How to Finance Your Dream Home With These Common Residential Loans

Owning your dream home might seem like a pipe dream, but it can be a reality with the right loan program.

There are plenty of excellent residential loans to choose from, so how can you be sure which one works best for your unique situation?

Before you start the home loan application process, read on to learn more about the most common types of loans so you can secure the home of your dreams.

Conventional Residential Loans

A conventional loan is a mortgage that is not backed or secured by the federal government. These loans typically have a bit stricter guidelines than some of their government-backed counterparts.

Conventional loans are back by either Fannie Mae or Freddie Mac, and each institution has its own separate set of rules that underwriters must follow. People with moderate to high credit scores tend to use conventional loans to obtain their mortgage.

You can use this type of loan for your primary home, a second home, or for an investment property. The borrowing costs are often lower than other types of mortgages but interest rates may be a bit higher.

Some people think that conventional loans require a higher downpayment, but many programs allow borrowers to put as little down as three percent. You'll need to pay PMI if your downpayment is less than 20 percent.

One perk of a conventional loan is that once your equity reaches the 20 percent threshold, you can ask your lender to remove the PMI. This will make your monthly payments lower, which is always a great thing.

A Jumbo Mortgage

A jumbo mortgage is basically a conventional loan, but it has extended loan limits that exceed the federal guidelines. This means you can purchase a home for more money under a jumbo loan if you're approved.

Most borrowers who seek a jumbo mortgage are living in higher-cost areas of the country. This loan requires a lot more paperwork and information in order to be approved.

You can borrow more money to purchase your dream home in an expensive area with a jumbo loan. Your interest rate should be close to those of other conventional loans, which is a bonus.

A negative to jumbo mortgages is that a downpayment of at least anywhere from 10 to 20 percent of the purchase price is required. This means that this type of loan is typically reserved for the wealthy or those with a high amount of cash in the bank. 

You will need to have a credit score of 700 or higher in order to qualify for a jumbo loan, but some lenders may accept scores as low as 660. These residential loans are mostly geared toward people seeking a high-end home.

Government-Backed Loans

The government does not directly offer loans to consumers, but it does "back" or insure three different types of loans, similar to how Title Loans are backed by a vehicle title. These loans include FHA, USDA, and VA loans which all have their own unique guidelines and requirements.

FHA

An FHA loan is an excellent option for first-time homebuyers, specifically those with lower credit scores or smaller down payments saved. You'll need to have a minimum FICO score of 580 in order to get the low 3.5-percent downpayment.

If your score is around 500, you may still qualify for an FHA loan but you'll need a downpayment of 10 percent or more. With an FHA loan, you will pay a mortgage premium upfront, and then another one through the life of the loan if you're paying less than 10 percent down which will increase the total cost of the mortgage.

VA

Veterans, active-duty members, and their families can apply for a VA loan which offers borrowers flexible terms and low-interest rates. These loans are only available to current members or veterans of the U.S. military and their direct family members.

There is no downpayment required with a VA loan, and there's also no PMI which makes these mortgages quite desirable. Borrowers are required to pay a funding fee as a percentage of the loan amount. This fee is to help offset the cost of the program to the taxpayers. 

USDA

If you are a low-income borrower in a rural area, a USDA loan could be right for you. In order to qualify, you must live in a specific part of the country and meet some other criteria. There are income limits attached to USDA loans, but if you meet them or are below the threshold, you may not have to pay any downpayment whatsoever.

Government loans work well for those who might not qualify for a conventional loan, or for those who cannot afford a large downpayment. You can apply whether you're a first time or a repeat buyer.

Most government-backed residential loans require borrowers to pay a monthly premium like PMI that cannot be canceled. The overall borrowing costs are higher, but the rates are usually lower.

Find the Right Loan for You

Whether your credit is outstanding or you're in need of some downpayment assistance, there are plenty of residential loans available for buyers. Talk to several mortgage lenders to find out which ones you may qualify for.

Military veterans and those who live in rural areas should look into VA and USDA loans. If you're planning to buy a more expensive home, jumbo loans might be better suited for your needs.

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