For a lot of people, owning a home is right near the top of their ultimate wish list. However, the journey to home ownership can be long and filled with financial disappointment if not done properly. You can avoid a lot of hassles and bitter exchanges with lenders if you know some basic facts about home loans. This article explains everything you need to know to get started!
What is a Home Loan?
A home loan simply means borrowed money from a financial institution or lender to help you finance the purchase of a home with customised terms and conditions that vary for every bank. While many of them want you to take out a mortgage, in this case, you’re promised to repay the money you’ve borrowed with an agreed-upon interest rate. These days home buyers are fortunate enough to have access to multiple programs like conventional loans, FHA home loans or VA loans. It all depends on your service history and down payment which suits you.
You can easily get your home loan by knowing the criteria to be eligible for a home loan.
- A reliable source of income: It is the key; every Bank will be interested in your future ability to pay it back with a reliable source of income. 
- A debt-to-income ratio: Lenders usually prefer to see a smaller debt-to-income ratio (i.e; 28% of that debt going towards servicing your mortgage).
- A fair or good credit score: Yes, many would say you need a perfect 850 credit score to get the best mortgage rates but you can easily get one with a score as low as 620. For qualifying the best interest rates on a mortgage, aim for a credit score of at least 740.
- A down payment: If you want to get the lowest mortgage interest rates, you’ll need a down payment of at least 20% of the house’s purchase price.
Home Loan Tips & Advice
The following tips will help you make sure that your finances are set before you pay a visit to the lender.
- Choose between a fixed or adjustable-rate mortgage
- Make the biggest possible down payment
- Make sure your credit is in excellent shape
- Pay for points
- Have a long employment history
- Prove income stability
- Lower your debt-to-income ratio
Home Loan Options To Consider
Here are some options that you can avail while getting a home loan:
1. Conventional mortgages
Conventional mortgages are not insured by the federal government. If you have a good, stable income and a down payment of at least 3 percent, then conventional mortgages are for you.
Pros of conventional mortgages include low borrowing costs and 3% down payment. Also, you can ask your lender to cancel PMI once you’ve gained 20 percent equity.
Significant cons of conventional mortgages include a minimum FICO score of 620 and a debt-to-income ratio of 45 to 50 percent. 
2. Jumbo mortgages
Jumbo mortgages mean the home price exceeds federal loan limits. Jumbo loans are for high-end home buyers.
Pros of jumbo mortgages: You can borrow more money for expensive purchases with competitive interest rates. 
Cons of jumbo mortgages: 10 to 20% down payment is needed and you cannot have a debt to income ratio above 45%. Typically a higher credit score of 700 is required for the application.
3. Government-insured mortgages
The United States government plays a vital role in helping people own a house. The following agencies back mortgages:
- The Federal Housing Administration (FHA loans)
- The U.S. Department of Agriculture (USDA loans)
- Veterans Affairs (VA loans)
Government-insured loans are beneficial for those having low cash savings with more relaxed credit requirements. There are also some cons like higher borrowing costs, longer approval time and process.
4. Fixed-rate mortgages
Fixed-rate mortgages mean that interest rates would remain the same throughout your loan term. This is beneficial in terms of financial stability.
The disadvantages of fixed-rate mortgages include more interest rates with a longer-term.
5. Adjustable-rate mortgage
Adjustable-rate mortgages have fluctuating interest rates that can go up or down with market conditions.
ARMs are advantageous as you can enjoy a lower fixed rate in the first few years. But the cons are likely to consider including unaffordable monthly payments.
When it comes to home loans there are potential pros and cons to every option. But thorough research can make it easy for you to make a choice. It all depends on your situation, so you need to figure out which program might best suit you.
- Bieber, Christy. “What Do You Need to Qualify for a Mortgage?” The Motley Fool. December 08, 2018. https://www.fool.com/retirement/what-do-you-need-to-qualify-for-a-mortgage.aspx.
- “U.S. Bank Fixed-rate Mortgage.” Conventional Loans | Fixed-Rate Mortgages | U.S. Bank. August 31, 2020. https://www.usbank.com/home-loans/mortgage/conventional-fixed-rate-mortgages.html.
- Investopedia. “Jumbo Loan.” Investopedia. August 28, 2020. https://www.investopedia.com/terms/j/jumboloan.asp.
- “Adjustable-Rate Mortgages (ARM).” BBVA. https://www.bbvausa.com/mortgage/adjustable-rate-mortgage.html.