There are different types of loans to buy a house. Many people think that there is only one type of mortgage out there. But the truth is there are different types of loans to buy a house that meet a wide range of different needs. Learn more about some of the home loan options available that can allow you to buy a house.
Conventional Mortgages
When most people think of a mortgage, what they are thinking of is called a “conventional mortgage” through a specific lender like their bank. This is a very popular type of mortgage loan. You go to the bank (or do it online) and fill out a loan application. The loan officer will need to see documents like paystubs, tax returns, and other documentation to verify what you have put down on the application.
With conventional mortgages, lenders like to see you put a down payment on the house. The preferred down payment is 20% of the loan. Just like when you apply for a used car loan, the bank wants to ensure that you are financially invested, the same is true with a mortgage. The bank likes you to have a financial risk in the property beyond what you owe the bank.
Coming up with that 20% down payment can be tough for a lot of people. You never want to put yourself in a position where you cannot afford the down payment and take a loan for that as well. If you are looking for a way to sell my car for cash to make a down payment on a house, you should be looking at different types of loans to buy a house that offers more wiggle room when it comes to down payments and how much out of pocket costs there will be. Keep reading to learn about the different types of loans to buy a house that requires very little money.
VA Loans
If you or your partner served honorably in the military for four years or more, you may be eligible for a VA loan. A VA loan is unique in that you do not have to put any money down. You read that right. With a VA loan, you do need to have decent credit and be able to prove that you can make the payments based on your income, but you do not have to put any money down.
This government-backed loan program was initiated to help returning veterans from WWII as part of the Servicemen’s Readjustment Act to make homeownership more affordable. Today, millions of veterans have been able to buy a home using their entitlements.
There are other benefits to this type of mortgage. For example, the person that is trying to sell a house will have to cover closing costs. You do not have to pay points. There are many reasons why this type of mortgage is ideal for people that have served, have decent credit, and can afford a monthly mortgage payment.
The Veterans Administration does not issue the loan, they simply guarantee the loan. There are thousands of lenders that work with VA loans that can help you get approved. If you have served or your partner has served, learn more about eligibility for a VA loan.
FHA Loans
FHA loans are also government-backed mortgages specifically for low-income families. You do need to make a down payment, typically around 3%, and you do have to meet other criteria, but for many young families, this can be a great opportunity to buy a home. The federal government actually has several different types of loan programs. FHA is one of the most popular, but certainly not the only one.
The USDA (United States Department of Agriculture), a government agency, has a program similar to the FHA program but it is focused on rural properties. The USDA will work with buyers that want to buy properties in counties in the United States that have been deemed “rural” or are in specific zones. These types of loans can often be a “no money down” scenario. There are specific eligibility requirements to qualify for this type of loan.
The different types of loans to buy a home that is backed by the government is a great way to get a mortgage but there are typically some caveats to these loans. For example, obviously, for a VA loan, you need to be a veteran, but that is not all. The VA requires that you live in the home for at least a year, and when it is time to sell, if you use your VA benefits again, you will have to pay a fee to reuse those benefits.
The USDA loans require that the house is located in a certain county, and there are other criteria that the house will have to meet to get the loan approved. Using government-backed loans may be a bit more complicated to deal with, but in the end, you won’t have to put any money down, or a very small amount of money down. As an added bonus, most government-backed loans have a lower interest rate.
Another benefit of government-backed mortgages is that they want to see you succeed. They will work with you to ensure that your home does not wind up in foreclosure. They take longer and require a bit of effort on your part, but in the end, they can be an easy way to home ownership.
Hard Money Loans and Subprime Loans
What if you only need a mortgage for a short period of time but you need it quickly so you can flip a property? What if your credit is on the cusp of being decent but not quite there? Are there different types of loans to buy a house for those situations? Yes, there are.
Sometimes a great deal just cannot be passed up. You find a property that needs some work but the owners really want out and they are offering the property at a bargain-basement price. Hard money loans can be the solution. These are short-term loans that have high-interest rates. These types of loans are not for the person that is looking to buy a home, they are more an option as an investment.
These types of loans are issued quickly and you pay them back quickly (typically the term of the loan is six months to one year). No one is recommending these loans to the average house buyer but they can be helpful to investors.
Subprime loans are often the solution for people that have less than desirable credit. With subprime loans, you will have to pay a higher interest rate and may have to put more money down. A lot of people will take out a subprime loan and work on their credit so they can refinance down the road.
A good rule of thumb is if you have to take pawn loans to come up with the money to put a down payment, this is not the right time. The same is true with subprime loans. If you are having a hard time getting a mortgage, you should wait to get your credit in shape.
Preparing to Buy a House
There are different types of loans to buy a house, but most every type will make decisions about the loan based on your credit history, income, and ability to pay the loan. Mortgage lenders look at a combination of things to determine your loan worthiness and the terms of your loan.
Your credit score is a major factor but not the only factor. You can have a great credit score but not have enough income to comfortably cover the mortgage payment. You also can have a great score, and a great income, but your income to debt ratio is too high, which may cause a lender to hesitate about giving you a loan.
Preparing a year or more in advance to get your financial picture in top shape can really pay off when you go to apply for a mortgage. Do what you must to pay down debt. If you have to sell jewelry to pay off a credit card that is weighing heavily on your income to debt ratio, do it.
Put a plan in place that is realistic and that will get your finances in order. This will do two things; it will help you get approved for a mortgage and help you to prepare to make that monthly mortgage payment. It takes discipline to prepare to buy a house, but you can do it. Millions of other people have done it before.
Do Not Do Any Of These Things If You Have Already Applied
The different types of loans to buy a house have different eligibility requirements and caveats. However, there are a few things you should not do because if you do, it could tank the approval for all the different types of loans.
Stay employed. If you have put in your loan application and are between approval and closing, do not switch jobs right now. As a matter of fact, throughout the entire loan process, stay with the same employer. Lenders like consistency. They do not want the added problem of changing things on your loan documents and dealing with verification. If a new job comes along that is too good to pass up, let the employer know you can start as soon as the house closes.
Never lie on an application, and never think you can beat the system. You cannot. Lying on a loan application is a big deal, it is punishable by law, and you could wind up in jail. Stick to the facts and follow the rules. For example, if it is required that you maintain occupancy in the home for a specific period, make sure you do. Banks do check to see if you are really holding up your end of the bargain. Getting caught in a lie or violating the terms of the loan can put you straight into foreclosure. It is not worth the risk, do what you agreed to.
Stay far away from new credit. Do not open any new accounts, do not take title loans on your vehicles, don’t take out a loan, and don’t do anything that will affect your credit. The bank will check your credit score right before you close to see if there have been any changes or anything that can affect your ability to pay the mortgage. Stay on course and do not take any risks with your credit until you close on the loan.
In other words, you should not make any major changes. The lender has the power to back out of the deal at any time. Making unexpected changes can “scare” off the lender and delay the closing. Typically, loans will close in about a month or two if nothing changes.
Enlist the Help of a Financial Planner
Many people are afraid to apply for a mortgage because of their credit. There are ways that you can improve your credit and apply without fear of rejection. Working towards owning your own home is a good goal to have.
Don’t panic if your credit is not where it needs to be, and you are considering sell my clothes and what I own to raise funds. There is professional help that is available that can help you to get your finances in order, so you will be able to choose between the different types of loans to buy a house. Getting your financial picture in order is the best way to open up your mortgage possibilities.
