What Is A Home Purchase Loan?
Most home buyers can’t afford to buy their home upfront without a loan. A home purchase loan allows you to borrow a significant amount of money to buy a house, using the property as security. Choosing the right home purchase loan is essential, especially in San Francisco, Berkeley, the wider Bay Area & the East Bay where house prices often exceed a million dollars. Buying a home in the Bay Area requires careful consideration and guidance to choose the right home purchase loan.
Some of the main types of loans used to purchase new homes in the Bay Area include fixed rate loans, adjustable loans, and jumbo loans. Home buyers may also have the option of choosing a FHA home loan, a VA home loan or a USDA home loan for a new home purchase depending on their needs and circumstances.
Conventional Fixed Rate Home Loans
Most California and Bay Area homes are financed through conventional fixed rate home loans. These home loans offer an unchanged or ‘fixed’ principal and interest payment throughout the life of the loan. The standard fixed rate loan terms are 10, 15, 20, 25 or 30 years, however 15 and 30 years are the most common. By choosing a shorter loan term, you can achieve significant savings in interest over the duration of the loan. There are also custom term mortgages if desired.
Conventional Conforming Loans
About 90% of the mortgages in the U.S. are securitized by Fannie Mae and Freddie Mac. Conforming loans must fulfill certain guidelines that take into account a borrower’s credit score, a borrower’s credit history, debt-to-income ratio, the mortgage’s loan to income ration and the size of the loan. The national maximum for conforming loans is $424,100 for a single unit dwelling, however with 208 counties around the U.S. designated as high-cost competitive areas, including certain parts of the Bay Area, the maximum loan limits can reach $636,100. This type of loan can make a buyer attractive to sellers as they facilitate a smooth and rapid closing process. On the other hand, with a maximum loan amount of $636,100, this may not be enough to cover home prices in the Bay Area.
Adjustable Rate Loans
For first home buyers wishing to buy a starter home in the Bay Area, adjustable rate loans with today’s low interest rates can make monthly mortgage payments easier to afford on an expensive home. However, homeowners that keep these loans over a longer period risk increases in the adjustable interest rates may be higher than expected.
To buy a home in the Bay Area where house prices often exceed $1 million, a jumbo loan may be needed. These loans can be fixed rate or variable interest depending on your financial situations and goals. However, jumbo loans can be slightly difficult to qualify for, with more stringent credit requirements and a larger down payment necessary. There is also an alternative to do a 1st and 2nd mortgage combination.
Choosing the right home purchase loan can be confusing, whether you’re a first time home buyer or looking to add properties to your portfolio. Experienced Bay Area mortgage consultant Karen Douglas offers unique insights to find the right solution for you.