Very few people are able to pay cash upfront for one of the largest purchases they will ever make. Some don’t even want to pay in cash because sometimes your interest rate on your mortgage can be very low, and if you are strategic with your financing then this may work out in your favor.
Anyway, most people will need to get a mortgage in order to purchase a home and that is one good reason why good credit can be so important. Homes are expensive and this is known.
What types of mortgages are out there?
There are three categories of mortgages including conventional, FHA and VA loans. There are some distinct advantages to each of them and learning a little bit about each of them before you apply for your new mortgage is probably a good idea.
The Federal Housing Administration, which is part of HUD, or the U.S. Department of Housing and Urban Development backs FHA loans. There have been over 35 million FHA loans issued since back the beginning back in 1934. FHA does not actually lend the money but rather they provide a backup for the lender in the case of default by the buyer.
With an FHA loan you can get a lower down payment. The down payment required is usually just 3.5%. However, there are additional fees, which make your closing costs higher. You also need to pay at closing for a mortgage insurance premium and that is 3% of the loan amount. With FHA you may still be able to qualify if your credit score is a bit lower as there is no minimum standard and each situation is evaluated on its own individual merit. The maximum loan amount for FHA is $625, 500.00 but it can go as high as $729,750.00 in the higher cost areas.
Conventional loans use the guidelines set out by Fannie Mae and Freddie Mac for their conforming loans. Fannie Mae and Freddie Mac are quasi-governmental agencies. In the recent past the government provided bailout money for these agencies, so far this has not affected the underwriting on these conventional loans. A conventional ?conforming? loan will typically not exceed $417,000.00 for a single family home and if it does it becomes ?non-conforming? and it is called a ?jumbo? loan. The limits can be higher in higher priced regions throughout the country.
There are established guidelines for credit scores, income requirements and down payments on conventional loans. While these guidelines are fluid and they often change a credit score of at least 620 is the minimum but if your score is less than 740 you can expect to pay some higher fees. The down payment ranges from 5% to 20% however, that can change, as before the subprime meltdown the zero down payment loans and the 125% loans were conventional loans.
If you can qualify for a VA loan you could feasibly get into a new home for nothing down. If you can negotiate with the seller to pay closing costs you wouldn?t have to bring any money at all to closing. But these loans are only for members of the U.S. Military who have these benefits. The Veteran?s administration does not lend the money but protects the lender in the case of default.
While this is a broad overview of the potential loans you can get for your new home there are a lot of details that were not covered here. Prior to looking for your new home you should do what you can to repair your credit and increase your credit score.
When you are ready you should get together with some good mortgage and real estate professionals to get all of your questions answered and pre-qualify for your new mortgage.
What type of mortgage are you looking to get?
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