Buying a home is exciting, but the financing component can feel daunting, but choosing between the best investment mortgage lenders doesn’t have to be painful if you know your requirements. Once you’ve done some homework and narrowed-in on a budget and down payment amount, and reviewed your credit, you’ll have a better idea of what loan works best for your needs.
Here are some of the most common types of mortgages:
A conventional mortgage is a home loan that’s not insured by the federal government. There are two types of conventional loans: conforming and non-conforming loans.
A conforming loan simply means the loan amount falls within maximum limits set by the Federal Housing Finance Agency. The types of mortgage loans that don’t meet these guidelines are considered non-conforming loans. Jumbo loans, which represent large mortgages above the FHFA limits for different counties, are the most common type of non-conforming loan.
Generally, the best investment mortgage lenders require you to pay private mortgage insurance on conventional loans when you put down less than 20 percent of the home’s purchase price.
Benefits of conventional mortgages:
They can be used for a primary home, second home, or investment property
Overall borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher
You can ask your lender to cancel PMI once you’ve reached 20 percent equity
You can pay as little as 3 percent down on loans backed by Fannie Mae or Freddie Mac
Drawbacks of conventional mortgages:
Minimum FICO score of 620 or higher is often required
You must have a debt-to-income ratio of 45 percent to 50 percent
You’ll likely need to pay PMI if your down payment is less than 20 percent of the sales price
Significant documentation required to verify income, assets, down payment and employment
Who should get one?
Conventional loans are ideal for borrowers with strong credit, a stable income and employment history, and a down payment of at least 3 percent.
Jumbo mortgages are conventional types of mortgages that have non-conforming loan limits. This means the home price exceeds federal loan limits. For 2021, the maximum conforming loan limit for single-family homes in most of the U.S. is $548,250, but in certain high-cost areas, the ceiling is $822,375. Jumbo loans are more common in higher-cost areas, and generally require more in-depth documentation to qualify.
Benefits of jumbo mortgages:
You can borrow more money to buy a home in an expensive area
Interest rates tend to be competitive with other conventional loans
Drawbacks of jumbo mortgages:
Down payment of at least 10 to 20 percent is needed
A FICO score of 700 or higher typically is required, although some of the best investment mortgage lenders will accept a minimum score of 660
You cannot have a debt-to-income ratio above 45 percent
Must show you have significant assets (generally 10 percent of the loan amount) in cash or savings accounts
Who should get one?
Jumbo loans make sense for more affluent buyers purchasing a high-end home. Jumbo borrowers should have good to excellent credit, a high income, and a substantial down payment. Many of the lenders offer jumbo loans at competitive rates. Keep in mind that whether or not you need a jumbo loan is determined solely by how much financing you need, not by the purchase price of the property.
The U.S. government isn’t a mortgage lender, but it does play a role in helping more Americans become homeowners. Three government agencies back mortgages: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans).
FHA loans – Backed by the FHA, these types of home loans help make homeownership possible for borrowers who don’t have a large down payment saved up or don’t have pristine credit. Borrowers need a minimum FICO score of 580 to get the FHA maximum of 96.5 percent financing with a 3.5 percent down payment; however, a score of 500 is accepted if you put at least 10 percent down. FHA loans require two mortgage insurance premiums: one is paid upfront, and the other is paid annually for the life of the loan if you put less than 10 percent down, which can increase the overall cost of your mortgage.
USDA loans – USDA loans help moderate- to low-income borrowers buy homes in rural areas. You must purchase a home in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a downpayment for eligible borrowers with low incomes.
Benefits of government-insured loans:
They help you finance a home when you don’t qualify for a conventional loan
Credit requirements are more relaxed
You don’t need a large down payment
They’re open to repeat and first-time buyers
Drawbacks of government-insured loans:
Many of these loans have mandatory mortgage insurance premiums that cannot be cancelled on some loans
You could have higher overall borrowing costs
Expect to provide more documentation, depending on the loan type, to prove eligibility
Who should get one?
Government-insured loans are ideal if you have low cash savings or less-than-stellar credit and can’t qualify for a conventional loan. VA loans tend to offer the best terms and most flexibility compared to other loan types for qualified borrowers.
Fixed-rate mortgages keep the same interest rate over the life of your loan, which means your monthly mortgage payment always stays the same. Fixed loans typically come in terms of 15 years, 20 years, or 30 years.
Benefits of fixed-rate mortgages:
Your monthly principal and interest payments stay the same throughout the life of the loan
You can more precisely budget other expenses month to month
Drawbacks of fixed-rate mortgages:
You’ll generally pay more interest with a longer-term loan
It takes longer to build equity in your home
Interest rates typically are higher than rates on adjustable-rate mortgages
Who should get one?
If you plan to stay in your home for at least seven to 10 years, a fixed-rate mortgage offers stability with your monthly payments.
Unlike the stability of fixed-rate loans, adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down with market conditions. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. Look for an ARM that caps how much your interest rate or monthly mortgage rate can increase so you don’t wind up in financial trouble when the loan resets.
Benefits of adjustable-rate mortgages:
You’ll enjoy a lower fixed rate in the first few years of homeownership
You’ll save a substantial amount of money on interest payments
Drawbacks of adjustable-rate mortgages:
Your monthly mortgage payments could become unaffordable, resulting in a loan default
Home values may fall in a few years, making it harder to refinance or sell your home before the loan resets
Who should get one?
You must be comfortable with a certain level of risk before getting an ARM. If you don’t plan to stay in your home beyond a few years, an ARM could save you a lot in interest payments.
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