Understanding Different Types of Home Loans
There are several types of home loans that you could apply to get from a lender. That is why when a potential homebuyer tells me, “I can’t get a loan” or “I can’t afford a house now” I know that they haven’t looked at all their options. Most likely they have ball-parked they numbers, thinking they need 20% down to get a loan or be competitive. Or they have used an online calculator on Zillow or another website that told them their monthly payment would be $X.
There are many factors that go into getting a home loan such as who is giving you the money, what they need for a loan-to-value ratio, debt-to-income ratio, your credit and several other factors as to what interest rate you can receive. There are also many assistance programs available that help buyers with down payments, closing costs, and even properties that sellers will hold the loan for (called Seller Carried Loans).
There are two main types of loans: Conventional and Non-conventional loans. Conventional loans are loans that are insured by banks and lending companies. These types of lenders can be companies that make their money on the interest paid for lending their money. If it is a bank, they are lending money for car loans, personal loans, Home Equity Lines of Credit (HELOC), etc. Conventional home loans are very often resold on the secondary mortgage market. In a nutshell, the banks take several loans, bundle them together, and then sell the bundle as one big investment to other investors on the secondary market. This is why usually after a few months of closing on your new home you will receive a letter in the mail that states you will need to now pay your mortgage to another company; they have bought the servicing rights to your loan. This doesn’t affect any of the original terms of your loan though, so don’t worry about your interest rate changing. Another conventional loan type is a Jumbo loan. There are loan limits to most loans. As of the writing of this in September 2023, the conventional mortgage loan limit goes up to $726,200. Therefore, you would want to qualify for a Jumbo loan if you are buying a home that is $726,201 or more. The major difference between the two conventional types of loans is that the bank or lender is taking on more risk, they require the borrower of a Jumbo loan to have a different down payment amount, debt-to-income-ratio, etc. to show the borrower can afford a larger loan payment.
A Non-conventional loan is a loan that is secured by the government. These loans include FHA, VA, and USDA loans. FHA stands for Federal Housing Administration and are great for homebuyers that don’t have a lot of down payment money. You can get an FHA loan for as little as 3.5% down. VA stands for Veterans Affairs. These loans are for veterans and active military members. These loans can be 0% down. USDA stands for U.S. Department of Agriculture, and these loans can also be 0% down. These loans are meant to help out people buying and living in rural areas, so there are certain areas that allow you to use them.
There are many special programs that are available for buyers that will help you lower your property taxes, your down payment, or your interest rates. One of these options in Oregon is the Oregon Bond loan, which is paired with an FHA loan. This means you could have only a 3.5% down payment needed, and potentially a lower interest rate if you meet the Oregon Bond requirements.
For all types of loans, it can be very quick and easy to apply for and see which home loans you can qualify for. We can help connect you with highly experienced lenders to answer all your questions, get you preapproved, and give you a real answer to the question, “How much home can I really afford?” I promise you it’s more than you think!
Contact us here for a great lender referral.