Purchasing a home can be the largest expense that you could make in your life. Understanding the various options that you have to finance your home will better prepare you for knowing which lender could be the best option for yours and your family's financing needs. Just as important, choosing the most appropriate home loan financing option for you and your family can save you thousands.
According to National Association of Realtors, during 2022, 78% of US homebuyers purchased real estate using lender financing. If you are fortunate enough to purchase your home with cash, then congratulations to you! You make up less than 22% of homebuyers across the United States. For everyone else and even homebuyers with cash, home financing options may be the best route, depending on various circumstances.
Traditional home loan financing can be categorized into the following three most common options:
1. Conventional home loans
2. Government-backed home loans
3. Lender-provided portfolio home loans
Conventional home loans are among the most popular options for home financing. Conventional home loans sold on the secondary market as mortgage-backed securities and are underwritten based on Fannie Mae or Freddie Mac guidelines. In other words, conventional home loans have a set criteria that are required to be met in order to qualify and approve. Such criteria may include minimum down payment, minimum credit score, maximum debt to income (DTI), and other factors such as various types of qualified income, i.e. employment income, retirement income, social security income, etc... Traditional conventional home loan options will also have private mortgage insurance for any borrowers who make a down payment of less than 20% or have a loan to value ratio of more than 80%.
Conventional home loans require as little as 3% down, but will require private mortgage insurance that is paid monthly with the principal, interest, taxes, and insurance payment.
Government-backed home loans are common as well. Primarily due to the lower down payment requirement and minimal (if any) private mortgage insurance, home loan options such as FHA, USDA, and VA loans are attractive to qualified buyers who choose to purchase their next home as their primary residence with little to no money down. Government-backed home loans are sold on the secondary market as mortgage-backed securities and are underwritten based on Ginnie Mae guidelines. Government-backed home loans traditionally require less of a down payment because the federal government provides a guaranty in the event that the home loan borrower goes into default and the home forecloses.
FHA home loans require a minimum down payment of 3.5%, but include an up-front mortgage insurance premium that is financed with the home loan, as well as monthly mortgage insurance.
USDA home loans may require $0 down payment, but also include an up-front mortgage insurance premium and mortgage insurance. However, USDA home loans are only available in select agricultural/rural areas across the nation and therefore, may not be available to everyone.
VA home loans require a $0 down payment, have no private mortgage insurance, nor any up-front mortgage insurance premium. However, for Veterans and service members that do not have a VA service-connected disability rating of at least 10%, a VA funding fee is assessed and typically financed with the home loan.
Lender-provided portfolio home loans are financing options that the lender intends to keep in-house, meaning they do not sell the loan to Freddie Mac, Fannie Mae or Ginnie Mae.
Your financial situation is unique! To confirm which home financing option would be best for you and your family, contact me or a trusted and verified lender.
This is a lot to educate yourself on and consider, but it’s important to do so because your home purchase may be the single largest expense of your life.
The answer to the most common question #8 for homebuyers "How do I get started?"
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the homebuying process across America.
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