The sheer number of financing options available to home buyers today can be more than a little overwhelming. It often takes a good amount of research for buyers to determine which option is best for them, for their particular life circumstances and financial position. Understanding the various options is the first step toward making the right decision. So here are 5 financing options to help you buy a house in Sacramento.
1. Conventional Loan
The first of the Sacramento financing options to consider is the conventional loan. This is the old standby option that most buyers used in the past.
These loans “are mortgages that are not insured or guaranteed by the federal government. They are typically fixed-rate mortgages. Although their stricter requirements for a bigger down payment, higher credit score, [and] lower-income-to-debt ratios . . . make them the most difficult to qualify for, conventional mortgages are usually less costly than guaranteed mortgages.”
Conventional loans also usually take one of two forms: conforming or non-conforming. Conforming loans, as the name suggests, conform to guidelines set forth by entities like Fannie Mae and Freddie Mac, guidelines having to do with things like loan amount limit. Non-conforming loans, on the other hand and obviously, don’t necessarily comply with such guidelines and often come with higher interest rates.
And if these distinctions sound more than a little confusing (and, actually, they are), consult your local real estate agent for some explanation and guidance. (To discover more, call (916) 949-6929.)
2. FHA Loan
A Federal Housing Administration (FHA) loan is, unlike a conventional loan, a government-backed mortgage loan. So owing to this backing, FHA loans typically have lower down payment requirements and are easier to qualify for. This means that an FHA loan is an excellent one of the Sacramento financing options for first-time home buyers. It’s a great way for them to get into home ownership with a lower credit score and a down payment of as little as 3.5%.
But there’s a catch. With the lower down payment, buyers will usually have to pay for private mortgage insurance (PMI). The cost of this PMI (which is a safety net for lenders when the down payment is lower) is typically rolled into the monthly mortgage payments. What this means is that FHA loans can cost substantially more over the life of the loan.
3. VA Loan
If you are a veteran or active-duty military, there is another attractive financing option to help you buy a house in Sacramento. And this is a VA loan guaranteed by the U.S. Department of Veterans Affairs.
Here’s how it works, according to industry financial pros: “The VA does not make loans itself, but guarantees mortgages made by qualified lenders. These guarantees allow veterans and service people to obtain home loans with favorable terms, usually without a down payment. In most cases, VA loans are easier to qualify for than conventional loans. Lenders generally limit the maximum VA loan to conventional mortgage loan limits.”
4. Owner Financing
One of the growing Sacramento financing options is owner financing. In this financing arrangement, “the current homeowner puts up part or all of the money required to buy a property. In other words, instead of taking out a mortgage with a commercial lender, the buyer is borrowing the money from the seller. Buyers can completely finance a purchase in this way, or combine a loan from the seller with one from the bank.” The seller and buyer agree on the interest rate and the amount of the monthly payment, and then (typically) a promissory note is drawn up and entered into the public record.
Owner financing can take to the form or a mortgage or lease-purchase agreement (sometimes known as a contract for deed). Just be aware that owner financing often carries more risk for you, the buyer. So be sure to get your local agent’s input (for pertinent laws vary) before signing anything.
5. Type of Mortgage Rate
Besides the kind of loan when considering financing options for a Sacramento house, you will also need to consider the type of mortgage rate that best fits your needs. The two main types are fixed-rate and floating- or adjustable-rate and each has its own peculiar benefits and downsides.
With a fixed-rate mortgage, the interest rate stays the same over the entire life of the loan – it never changes. The advantage here is that buyers will know what their payments are always going to be and can budget accordingly. But if you get locked into a fixed rate when rates are high, it may not be such a great thing.
An adjustable-rate mortgage (ARM) starts out with a fairly low-interest rate that increases later on. This type of mortgage rate “is designed to assist first-time buyers or people who expect their incomes to rise . . . Of course, this option can be risky if your income does not grow in step with the increase in interest rate.”
Cut Through the Confusion in Financing Options
Often, in light of all these possibilities cluttered with industry jargon, it takes a real estate professional to make sense of it. And that exactly where our agents can help.