of Veterans Affairs (VA Loans).
FHA Loans can be as little as 3.5% down depending on credit. FHA Loans require two mortgage premiums, one paid upfront and the other paid annually with under 10% down payment. Private mortgage insurance (PMI) is required until you have at least 20% equity in your home.
VA Loans are provided to U.S. Military (active duty and veterans) and their families. They don’t require a down payment or PMI but a funding fee is charged as a percent of the loan.
USDA Loans help those living in rural, USDA-eligible areas secure a mortgage. Depending on income level, some USDA loans don’t require a down payment. Upfront mortgage insurance is 1% with a 0.35% annual fee paid in monthly installments.
3. Adjustable Rate Mortgages (ARMs)
An adjustable rate mortgage has a fluctuating interest rate that is depending on market conditions and lender terms. Many ARM products have a fixed rate for the first few years then reset to variable rates, sometimes with a cap. If you don’t plan to stay in your home for more than a few years, this could save you on interest rate payments.
4. Interest Only Mortgage
In some cases, a lender can give you an interest only mortgage in which you only pay for the interest for the first 5 or 10 years. After that period, it reverts to a conventional mortgage with fixed rates. This will take longer to pay off but can be useful if you are having trouble with the monthly payments.
5. Seller Carryback Financing
In a buyer’s market, sellers can often entice buyers with special concessions to get a deal done. One of which is seller carryback financing. In this case, the seller acts as the bank or lender and obtains a second mortgage on the property in addition to the buyer’s initial mortgage. Each month, the buyer pays off both mortgages. This may also be referred to as owner financing or seller financing.
6. Owner-Occupied Loan
If the property in question is a duplex or multifamily home, the buyer can obtain an owner-occupied loan. In this case, buyers can use the rental income from the property to underwrite the loan with higher loan limits. The property must have signed rental lease agreements so that payments can be verified. These are considered investment properties so private lenders may require higher down payments, typically between 25-30 percent down. The VA and FHA will also work with buyers on owner-occupied loans.
7. Agricultural Loans
Ag loans are available for properties with 10 or more acres and have no restrictions for owner vs. non-owner occupied. These include properties with orchards, farms, vineyards and more. Red Hawk Realty issues agricultural loans for eligible properties with flexible financing options. Contact our team to learn more.
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