First comes love, then comes marriage. After that? You might be in the market for a home. Of course, you’ll need to decide on the best type of mortgage to finance your purchase, as the right decision can save you a considerable amount of money over the years.
So how do you know which type of loan is right for you? Part of your decision hinges on your financial situation and how much money you’ve saved for your down payment. If you fall into specific categories, you might qualify for programs that require no down payment at all.
1. Conventional Loans
Conventional loans are a wise choice for individuals who have a larger down payment. Some lenders will accept as little as 5%, although many require 10-20%. That might sound like a lot, but the money you spend gives you instant equity in the property.
This substantial down payment amount stems from the fact that banks have little recourse if you default — the federal government does not guarantee these loans. Plus, if you put 20% or more down, you won’t have to pay mortgage protection insurance (MPI).
If you meet this requirement, you can substantially lower your monthly payments.
Several types of conventional loans exist. The best choice for you depends upon your financial portrait.
Adjustable-rate mortgages have an interest rate that varies over the life of the loan. If rates rise, yours will increase, but if they go down, you enjoy a break. These types of loans offer a lower interest rate upfront, but you could end up paying more over time.
They make sense if you plan to fix and flip the property relatively quickly. If you opt for this type of loan, pay attention to the interest cap. Most loans place a cap on how much rates can increase per year or over the entire life of the loan.
If you want a predictable interest rate for the life of your loan, go with a fixed-rate mortgage. Your monthly payments will remain the same, making budgeting a snap. These mortgages work best if you intend to stay in your home for a considerable length of time.
Swing loans provide short-term financing at a higher interest rate. They’re useful if you need additional time to qualify for a different mortgage vehicle.
For example, if your landlord forecloses, you might want to move into your home right away instead of finding another rental. Maybe you need another three to four months before you’ll amass the 20% down to avoid paying PMI. A swing loan, also known as a bridge loan, offers a potential solution.
5. Government Loans
The federal government guarantees government housing loans. They have more flexible underwriting requirements, making them attractive to buyers who have less-than-perfect credit and low down payments.
However, because the government backs them, you must meet stringent credit score requirements and pay mortgage insurance. Unlike a conventional loan, you cannot stop paying this insurance once you hit the 20% mark. You must continue to pay it until you sell or refinance into a conventional loan.
FHA lenders can save you money on closing costs. The government limits them to charging no more than 3-5% of the loan amount in closing costs. It also enables the seller, builder or lender to pay some of these costs. To qualify, you’ll need two years of verifiable employment history and a credit score of 580 or above. If your credit score is lower than 580, you may still qualify if you can amass a 10% down payment.
If you’ve served in the military, you can qualify for a VA loan. With this type of mortgage, you need no down payment, although including one will get you equity.
It’s important to note that with both VA and FHA loans, you must use the funds for the purchase of a primary residence. You cannot use these vehicles for investment properties or second homes.
USDA mortgages are little known, but they cover properties in rural areas — so if you and your new spouse love the country life, this loan could be for you. You don’t need to buy a farmhouse, but you do need to purchase a qualifying property.
To qualify, your housing payment needs to comprise no more than 29% of your total income. Plus, you must meet debt-to-income and credit score requirements.
Unconventional Financing Methods
If you can’t qualify for a conventional or government mortgage, don’t throw up your hands in despair. You do have a few additional options.
1. Lease Option or Lease-Purchase
In this type of purchase, you rent, but you pay an additional fee for the option to buy the property during the lease term when you do qualify for a loan. In an option, you could pay as little as $1 extra per month. In a traditional lease-purchase, a portion of your rent goes toward the purchase price.
2. Seller Carryback
In a seller carryback, the seller acts as the bank for the buyer. The seller carries the original mortgage and may take out a second one to pay for costs. The buyer then repays this amount to the seller, typically by making monthly payments.
Finding the Right Mortgage
When it comes to buying a home with your partner, you have multiple options. Choose the one that works for you and move forward with confidence!