As with most careers, real estate agents tend to hear a pattern in questions they get asked. One question that seems to pop up during every transaction is, “Which loan is best for buying a home?” So, we wanted to dive into that to be a resource for you on your journey.
Buying A Home With Cash
If you are thinking of buying a home and have the means to buy a house with cash—do it. Cash is king. The reason that paying cash for a house is so appealing to a seller is because there is almost no risk involved. When we get out a loan, there is always a chance that it may not come through during escrow. This is tricky for a seller because they are relying on that loan to get approved to finalize the sale of their home. So, by paying cash for houses, you are immediately removing that stress. They ask for $100 you give them $100. Bada-bing, bada-boom, you got yourself a deal. If you want to make the cash offer even more appealing, (yes, it is possible) take off contingencies, put down a large deposit, and show your buyer you are serious. This is music to a seller’s ears. And you, my friend, will be finding yourself at the top of the stack.
(All of) what you need to buy a home with cash:
1 | Cash
Buying A Home With A Conventional Loan
But, for most of us, buying a house with cash in San Diego is not an option, so we have to get out a loan. Don’t worry, those can be attractive too, it just matters which you go with. With today’s mortgage rates, it is very appealing to buyers as well. Instead of a 5% interest rate or higher that you may have seen in years past, you can—as of right now—get in the 3% range. Now—that could all change tomorrow—but it does make a conventional home loan a little sexier. Why is it more appealing than the other types of loans to a seller? Two words: less risk. When you have 20% of a full home’s price, the seller knows that you are a serious buyer, and the bank doesn’t have to take as much risk on you. Let’s look at it this way: Your friend wants to buy a purse that is $500 and asks to borrow some money to make up the difference. In scenario A, your friend has saved $17.50 and needs to borrow $482.50 to complete the purchase. In scenario B, your friend has saved $100 and needs to borrow $400 to make the purchase. Which sounds like a less risky loan for you? (The answer is B.)
(A little of) what you need to qualify for a conventional home loan:
1 | 20% of the home’s purchase price for a down payment
2 | A healthy credit score
3 | A healthy debt to income ratio
4 | Proof of two years worth of income
Buying A Home With A FHA Loan
FHA Loans are next up on the list. This is a government-backed loan. It allows you to make a smaller down payment, but you will be paying a part of that back to the government each month through required mortgage insurance. The FHA loan allows you to put 3.5% – 19.9% down on the price of your home. To be approved for this loan, the bank will take it’s time to ensure that you can afford the house, but you just haven’t saved up the cash. This loan is a little more risky for a seller because there is not as much cash on hand, and there are a few more hoops to jump through to qualify.
(A bit of) what you need to qualify for an FHA loan:
1 | Proof of two years worth of income
2 | A credit score around 580+
3 | 3.5% (or more) of the purchase price for a down payment
Buying A Home With A VA Loan
Finally, the VA loan. Unfortunately, this type of loan causes the whole process to take a little longer. For the government to sign off on this a VA loan, everything needs to be absolutely perfect. There are no down payments, and they are just harder to work with overall. Since there is no down payment, you can probably imagine that the paperwork and administrative tasks involved are a lot more complicated. That is why, unfortunately, the VA loan tends to land its way at the bottom of the buying pile. But, with low interest rates, it is an excellent option for buyers who want to make a smart investment.
Some things needed to qualify for a VA loan:
1 | Honorable or general discharge
2 | DD214
3 | A credit score around 550+
It’s About What Is Best For You
We work with an incredible network of people who can help you through this complicated process. In the end, you need to do what is best for y-o-u. Contact our team, and we can get you started on your home buying journey. Introduce yourself at office@redrhinorealty.com.