One of the greatest barriers to home ownership is mortgage expenses. With Interest rates being as high as they are, many prospective home buyers feel deterred and pull back due to the rates in this current market. In this article, we will cover the different types of mortgages available, as well as any financing options and programs that you could take advantage of to offset those higher rates.
There are a few types of mortgages to choose from with different expenses and eligibility requirements. Typical loan types include Conventional, FHA, and VA loans. More obscure options include Bank Statement, ITIN, Foreign National, and Bridge loans. We will cover each of these loan types, as well as a variety of programs you probably did not know were available to you.
Conventional loans are the most common mortgage loan offered by lenders that usually require a credit score of 620 or higher. A typical down payment for these loans range from 5 to 20%. Conventional loans offer even better rates for first time home buyers. The down payment for these loans is typically 3%, and in order to qualify, you must not have owned a home for the last three years.
These loans are often the best option for borrowers with strong credit scores.
FHA loans are mortgages insured by the Federal Housing Administration that have more lenient requirements for credit scores, allowing borrowers with scores in the low 500’s to still secure a loan. With a 580 FICO score, the rate typically falls at 3.5%. For borrowers with scores in the low 500’s, rates are closer to 10% down.
These loans are popular amongst borrowers with poor savings or credit issues.
VA loans are available for veterans that have a valid certificate of eligibility. These loans require 0% down, since lenders take on minimal risk due to the loan being backed by the Department of Veteran Affairs. Another advantage of the low risk of these loans is the lack of a requirement for private mortgage insurance, allowing borrowers to save even more.
There are no credit requirements for these loans, and this is the best option for those who have served in the military.
Bank Statement loans do not require the typical financial paperwork required for most loans to prove income, such as providing tax returns. Instead, these loans require you provide 12 to 24 personal or business bank statements for approval. These loans are ideal for self-employed borrowers and should be considered if you have an inconsistent stream of income or claim significant tax returns. Credit requirements and down payments are around a minimum of 620 at 20% down with better rates and terms at higher scores.
At 20-25% down, some lenders will offer a 1 Bank Statement loan requiring only one bank statement to qualify. These loans do require 12 to 18 months of reserves to make the program work. It is important to note that these loans are not backed and are therefore considered a riskier option than traditional loans.
There are a few significant drawbacks to these loans, including higher rates and pre-payment penalties. If you can qualify for a traditional loan, a bank statement loan is likely not the right choice for you.
ITIN loans and Foreign National loans are for borrowers who lack the traditional documentation required for approval. ITIN loans are issued by the IRS and do not require a social security number. Individual Tax Identification Numbers (ITIN) are issued to anyone filing a US tax return and can be used as a form of ID in place of an SSN for loans.
These loans require proof of employment for at least two years, as well as two years of tax returns. Credit requirements vary from lender to lender but are typically more flexible than other types of mortgages. The down payments on these loans run a bit high at a range of 10 to 20%.
Foreign National loans are intended for non-US citizens who are interested in property ownership in the US. Basic requirements include a US visa, two years of employment history, and proof of income. These loans typically require 25 to 30% down due to a lack of US credit history. Lenders may order an International Credit Report (ICR) if you lack US credit history. This report provides lenders with foreign credit history and may be required for approval.
Bridge Loans allow borrowers to purchase a new home without selling their current one first. These loans are a great way to avoid being contingent on the sale of your current home. This is especially helpful in a competitive market where any type of contingency can lead to you being passed over as a potential buyer. So, how do you know if you qualify for this type of loan? Perform this formula to see if a bridge loan could benefit you. First, add your CURRENT LOAN AMOUNT + the NEWPURCHASE PRICE of the home you want to buy. Then, divide that by your HOME’S CURRENT VALUE + THAT NEW PURCHSE PRICE.
Then, see what the percentage comes out to. You want the percentage to be lower than 85%. If it is, then this means you can purchase your new home with 100% financing while remaining non-contingent on the sale of your current home. If this is the case, you’re in good shape to apply for a bridge loan.
For more information and examples of bridge loans, check out this article: Want to Buy, Need to Sell? Get a Bridge Loan
If you want to buy but are worried about interest rates or mortgage requirements, there are a few different options to explore before abandoning the idea of home ownership altogether.
As far as interest rates are concerned, you can use the 2/1 seller buydown program. This works by lowing the interest rate on your mortgage by 2% in year 1 and 1% in year 2. This can help you save hundreds of dollars every month for the first two years (ideally, until you can refinance). Our preferred lender, AmCap Home Loans, will offer a FREE refinance when interest rates drop, offering a $2,000 lender credit to help fight these higher rates and bring your rate down.
Regarding mortgage requirements, down payments often require a larger sum of money up front than most people easily have on hand. However, many lenders offer Down Payment Assistance for conventional, FHA, and VA loans. Qualifications are based off your income and assistance can reach up to 5% of your down payment.
No matter what financial situation you find yourself in, these programs and mortgage types make home ownership a very real possibility for everyone.
If you’re looking to buy a home, don’t put it off because you feel you cannot afford it or have too low of a credit score.
There are so many options out there intended to help you get into a home, stop renting and begin building equity – which continues to increase every year.
When you are ready to get started, call us at M&D Real Estate and secure one of our 5-Star Agents.
They will help you reach your goals and needs all within your timeline and price range, securing the best terms possible for you and guiding you throughout the process to get you into your dream home as soon as possible.
Leave your details, select your interest(s), and we’ll get you more information on how we can help.