Financing can be a challenging topic to understand. We have broken down some of the most common terms to help you better understand mortgage loans.
These loans finance the entire purchase price of a home. Check with your Realtor® and a lender for more information.
Rural Development (RD) Loans
A Rural Development loan is a financing option for those looking to purchase a home in an area with a population of 25,000 or less. As Northwest Arkansas grows, these opportunities are harder to find, but it is not impossible! Use this link to determine any home’s RD eligibility. Rural Development loans are subject to limitations such as income and size of household. Other limits may apply, click this link or speak with a lender about this financing option.
A VA loan is a mortgage loan for current and past service members, and surviving spouses. While 100% of the sales price can be financed, VA funding fees do apply but may be factored into the loan. Check VA loan eligibility at this link or speak with your preferred lender.
Other Special Financing
Many banks offer special programs for low-income borrowers or those in specific occupations such as teachers, doctors, and first responders. Make sure to ask your preferred lender about any additional incentives they offer.
FHA loans are backed by the federal government, specifically the Federal Housing Administration. These loans are typically for low-to-moderate-income borrowers and require a lower down payment of 3.5%. While there is no income limit, loan amount limits do apply. In 2023 the limit is a loan amount of $472,030. Check your FHA loan eligibility at this link or speak with your lender.
A Conventional Loan is not insured by the government and will require a larger down payment, and a higher credit score to obtain. The typical credit score threshold is 620 for a conventional loan. It is also important to keep in mind that a 20% down payment is required in order to avoid having to pay for additional mortgage insurance. Other limits that will factor in are your debt-to-income ratio and the size of the loan. While conventional loans have more limitations to qualify, the monthly mortgage payment is typically lower.
Adjustable VS Fixed Interest Rates
The interest rate you qualify for will vary based on a number of personal factors as well as the length of time over which you wish to finance the loan and whether or not you want to lock in a fixed loan or can be flexible with your rate changing over time.
Fixed rates are locked in at the time you secure your loan and do not change unless you refinance your loan. If interest rates go down you can always refinance to the lower rate, but keep in mind that refinancing fees will apply. Payments with a fixed-rate mortgage are typically more predictable than adjustable-rate mortgage payments.
Adjustable Rate Mortgages, or ARMs, are mortgage loans with interest rates that are fixed for a short period of time, usually a range of 4-10 years. After this time, the rate is subject to change depending on the market. ARMs typically have a lower starting interest rate associated with their higher risk. While an increasing interest rate can seem scary, they do have caps that do not allow rates to exceed a certain percentage. While refinancing is always an option at any point during the life of the loan, you’ll want to consider whether or not you will qualify for refinancing at the same or lower rate further down the road. There are many factors to consider when it comes to choosing an adjustable-rate mortgage.