Buying a home is a whole new world for many people. There are tons of new jargon terms to learn, a lot of financial stress and uncertainty, and tons of places where things seem like they can go wrong. It totally makes sense if you’re stressed about the home buying process and aren’t sure what the right way to go about it is.
One thing that’s important to know is that, under most circumstances, you’ll be financing your home. Unless you’re wealthy enough to purchase a home outright, or you inherit a home from someone who has moved out of it or passed away, chances are you’ll be making monthly payments of some kind.
The question is, what kind of home loan is right for your specific situation? Home loans are most often called mortgages. A mortgage is a loan from a bank, credit union, or lending agency. Essentially, they purchase the home for you on your behalf. Then, you spend the next couple decades paying them back for it. This financing vehicle makes home buying accessible for many people who might not be able to otherwise. When considering mortgages, there are a few factors to consider:
- Interest rate: this is the amount of money the bank charges you for the pleasure of borrowing their money. This will largely depend on your credit score.
- APR: Annual percentage rate is the interest rate plus any closing costs, fees, or other payments you’ll have to make the bank or agency.
- Loan term: do you have the cashflow for a relatively short 10-year loan, or will you opt for the more common 30-year option?
- Penalties: how strict is your lender? If you miss a payment due to financial hardship, will they immediately seize the property, or is there a grace period?
Let’s take a look at three different kinds of loans with these factors in mind, so you can better make a decision about your homebuying future.
What is a VA loan? VA loans are backed by the Veteran’s Administration. Whenever the government backs a loan, you know it’s probably a good deal. The lender doesn’t worry as much about borrowers defaulting because they know they’re insured by the government. That means they’re more willing to offer better conditions:
- Lower interest rate and APR
- Potential options for those with lower credit scores
- Fewer penalties
VA loans are specifically intended for veterans and active duty service members, so if you are not one of those, they may not be available for you. Let’s take a look at our two other options.
Bank or credit union loan
Banks and credit unions are two of the more common places that offer mortgages to potential homebuyers. They tend to be some of the most reputable and flexible options, as they’re established experts and know the ins and outs of the industry. On top of that, most banks and credit unions are backed by a large network of professionals, so they will be helpful to you in every step of the process.
The catch, however, is that banks and credit unions may have limits on the credit scores of potential borrowers. That means that those with lower credit may have a hard time getting the terms they desire – or even securing a loan at all. You may need to spend some time rebuilding your credit score to be able to secure a loan at the interest rate you desire, if your score is a little on the low side.
Private lending agency
Private lending agencies are neither banks nor credit unions. They exist specifically to lend money – whether that’s for a car, a wedding, or a mortgage. Because they specialize in loans, they may be able to provide you with a number of different financing options, if you need it.
Some lending agencies may also provide more flexible terms for borrowers with lower credit scores. However, it’s smart to be wary of these agencies. Some engage in more predatory practices, offering loans with low initial rates, then hiking the rate up after a few months. They may also be quick to repossess property after a couple of missed payments. If you do decide to loan from a lending agency, it’s smart to have a legal professional look over the terms of the loan, just to be safe.
Buying a home is exciting, even if it is a bit stressful. With the right knowledge, however, you can be empowered to make the right decision for your finances.