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Financing a property purchase is a process that most buyers have to undertake. In fact, according to the National Association of Realtors, 87% of property buyers financed their purchases.
Finding the right home may be a challenge, but home financing and finding the right loan product for you. Chances are this is a loan structure you will be paying back for many years, so it’s important to get it right.
Loans have two main portions, the principal and interest. Interest is charged at a disclosed percentage calculated off the principal amount. Mortgage payments are made monthly through the loan term based on an amortization schedule provided by the lender at the commencement of the loan.
Conventional Loans
The most accessed home loan is a conventional loan. These loans are for borrowers with good credit, a stable income, and the ability to pay at least a 3% deposit. A conforming conventional loan has a maximum limit set (based on your geographic area). Loans must be within this limit to be backed by Fannie Mae or Freddie Mac.
Nonconforming loans generally don’t meet Fannie Mae or Freddie Mac underwriting guidelines. For example, the most common non-conforming loan is a Jumbo Loan because they exceed the maximum limit.
Government-Backed Loans
There are three main types of government-backed loans, each with its own set of requirements for eligible buyers.
- FHA: These loans are designed to help buyers who don’t have a credit score high enough to qualify for a conventional loan. Buyers with credit scores as low as 500 can access FHA loans.
- VA: VA loans are backed by the U.S. Department of Veteran Affairs and offer eligible buyers a 100% finance loan without the requirement of private mortgage insurance.
- USDA Loans: These loans make it easier for low-income buyers to buy property in rural areas. If a property meets the USDA guidelines, buyers can get loans with little to no money down
Interest Rates
The second factor that comes into play when deciding on a loan is whether you want a fixed-rate or adjustable-rate (ARM) loan. Fixed-rate loans will have their terms locked in for a set period – usually between 10 and 30 years. These are best for buyers who don’t plan on moving for many years. ARMs will have a fixed period at the commencement of the loan, typically for up to 10 years, but when that fixed term expires, the provider can adjust the rate to meet market conditions.
To pick the right loan program for you, it’s important to consult with a professional. Mortgage brokers are well versed in each loan option and can help guide you to the best loan for your financial circumstances.
