Buying a House

Understanding Your Financing Options When Buying a House

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Deciding how to pay for a home is one of the biggest money decisions you will ever make. This guide will explain the main financing paths and their pros and cons.

Mortgage Loans

Unless you have a massive savings account, you will likely need a mortgage loan. This allows you to borrow money to buy the house and pay it back over time, plus interest.

Most mortgages last 15-30 years. Putting down a larger down payment (10-20%+) usually qualifies you for lower interest rates and skips private mortgage insurance (PMI). But do not drain your life savings as you will need a cash cushion for repairs and emergencies.

Types of Mortgage Loans

Not all mortgages are the same. Shopping around is crucial to find the best rates and terms. Here are the main loan varieties:

Conventional Loans

These standard loans conform to Fannie Mae and Freddie Mac guidelines. You will need good credit (620+ score) and a down payment of at least 3%.

FHA Loans

Insured by the Federal Housing Administration, FHA loans allow lower credit scores (500+) and down payments as low as 3.5%. But you will pay mortgage insurance no matter what.

VA Loans

For military members, veterans, and eligible spouses only. VA loans require zero down payment and no mortgage insurance. Credit score minimums vary by lender.

USDA Loans

If you meet income limits and buy in an eligible rural area, a USDA loan allows zero down payment. Income and credit score requirements apply.

Jumbo Loans

Used for luxury properties with loan amounts above conforming limits ($647,200 in most areas), jumbo loans require top-notch credit and big down payments.

Adjustable vs. Fixed Interest Rates

Most loans come with a fixed or adjustable interest rate. Here is the difference:

Fixed-Rate Mortgage

Your interest rate never changes for the entire loan term, so your payments stay the same too. This provides stability and predictability.

Adjustable-Rate Mortgage (ARM)

ARMs start with an ultra-low “teaser” interest rate that adjusts annually after an initial fixed period. If rates rise, so do your payments – sometimes dramatically.

ARMs can be smart if you plan to sell before the adjustment period ends. But most homeowners prefer the safety of fixed-rate mortgages.

Get Pre-Approved

Before starting your official house hunt, get pre-approved for a mortgage. This shows sellers your offer is serious and gives you an accurate price range.

According to the experts at Mortgage Maestro, based out of Denver, mortgage brokers can shepherd you through the pre-approval process, which involves:

  • Providing pay stubs, tax returns, bank statements, etc. to verify your income and assets.
  • Undergoing a credit check.
  • Getting pre-approved for a maximum loan amount at an estimated interest rate.

Once pre-approved, your broker will clearly explain the next steps and different loan program eligibilities. Having this expert guidance simplifies the entire process.

Other Financing Options

For those who cannot qualify for a traditional mortgage yet, alternatives exist:

Rent-to-Own

Rent the home for a set period with a portion of rent going toward the down payment to buy it later.

Borrowing from Retirement Accounts

You can borrow from your 401(k) or withdraw from IRA accounts penalty-free for a home purchase.

Assistance Programs

Nonprofits, employers, and government groups offer down payment assistance and other incentives.

Conclusion

Financing is the biggest hurdle for most buyers. The home buying process has so many twists and turns, but getting the financing squared away first gives you an enormous head start. Whether you collaborate with a broker or go it alone, don’t rush into mortgage decisions you may regret later. Slow and steady moves you one step closer to those coveted keys.

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