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The San Diego Real Estate BLOG
Buying a Home #4:
Types of Loans
You’ve been pre-approved, you’ve completed your search, you’ve found your San Diego dream home, you made an offer and had it accepted, and escrow has begun, and now the moment of truth has arrived:
It’s time to buy your home.
The average price of a home here is San Diego is almost $600,000, or closer to $800,000 if you want to live somewhere like Point Loma. While some buyers have the means to simply buy a house outright, and some are able to make an “All-Cash” offer by leveraging some other form of credit that does not require them taking out a loan from a bank for the specific purpose of buying a home, the vast majority of home buyers will need to secure financing to purchase a home.
There are many options, but which type of loan is right for you?
This week on the San Diego Real Estate BLOG, we examine the 5 most common types of residential homes loans and explain how they work so that you can make the best choice for your own set of circumstances.
This is yet another reason working with a licensed Realtor makes the home buying process much easier, as they can walk you through this process and help you choose the right type of loan for your particular set of circumstances. Many also have preferred lenders that they work with that will make the process run even that much more smoothly.
So without further ado, here are the 5 most common types of residential loans:
If you you missed the first few posts in our series on the home buying process, you can catch up here:
Buying A Home #1: Getting Pre-Approved
Buying A Home #3: Types of Escrows
Fixed Rate Mortgage Loan
This is the most strait-forward type of loan available, and the kind that is most typically used in residential real estate transactions.
With this type of loan, the buyer pays the same interest rate on the borrowed amount for the entire length of the loan. This type of loan is often the best option for most buyers as the monthly payment will never change regardless of the length of the loan.
These types of loans tend to have a slightly higher interest rate than adjustable-rate loans, but come with the security of knowing that there won’t be any rate hikes in the future.
Adjustable Rate Mortgage Loan
As is implied in the name, this type of loan has an interest rate that is adjustable from year to year. With and adjustable-rate mortgage loan (or ARM), the rate of the loan will fluctuate both up and down based on market interest rates.
ARMs also have a hybrid option, where the loan begins with a fixed rate for a specific amount of time before the rate begins to adjust annually.
ARMs will tend to have a lower rate up front so they appear more appealing, especially to first-time homebuyers and other types buyers on a strict budget. However, as the rates of these types of loans can (and tend to) rise over time, home owners could find themselves having difficulty paying or even being unable to pay at all in a few years when the rates a increase dramatically.
Conventional Loan
A conventional loan is a type of loan that is not backed by the government. These types of loans are more ideal for borrowers who have good to excellent credit, and also have a good debt-to-income ratio.
These types of loans typically cost the buyer a bit more cash “up front” as they tend to require larger down payments, and include things like closing costs, mortgage insurance, and points.
As a general rule, it is easier to qualify for a this type of loan, but buyers need to have excellent credit to receive the best interest rates.
Federal Housing Administration (FHA) Mortgage Insurance Program
FHA loans are loans that are insured by the Federal Housing Administration of the United States of America. This is a government agency within the Department of Housing and Urban Development (HUD).
This type of loan requires that the buyer use an FHA-approved lender, and that the buyer pay for private mortgage insurance, which protects the lender should the buyer default on the loan. This additional insurance cost will increase buyer’s monthly mortgage payments, sometimes significantly.
Many think that only first-time buyers are eligible for FHA loans. But this is not the case. This type of loan is popular because they require less of a cash down payments upfront, sometimes even requiring as little as 3.5 percent of the home price as a down payment.
The lending standards for this type of loan also are not as stringent as those associated with a conventional home loan. However, a credit score of at least 500 is required to qualify for an FHA-type loan.
Veteran Affairs (VA) Loan
VA loans are loans offered to military members of the United States armed forces and their families. These types of loans are backed by the U.S. Department of Veterans Affairs, which means that if a borrower defaults on their loan, the VA will reimburse the lender for any losses.
To qualify for a VA loan, borrowers will need to have suitable credit, sufficient income, and a valid Certificate of Eligibility from the VA. Only service members and/or their spouses who meet specific service requirements and received and honorable discharge can obtain a Certificate of Eligibilty.
This type of loan comes with the ability to obtain up to 100 percent financing, waiving the need to make a down payment.
While you’re here, you might want to check out our previous post on Getting Your Home Ready for Summer
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