The 7 Most Popular Mortgage Loans for Missouri Home Buyers
Most people need to take out a mortgage in order to be able to afford a home that meets their needs. A banking institution will work with you to find the best loan option that meets your specific situation. Things such as your debt-to-income ratio, credit score, employment history, savings, and spending habits will be used to determine what type of loan you qualify for. A mortgage is simply a loan that closes the gap between the available cash you have for a down payment and the purchase price of the home you wish to own. Thankfully there is a pretty wide variety of mortgage programs available to homebuyers.
Fixed-Rate Mortgage or Conventional Home Loans
Roughly 90% of home buyers chose a 30-year fixed-rate loan. It makes a lot of sense that this loan is the most popular mortgage in the country for a variety of reasons. The interest rate of a fixed-rate mortgage does not vary over the course of 30 years. This provides borrowers the benefit of lower monthly payments because the mortgage is extended over a longer period of time. However, it’s important to note that the borrower will pay more interest over the loan’s lifetime.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage, or ARM for short, is a home loan with an interest rate that changes. The initial rate is set below the market rate of most comparable fixed loans—this is called a “teaser” rate. For the first three to seven years of the loan’s life, this initial rate is typically cheaper than fixed-rate mortgages. However, Overtime the rate is expected to rise at regular intervals—this is called the adjustment frequency. This type of loan is very attractive to someone who plans on living in a home for only a short period of time.
An interest-only mortgage requires the borrower to pay just the interest portion of the loan for the first several years of the term. Once the initial period ends, (which is typically determined by your bank) the borrower will begin paying both the interest as well as the principle. Interest-only mortgages are very complex and are not often recommended by lenders.
A jumbo mortgage is a loan that exceeds the amount set by the Federal Housing Finance Agency. This amount can change on an annual basis to reflect the increase in median home values. As of 2021, you will need a jumbo loan if the property that you are looking at exceeds $548,250. For high-cost locations, such as California, the limit is $822,375. Most lenders will require a credit score of 680 or higher and a cash reserve of up to 12 months of mortgage payments. Furthermore, a lender can require at least two home appraisals before approval. Additionally, the closing costs tend to be significantly higher due to additional fees.
An FHA loan is guaranteed by the Federal Housing Administration and issued by government-approved lenders. This type of loan is designed to help low to moderate-income borrowers. If a borrower has a credit score of 580 or higher, the down payments can be as low as 3.5%. Even if someone has a credit score between 500 and 579, they can still qualify for a mortgage, they will just need to provide a down payment of at least 10% of the loan. For a borrower to be approved, one will also need to have a debt-to-income ratio of 50% or less. Debt-to-income or DTI is the percentage of pre-tax income that a borrower uses to pay their debts—such as credit cards, mortgages, auto loans, and student loans. Finally, FHA requires borrowers to pay for mortgage insurance. This insurance protects the lender in case of default.
A VA loan is a mortgage insured by the US Department of Veterans Affairs. Similar to conventional mortgages, VA loans can be issued by banks, credit unions, and private lenders. VA loans are available only to active military personnel and veterans who meet the required length of service. Spouses of military members who died while on duty are also eligible. VA loans do not require mortgage insurance or a down payment, and interest rate tend to be lower than FHA and fixed-rate mortgages. Another benefit of a VA loan is that a borrower can finance the cost of home improvements. It is important to note that borrowers who choose a VA loan must pay a funding fee and use a VA-endorsed appraiser. Additionally, one cannot use a VA loan to purchase a vacation home or investment property.
A USDA loan is backed by the US Department of Agriculture and is intended to help low-income borrowers in rural areas. These loans tend to have interest rates as low as 1% and no down payment requirements. The eligibility of this type of loan is determined by a home’s location and a borrower’s income level. Additionally, a borrower must have a debt ratio of 41% or lower. If someone has a credit score of at least 680, the USDA may consider higher DTIs.
Though I have just scratched the surface of some of the most popular mortgage programs, there are plenty of other options available. Finding a local mortgage lender that you trust is important. If you do not know where to start, reach out and we can give you some great options! Also, several cities around Missouri offer special loan programs designed specifically for their residents. Here are the Missouri statewide and regional homeowner's mortgage assistance programs.