Owning a home is like a dream. Not only does it give you a sense of ownership but also you get a lot of economic benefits.
Are you thinking of buying a new home or wanting to relocate to a bigger place? There are various programs for mortgage loans in California to ease your financial problem.
Choosing the right mortgage program can be confusing and complicated. This article will act as a guide for selecting the best mortgage program according to your needs.
Mortgage Determining Factors-
When you’re choosing a home loan program, you have to make two major decisions. First is whether you want a conventional or VA or FHA loan. The second determinant is the mortgage rate. The mortgage can either be fixed or adjustable.
Fixed Mortgage Rate-
The interest is charged at the same rate for the whole duration of the loan. The principal amount and the interest remain the same for each month. This helps in making budgeting easy and convenient for the borrower. This provides protection against failure of payment as there is no fluctuation in the payable amount.
Adjustable Mortgage Rate-
In the case of an adjustable interest rate, the rate remains constant for a specified period of time. The initial rate is generally lower than the market rate. After that, the rate gradually increases according to the pre-decided rate. There is an element of risk involved as the rate is variable.
Types Of Mortgage Loans In California-
Conventional Loans:
A conventional loan can be of different types. This type of loan is not backed up or guaranteed by the government. Home lenders in California can provide conventional loans at attractive terms.
The two common types of conventional loans are-
1. Conforming Loans:
The conforming loans are such loans that follow the funding rules or standards set by the government-approved mortgage companies Fannie Mae and Freddie Mac. Also, they adhere to the limits set by the Federal Housing Finance Agency (FHFA).
Every year a loan limit is released for each county in the country. The limit is set after determining the cost of homes in a particular county in the previous year. The amount of the loan cannot exceed the limits. In 2022, the limit in high-cost areas is $9,70,800 while in other low-cost areas, the limit is $6,47,200.
2. Jumbo Loans or Non-conforming Loans:
Unlike conforming loans, these loans do not follow the prescribed standards of the Federal Housing Finance Agency (FHFA). These loans are generally taken for larger properties. When the loan amount exceeds the prescribed limits of conforming loans then non-conforming loans can be taken.
Non-conforming loans or Jumbo loans aren’t backed up by any financial institution or government agency. As these loans include a big amount the degree of risk involved also increases. So the lender will consider the credit score and repaying capacity of the borrower. The down payment can be higher for such loans.
3. VA Mortgage:
Another type of home loan in California insured by the Department of Veterans affairs (VA) is VA mortgage. This type of loan is given to only military families and their spouses according to their eligibility. The interest rate on such loans is lower and there is zero down payment.
Additionally, you won’t require any mortgage insurance to get a VA loan. You can be eligible for a VA loan if your credit score is minimum 660 and your debt-to-income ratio is 41%.
4. FHA Loans:
FHA mortgage in California is especially for those who haven’t owned a house before or in the last three years. Californians with a non-desirable credit score or those who are looking for a low down payment can get an FHA loan.
These loans are backed or insured by the government through their agency called Federal Housing Association (FHA). Being backed up means in case of any default, the government agency will repay the loan.
You can get a FHA loan with a 3.5% down payment if your credit score is 580 or above. Even with a credit score of 500, you can get a FHA loan by paying a 10% down payment.
5. USDA Loans:
Another one in the list of government backed loans is USDA loans. These loans are backed or aided by the United States Department of Agriculture. These loans are designed for families with low or middle level income looking for homes in rural areas. To be eligible for loan, the property must be located in USDA eligible area.
The interest rates on such loans are generally lower and there is no down payment. Unlike conforming loans, USDA loans do not have any limit. The credit requirements are quite flexible which make it more desirable, especially for first time owners. An added advantage is there is no minimum needed credit score. However, in some cases, a credit score of 640 is required.
6. Reverse Mortgage:
It is a loan that can be taken by a person aged 62 or above. The homeowner or borrower who has gained home equity over time can borrow against the total value of the home. Unlike a forward mortgage, the lender is the one who makes payments to the homeowner in exchange for his equity.
The homeowner can choose whether he needs a lump sum amount or monthly payments. The maximum loan limit depends on factors like the age of the borrower, interest rate and the current value of the home.
As the payments are made, the homeowner’s equity keeps decreasing. Reverse mortgage rates differ in some cases. This type of loan helps the elderly to meet their expenses. Reverse mortgage loans are non-taxable which is a great benefit.
7. Non-Qualified Mortgage Loans:
Most mortgage loans have strict criteria for eligibility. That is not the case with non-qualified mortgage loans. People with non-traditional or fluctuating incomes can apply for Non-QM loans.
The terms of repayment can be quite flexible. If your income or financial position doesn’t meet the requirements of a qualified loan, you can go for a non-qualified loan. The risk factor is high in non-qualified loans. The lender might go through your bank statements to determine your repaying capacity.
To control the risk, the lender can provide a loan on the following terms–
Balloon Mortgage:
In a balloon mortgage, the borrower pays monthly installments as paid in any kind of mortgage for a specified period of time. After the period ends, the remaining amount has to be paid in a lump sum.
This can be beneficial if you’re expecting to receive a large amount of money after the expiry of that period.
Interest Only Mortgage:
As the name suggests, the borrower has to pay only the interest amount that accrues every month. This means that the borrower only pays the interest and not the actual principal amount that he has borrowed.
These loans are generally given for a period of 10 years or less.
The terms are decided by the lender so they can differ. But generally, the lender will focus on your credit score and debt-to-income ratio. A drawback is that it would take a long time to build up equity.
8. HELOC Loans:
Home Equity Line of Credit or Home Equity Loans are provided on the basis of the equity that the borrower has gained in their house. Equity means the difference between the remaining mortgage and the total value of the borrower’s house.
These loans are taken as a second mortgage and are usually taken when in need of funds. A disadvantage of such a type of loan is that the home becomes collateral.
Like any other mortgage, the eligibility criteria include a good credit score, low debt-to-income ratio, and the borrower’s equity in the home. To qualify for such a loan, a borrower needs a credit score of 620 or more. The favorable debt-to-income ratio is 40% or lowers to acquire a home equity loan.
9. Mortgage Refinance:
Refinancing a home means taking up a new loan that replaces the existing mortgage. The primary reason for refinancing is lower interest rates. This allows the borrower to save money or pay back the original mortgage sooner. Other reasons for refinancing can be home improvements or renovations.
The existence of the loan is completely separate from the original mortgage loan. So the terms of the new loan can be different from the original mortgage. The borrower can switch from a fixed-rate mortgage to an adjustable-rate mortgage or vice versa.
The borrower can select whichever is more suitable. The refinance lender in California will examine your finances and the loan will be given according to your creditworthiness.