3 Ways You Can Finance Your Dream Home

3 Ways You Can Finance Your Dream Home

Are you thinking of buying a property? Whether it’s a forever home for your family or just for investment, one of the most important things you should secure first is that you’re using the correct financing.

By knowing the different options, you’ll be able to find one that is most suitable for your needs. That said, here are some ways for you to finance your next home.

Conventional Mortgage

A conventional mortgage or a loan is any type of home buyer’s loan that isn’t subsidized or offered by the government. Instead, you can it from private lenders such as banks, mortgage companies, or credit unions. However, you can get them from government-sponsored companies, such as the Federal National Mortgage Association or Fannie Mae, the Federal Home Loan Mortgage Corporation, or Freddie Mac.

One of the best things about a conventional mortgage is that it has a fixed interest rate. This means that the interest rate won’t change for the whole duration, no matter how the real estate industry changes. However, since conventional mortgages aren’t offered by the government but by private lenders, they typically have stricter requirements than borrowers need to get into the program.

Since 2007, when the subprime mortgage meltdown happened, lenders and creditors alike have tightened their qualifications for a mortgage. Things like ‘no verification’ and ‘no down payment’ were abolished. But other than that, the overall qualifications are still the same. You still need to complete an official mortgage application and provide the necessary information, including your credit history and credit score, for them to review.

As we all know, no property is 100% financed. Therefore, when checking your liabilities and assets, a lender would check if you can afford the monthly payment that shouldn’t exceed 28% of your income. Also, a lender will see if you can afford the down payment required for the property.

Of course, a lender will ensure you can afford other fees and costs such as the underwriting, origination fees, closing costs, settlement, broker fees, etc. However, if you think you’re not ready for a home loan just yet, but are looking for an apartment in the meantime, CreditNinja has a guide on finding an apartment that you can read through.

Federal Housing Administration Loans

A Federal Housing Administration loan or FHA loan is a type of loan insured by the Federal Housing Administration, which is issued by a lender that’s FHA approved. This type of loan is great if you are a low-to-moderate-income borrower, as they require a low down payment and accept people with less than stellar credit scores.

In 2020, you could borrow up to 96.5% of the property’s total cost with a credit score of at least 580. This would also mean that the down payment you should pay is 3.5%. However, if your credit score falls just above 500, you can still qualify for an FHA loan, although you need to pay at least 10% for a down payment.

The FHA doesn’t necessarily lend you the money for housing with an FHA loan. Instead, an FHA-approved lender does. However, the FHA is still processing your application and approving for you to get the loan. If you want to guarantee that you can get the loan, the FHA would also require you to get mortgage insurance and the premium payments will go to the FHA.

Adjustable-Rate Mortgage

One can say that the adjustable-rate mortgage (ARM) is the direct opposite of conventional loans because their interest rate changes over time. For example, with an ARM, your interest rate would be fixed for only a period, and after that, your interest rate would reset in set intervals.

Adjustable-rate mortgages are also called floating mortgages or variable rate mortgages because of their fluctuating interest rates. ARMs are expressed with two numbers, where the first number indicates the years where you’ll have a fixed rate, and the second is the number of years where your interest rate would be reset periodically.

For example, your ARM is 2/28. These numbers indicate that you’ll have two years where your interest rate would be fixed, followed by 28 years of floating rates. However, sometimes the meaning of the numbers changes. For example, let’s say you have an ARM with 5/1. This would indicate that you will have a fixed rate for the first five years. Then you would have a resetting interest rate every year as indicated by the number “1.”

Another example would be 5/5, where you would have a fixed rate for the first five years and would have a resetting interest rate every five years.

If you’re considering ARMs, you can calculate and compare different ARM types so you can find one that is most suitable for your financial situation.

Conclusion

There are several more ways to finance your next home, especially if you’re a first-time homebuyer. However, every financing option has its pros and cons, so you should research more on them. Once you pick one that you think is suitable for you, you can find a good agent to pick out the right house.


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