You’re tired of renting, and now you’re ready to settle down in the perfect community and become a homeowner in the perfect home – so now what? What are the home loan options for buyers?
Let’s start with the best possible scenario, in which you have won at the game of life, and you are a young founder of a successful technology startup called Garage Beacon. You’ll have plenty of cash to burn in the future but the revenue just hasn’t come in yet, so you have to apply for a home loan, but you intend to go big. After all, you worked hard, and you have to entertain those new clients from overseas, right? Fake it until you make it – it’s all about the image. In this situation, you would have to apply for what’s called a jumbo mortgage. These loans are too big for lenders like Fannie Mae and Freddie Mac, and the threshold varies by region, but generally the threshold for these types of home loans is about a half a million dollars. The rate of these loans is going to be higher than the rates for smaller loans because the lender’s financial risks have increased significantly. In this situation it would be advisable just to wait for the startup’s cash to flow in and purchase your dream home with straight cash and forgo the increased home loan rate – but nonetheless this is America, and we don’t like waiting.
What if instead of being a young technology mogul, you’re more of a humble country-type person that wants to keep things simple and move out to a rural area? Well, a balloon mortgage could be a great option for you. In a balloon mortgage, the buyer agrees to pay normal month-to-month payments for a given amount of time – just like a traditional mortgage – sometimes it can be a few months, 3 years or even 10 years. After this set period, the buyer then has to either pay off the rest of the mortgage in one lump sum or refinance the home loan.
But let’s say you want to split the difference between country living and the high-paced city living of the young technology founder, but you want to build new. You have a home loan option called construction-to-permanent mortgage. This lets buyers cover the costs of building the new home, and the contractors are paid directly from the mortgage payment, with the buyer paying the interest on the outstanding amount. After the construction is completed and the contractors are squared away, the mortgage transitions over to a permanent loan in which there is a fixed-rate or adjustable-rate mortgage.
In another scenario, you find a seller that for whatever reason doesn’t have the ability or desire to secure a home loan. What happens here? Is the seller hopeless? No, of course not. The seller has the ability to act as the lender instead of a bank and provide a financing agreement for this lucky buyer. The buyer then makes monthly payments directly to the seller instead of the bank until the home loan is paid off. A promissory note is secured by the property to enforce this agreement.
In a very rare situation, you have a seller that hasn’t quite paid off the mortgage on their home but they need to sell for whatever reason. In this situation, it’s possible to pass the existing home loan off on to the buyer using an assumable mortgage. The idea is normally to use the profit from the sale to cover the existing loan but if that can’t happen it’s possible to pass it on to the buyer and have them pay off the remaining amount on top of whatever home loan may or may not exist.
And finally, the most popular home loan type – the FHA home loan. These are mortgages that are insured by the Federal Housing Administration, and the borrowers pay for this insurance, which protects the lenders in a scenario in which the borrower defaults on the loan. Because these are insured, lenders can offer these FHA mortgages to borrowers at much lower interest rates and with relaxed qualification requirements, so more people can get these insured home loans. These types of home loans are intended for the bulk of buyers. If your credit score got dinged for whatever reason, it’s still possible to secure a home loan. A down payment is required, and, depending on the borrower’s credit score, it can fluctuate between 3 percent to 10 percent of the FHA home loan.
Whatever your situation, there are plenty of home loan financing options tailored to your individual needs, and now you can find one that fits.