Buying a home is a big investment. For most of us, it’s the biggest loan we’ll have in our lives. The Consumer Financial Protection Bureau discusses the different types of loans, many of which are available through private lenders and partially guaranteed by different federal programs, thus offering benefits for people who qualify. Talk with your real estate agent or lender to see which programs you may qualify for.
Conventional Loans
Most homebuyers get this type of loan, which is available through standard lenders. Typically, you put down 20 percent of the price of the home with this type of loan; buyers who put down a smaller amount (3-5 percent is common) often pay mortgage insurance. The government sets a maximum loan amount for these types of loans, which are also known as conforming loans.
VA Home Loans
The Veterans Affairs Administration has a program to help military veterans, soldiers and their families buy houses. You get these loans through a private lender, and the VA guarantees some percentage of it, which gives you, the borrower, better terms for the loan, often including a smaller down payment or no down payment at all and no mortgage insurance.
FHA Loans
The Federal Housing Administration’s program regulates and insures loans from private lenders, which let potential buyers pay a 3.5 percent down payment and do not require as high a credit score as conventional loans. These typically come with a higher interest rate than a conventional loan but is more accessible to a buyer whose credit or cash flow is limited.
USDA Loans
The Department of Agriculture offers loans to buyers who want to build or buy in rural areas. These are for low- to moderate-income purchasers; they do not require a down payment, and you pay a lower mortgage insurance rate. Your lender can tell you the income requirements and what areas in your city qualify as rural.
Down Payment Assistance
Some local governments and area nonprofits offer down payment assistance programs, usually for first-time or low-income homebuyers. Cities may do it to help employees overcome a high cost of living and get them connected to the town. Some of these are grants; often they’re second loans that are forgiven over time or that you repay when you sell your house.
Home Buying FAQs
Home buying is confusing, with jargon, unexpected expenses and lots of decisions to make, sometimes with what feels like little information.
What is Mortgage Insurance?
Mortgage insurance decreases the lender’s risk when making a loan with less than a 20 percent down payment. Private lenders usually get private mortgage insurance; rates vary according to down payment and credit score but is a percentage of your loan and paid monthly. Mortgage insurance also is required on FHA and USDA loans. Remember, this protects the lender, not the buyer.
What Does a Title Company Do?
According to Title Forward, the title company is the intermediary between buyer and seller, gathering and recording all the legal documents, ensuring the property title is free of liens or easements, holding your escrow money, filing the deed with the county and getting all the paperwork signed from both buyer and seller.
What Goes into Closing Costs?
Those fees, which run about 3 to 5 percent of the total cost of the house, include fees for your assessor and your lender’s appraiser; the title service fees, which pay for the title search, the premium for your lender’s title insurance policy, wire transfers and other costs of the title company; fees you pay to your lending institution for the processing of the loan; prepayment of some insurance, property tax and mortgage insurance; homeowners association fees; credit report fees; and some other processing fees. Usually the buyer pays these fees at the time of closing; you can negotiate for the seller to pay, but expect the cost of the home to increase.
What is the Difference Between Interest Rate and APR?
Your lender will provide you two numbers when you secure your loan: interest rate and annual percentage rate, or APR. The Consumer Financial Protection Bureau says the interest rate is the cost you pay annually to borrow the money. The APR accounts for points, mortgage broker fees and other fees you are charged for the loan. Points let the borrower make a tradeoff between upfront costs and monthly payments. You may pay more upfront but receive a lower interest rate.
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